why retail is a bright spot in food industry m & a

Why Retail is a

Bright Spot in

Food Industry

M & A

March 21 , 2019

B r ian Todd

Pres ident

The Food Ins t i tu te

WWW.FOODINSTITUTE.COM

MISSION The Food Institute (FI) is the single source for

information, analysis and reporting for the food

industry ‘from farm to fork’.

FI provides balanced coverage of food trends through

multiple channels so that industry professionals

worldwide can tap in when and how they choose.

316 311

503

410

505

591

527

2012 2013 2014 2015 2016 2017 2018

Overall Food Industry M & A Slowed In 2018

Source: Proprietary data from The Food Institute.

Food Processors Account For 30% Of Deals

Retailers Make Up 17%!

30%

14%

15%

17%

5%

3%

16%

Food Processors

Investment Firms & Banks

Foodservice & Restaurants

Retailers

Diversified Firms

Wholesalers

Others

Proprietary Information: Food Institute LLC, Upper Saddle River, NJ

A Few Of The Findings

• ConAgra acquired Pinnacle Brands

• Ferrero acquired Nestles U.S. confections

• General Mills and Smuckers invest in pets

• Tyson buys lab-grown meat startups

Supermarket M&A Rebounded In ’18…


19

28

36

29

36

22

36

1999 2012 2013 2014 2015 2016 2017

On the Retail Side


•SUPERVALU UNFI

•Best Markets LIDL

•Flipkart Walmart

•Martins Spartan Nash

Available Soon at

www.foodinstitute.com

Contact Info

Brian Todd [email protected]

http://www.foodinstitute.com/

www.thefoodpartners.com

PRESENTED BY THE FOOD PARTNERS

Why Retail is a Bright Spot in M&A

March 2019

MERGERS & ACQUISITIONS

• Amazon’s acquisition of Whole Foods was the catalyst for several major competitors

radically altering their strategic plans

• Amazon and Walmart are like two elephants wrestling and all of the other retailers in the

U.S. are the grass

• In May 2018, Kroger and Ocado partnered to build 20 fulfilment centers in the U.S. which

will materially expand Kroger’s geographic market – improve efficiency – grow online

business without any material investment in brick and mortar

• In December 2018, Kroger announced it was offering autonomous vehicle grocery delivery

in Scottsdale and announced the expansion to Houston in March 2019

• In January 2019, Trader Joe’s ended its home delivery service in Manhattan – “Instead of

passing along unsustainable cost increases to our customers, removing delivery will allow us

to continue to offer outstanding value”

• In March 2019, the Wall Street Journal reported Amazon was expected to launch a new line

of brick and mortar grocery stores in major U.S. cities

• Ocado’s home delivery business in Great Britain for FY 2018 generated revenues of $1.9

billion – EBITDA was 5.6% of sales

Retail Landscape

2


• A number of players focusing on “the last mile” are losing money on every incremental

dollar of business – the question will be whether these players can generate sufficient

volume in a market to create a profitable business model

• Consumer tastes and preferences continue to shift rapidly for what, when and where they

buy food

• Winn-Dixie CEO’s vision for the company is as a conventional store operator – not a recipe

for success

• Food retailers in the U.S can be separated into two categories – those that are “relevant” and

have momentum and those that are operating “conventional” stores

• Majority of supermarket chains in the U.S. are focusing on eliminating non-core stores to

make material capital investments in the core business, including technology

• In 2018, U.S. retail grocer store count declined by 2.5% - it can be expected that this trend

will continue at the same level or increase the next five years

3

Retail Landscape


• The number of grocery wholesalers has declined from 48 in 2003 to 28 in 2019

• During the same time period, 29 grocery distribution centers closed

• UNFI’s acquisition of Supervalu is one of the most significant transactions in the grocery

distribution space since Fleming’s liquidation in 2003

Business combination surprised the industry

Caused a number of other grocery wholesalers to rethink their business model

4

Distribution Landscape


30 3019

42

27

43

22 24

39

8 1327

24

21

17

1720

113843

46

66

48

60

3944

50

0

10

20

30

40

50

60

70

80

90

100

2010 2011 2012 2013 2014 2015 2016 2017 2018

Portfolio Corporate

1,192918 770

877 1,335

3,400

230

907

582

2,0692,253

4,170

991

651384

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013 2014 2015 2016 2017 2018

Stores Sold Stores Sold Through Large Transactions[1]

6

21

13

31

47

70

15

8618 19

13

25

0

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015 2016 2017 2018

5

- Source: Company reports, news articles, The Food Partners

- Includes announced but not yet closed transactions

[1] Albertson’s, Safeway and Delhaize acquisitions in 2013, 2014 and 2015, respectively

Portfolio Versus Corporate Transactions Mergers and Acquisitions

• The number of stores sold annually since

2010 has fluctuated between

approximately 400 and 1,000 (excluding

the Albertson’s, Safeway and Delhaize

acquisitions in 2013, 2014 and 2015,

respectively)

Average Stores per Transaction Stores Sold

Transactions


14

5

7

1

6

3 3

1

3

4

0

2

4

6

8

10

12

14

16

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

6 - Sources: The Food Partners, Capital IQ, news releases

Supermarket Bankruptcy Detail Number of Supermarket Bankruptcies by Year

• The number of supermarket bankruptcies

has remained steady over the past several

years – although slightly up in 2018

• Since 2010, 5 companies with over 100

stores have filed for bankruptcy

A&P, Fresh & Easy, Haggen, Southeastern

Grocers and Tops

• Average chain size is 18 stores (for

bankruptcies under 100 stores)

Company Date Filed

No. of

Stores

State

Filed Status

Seasons Kosher Supermarket 9/16/2018 8 NY Emerged

Schuette Stores 9/7/2018 2 IL Liquidated

Southeastern Grocers 3/27/2018 582 DE Emerged

Tops Holding II 2/22/2018 169 NY Emerged

Marsh Supermarkets Holding 5/11/2017 44 DE Sold

Central Grocers 5/2/2017 n/a IL Sold

Thorne's Markets 1/20/2017 4 OH Closed

Fairway Group Holdings 5/3/2016 15 NY Emerged

Fresh & Easy 10/30/2015 97 DE Liquidated

Haggen 9/9/2015 164 DE Sold

The Great Atlantic & Pacific Tea 7/19/2015 297 NY Liquidated

Dahl's Foods 11/10/2014 10 IA Sold

Associated Wholesalers 9/9/2014 n/a DE Sold

Farmers Foods (Highland Springs and Webb) 6/2/2014 2 VA Closed

C&K Market 11/19/2013 60 OR Emerged

Fresh & Easy Neighborhood Market 9/30/2013 167 DE Sold

Midwest Gourmet Foods (Fox & Obel) 9/19/2013 1 IL Unknown

Mi Pueblo San Jose 7/22/2013 21 CA Emerged

Belle Foods 7/1/2013 57 AL Sold

Pro's Ranch Markets 5/29/2013 11 CA Sold

Liborio Market 4/13/2012 8 CA Liquidated

Michael’s Fresh Market 12/30/2011 7 IL Unknown

Associated Grocers of Maine 8/26/2011 n/a ME Dismissed

Azteca Ranch Market 8/1/2011 n/a CO Liquidated

Moo & Oink 8/24/2011 4 IL Liquidated

Andronico's Market 8/22/2011 7 CA Sold

A.G. Ferrari Foods 3/30/2011 13 CA Sold

Rizk-Co-Zann Foods Corporation 3/10/2011 1 PA Dismissed

The Great Atlantic & Pacific Tea 12/12/2010 336 NY Emerged

Empresas Cordero Badillo 11/12/2010 n/a PR Emerged

Grand Mart International 10/19/2010 6 MD Sold

Supermercado del Pueblo 4/1/2010 4 NV Unknown

Star Food International 1/5/2010 3 CA Unknown

Bankruptcies


7

Looking Forward at Retail

• Southeastern Grocers may be a repeat of A&P

• At least one regional chain is currently for sale

• In 2019, we anticipate 300 to 500 stores will be sold

• Store closures continue at an accelerated pace

• The rise in interest rates has had a minor impact on buyers’ appetite for the “right” stores

• EBITDA multiples paid by buyers should remain stable

• The consolidation of the retail grocery sector will strengthen the overall health of remaining

retail base


• In specific markets the increase in the minimum wage appears to have resulted in fewer

people qualifying for government assistance resulting in a decline in same store sales – where

did the sales go

• Investing gross margin to maintain or grow top line sales did not prove to be successful

strategy for most of 2018

• Price investment in the fourth quarter of 2018 and first quarter of 2019 had a positive

impact on same store sales for many independents

• Focus on fresh and local products

• The difference between undertaking a minor or major store remodel is a balancing act to

maximize value and the long-run viability of a store

• Five year goal is to be the survivor in every market served

8

The Future: Defining a Strategy for Independent Retailers


• In 2019, meal solutions do not come in a box delivered to your house like last year

They are now delivered by an Uber driver

• Why do consumers pay a premium for a meal solution in a box that they can get at the

grocery store when they could buy the ingredients and Google how to prepare it in a new

and interesting way

• We have two kinds of customers, those that shop at our stores and those that shop at our

competitors’ stores

• In the new world order, every supermarket in this country is a limited assortment store

because on line shopping provides an endless aisle

• The best quote for 2018

“I have two more sons in the business then I need”

“How many sons do you have?”

“Two!”

9

Quotes of the Year

0

Food Institute M&A Webinar

Topic: Retail a Bright Spot in M&A?

Presenter: Karen Martin

March 21, 2019

1

Presenter Biography

Karen specializes in mergers & acquisitions in the Food, Consumer & Retail

sector. For over 25 years, she has focused on mergers and acquisitions and

corporate finance for public and private companies. Prior to joining BMO Capital

Markets, Karen was with Banc One Capital Markets, Inc. for ten years. For the

last 16 years, Karen focused exclusively on the food, consumer & retail sectors.

BMO Capital Markets includes nearly 100 M&A professionals globally. Karen

leads the firm’s M&A activity in the Food and Food-Retail sectors. Karen has

advised on various types of transactions, including outright sales, corporate

divestitures, acquisitions, capital raises and take-over defense.

Some of the transactions on which Karen advised include the recapitalization of

Mastronardi Produce, KeHE Distributor’s acquisitions of both Tree of Life and

Nature’s Best, SaveMart Supermarkets’ acquisition of Albertsons Northern

California stores, the sale of Wilson Farms for BRS, the sale of Albertsons fuel

center business, the sale of Fleischmann’s Vinegar to Green Plains, the

acquisition of Glacier Water Company by Primo Waters, the sale of Red Arrow

Products to Kerry Group plc, the sale of Associated Brands to Treehouse Foods

and the take-over defense and ultimate sale of Vincor Wines.

Karen has an MBA from the University of Chicago Booth School of Business and

a Bachelor of Arts from DePauw University.

Karen Martin

Managing Director

Mergers & Acquisitions

BMO Capital Markets Corp.

115 South LaSalle Street

35th Floor West

Chicago, IL 60603

Tel.: (312) 461-3626

Cell: (312) 961-0207

[email protected]

KAREN MARTIN

2 Source: Financial Times, New York Times, Statista, Wall Street Journal

The Demise of Retail Captures Headlines…

“AMAZON IS TAKING OVER THE WORLD”

63 65

80 85

90 95 97

101

9%3%

23%

6% 6% 6%2% 4%

Jun-16 Sep-16 Mar-17 Jun-17 Sep-17 Jun-18 Oct-18 Dec-18

% Growth

(U.S. Prime members in millions)

AMZN Q2 official data not

released, projections not in ER

Amazon climbs as beneficiary of

‘retail apocalypse’ -Financial Times 10-Apr-17

Amazon Hits $1,000,000,000,000

in Value -New York Times 4-Sep-18

Walmart to Close 269 Stores as

Retailers Struggle -New York Times 15-Jan-16

Retail Sales are Weakest in 35

Years -Wall Street Journal 4-Dec-08

JCPenney’s Retail Revolution Has

Failed -Wall Street Journal 4-Dec-08

2008 2018

THE CHANGING CONVENIENCE STORE INDUSTRY

3

23.5

16.8

11.2

4.6

4.4

4.1

3.8

3.6

3.6

3.4

2.8

2.8

2.4

2.3

2.3

2.2

US

Canada

Australia

UK

Japan

Netherlands

France

Switzerland

Median

Spain

China

Italy

Taiwan

Thailand

German

South Korea

(1,871)

(536)

(527)

(274)

(257)

(250)

(250)

(154)

(120)

(108)

(106)

(102)

(100)

(100)

(99)

(97)

Rite Aid

Stripes C-Stores

Toys R Us

Mattress Firm

Best Buy

Radio Shack

The Bon Ton

Sears / Kmart

Signet Jewelers

Ascena Retail

Charming Charlie

Gymboree

Payless Shoesource

The Children's Place

Orchard Supply

Perfumania

…But the Death of Retail is Greatly Exaggerated…

RETAIL STORE CLOSURES IN 2018 ARE HIGHLY CONCENTRATED(1)

1. IHL Group (based on company reports), reflects those planned for 2018 as of Aug-18

2. International Council of Shopping Centers’ Country Fact Sheets (2018), represents median of the top 15 countries with greatest per capita retail square

footage

/

RETAIL SQUARE FOOTAGE PER CAPITA(2)

Malls built at 4x rate

of population growth

since 1975

U.S. has over 6x space

per capita than median

U.S. retail was poised for pain due to excess capacity regardless of Amazon


4

The Retail Landscape Is Undergoing a Transformation

48% 2017

42% 2014

USERS WHO HAVE PURCHASED ON A SMARTPHONE(1)

22% Baby Boomers

66% Millennials

47% Gen Xers

10% Seniors

HISTORICAL AND PROJECTED POPULATION BY GENERATION POPULATION PERCENTAGE BY RACE AND ETHNICITY

85%

4% 11%

1%

61%

18% 13%

6%

47%

29%

13% 9%

--

20%

40%

60%

80%

100%

Non-HispanicWhite

Hispanic African American Asian American

1960 2017 2050E

Source: Public sources, Pew Research, Sage Policy Group, street research, U.S. Census Bureau

66.9 61.3

79.3

71.4

58.7 55.9

69.4

48.0

19.0

--

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

Millennial Gen X Baby Boomer

2015 2035 2050(millions)

GROWTH IN BUYING POWER OF CONSUMERS BETWEEN 2014-2019 WHAT DO MILLENNIALS VALUE?

Non-Hispanic

White

(9.7%)

Hispanic

32.1%

African

American Asian

American

23.4%

29.2%

Bang for Buck 1.

Quality 2.

Digital Integration 3.

Bang for Buck 1.

Quality 2.

Digital Integration 3.

1st


5

1.1%

5.9%

14.8% 16.9%

21.9%

28.2%

2.9%

10.8%

28.0%

31.9% 34.1%

46.0%

Food & Beverage Consumables Clothing & Accessories Sporting Goods Electronic & Appliances Toys & Games

2013A 2018E

Digital Integration in Food Retail is Small and Growing

E-commerce only in beginning stages of

potential encroachment on c-stores sales, as

opposed to hardlines and softlines

Cigarette volume demand decrease not fully

realized with temporary masks of manufacturer

price increases and cigarette-specific taxes

2-3% volume decrease over the past

decade

Retailers facing lower effective tax rates,

where they once paid the highest effective tax

rate of any industry

Companies have experienced one-time

favorable EPS increases and additional

employee bonuses

TBD

Source: BMO Economics, BLS, IHL, Moody’s, street research, US Census

Beginning Stages of C-

Store E-Commerce 1.

Only in early stages of encroachment as


Masked Cigarette Volume

Decreases 3.

Higher prices driven by taxes and

manufacturers hiding 2-3% volume

decrease over past decade

The JOBS Act 2.

Retail industry relishing one time EPS

increases and cash influxes, as they paid

the highest effective tax rate of any

industry before the JOBS Act

Philip Morris Shares Suffer… on

Declining Cigarette Volume -WSJ 25-Apr-18

Confirm sources

E-COMMERCE PENETRATION BY CATEGORY


eCommerce Transformation

- Walmart is quickly building its eCommerce units and expects 40% growth in online in 2019

- Instacart continues to grow and raised another $600MM in fresh capital in Oct.’18 – valuation expands to $7.6B

- Albertsons, Target, Kroger have acquired meal kit and online companies

- During 2018, Amazon Prime members exceeded 100 million – over 45% of American households

Industry observers estimate online grocery grows to 20% by 2025

6

Shift in How Products are Ordered and Received

CHANGING FOOD DISTRIBUTION LANDSCAPE

Joint Bookrunner December 2016

$990 million

Senior Secured Credit Facilities

Food Manufacturer

Distributor

Retailer

Retailer

3rd

Party

3rd Party

TRADITIONAL SHOPPING

CLICK AND COLLECT / BOPUS

RETAILER DELIVERY

3RD PARTY DELIVERY

DIRECT TO CONSUMER (DTC) / ONLINE

FULFILLMENT

Traditional brick and mortar shopping currently accounts for

~97% of food and beverage purchases; expected to reduce to

~92% in 2023

6 in 10 online grocery shoppers have used

click and collect

Enjoy freedom (not required to sit at home

waiting for delivery) and ability to select their

specific products (i.e. produce and meats)

Mintel GROCERY RETAILING, US - NOVEMBER 2017 12

Delivery is direction industry is

moving

Last mile delivery proving expensive

for retailers particularly for grocers

Economical delivery solution for retailers

Fees can be a deterrent for potential

shoppers as well as

Don’t trust shopper

Amazon is the dominant disruptor with online fulfillment in

the food space – AmazonFresh, Prime, Marketplace

E-commerce has opened up the potential for CPG’s to go

DTC eliminating costs but risk upsetting retail partners

Amazon and other online fulfillment

companies as well as DTC food

manufacturers are potential disruptors to food

retail; however, if willing and capable to

adapt, distributors can play a critical role in

helping manufacturers go direct to consumer

Source: Equity research, Mintel

7

14%

13%

9%

9%

21%

15%

29%

21%

18%

72%

51%

49%

47%

43%

37%

33%

33%

27%

14%

36%

42%

44%

36%

48%

38%

46%

55%

100%

Department Stores

Bar / Restaurants

Fast Food

Food / Grocery

Drug Stores

Specialty Hardgoods

Specialty Softgoods

Mass Merchandisers

Convenience Stores

Superstores / WH Clubs

Decrease Steady Increase

Yet Bricks and Mortar Continue

E-commerce only in beginning stages of

potential encroachment on c-stores sales, as


Cigarette volume demand decrease not fully

realized with temporary masks of manufacturer

price increases and cigarette-specific taxes

2-3% volume decrease over the past

decade

Retailers facing lower effective tax rates,

where they once paid the highest effective tax

rate of any industry

Companies have experienced one-time

favorable EPS increases and additional

employee bonuses

TBD

Source: BMO Economics, BLS, IHL, Moody’s, street research, US Census

Beginning Stages of C-

Store E-Commerce 1.

Only in early stages of encroachment as


Masked Cigarette Volume

Decreases 3.

Higher prices driven by taxes and

manufacturers hiding 2-3% volume

decrease over past decade

The JOBS Act 2.

Retail industry relishing one time EPS

increases and cash influxes, as they paid

the highest effective tax rate of any

industry before the JOBS Act

Philip Morris Shares Suffer… on

Declining Cigarette Volume -WSJ 25-Apr-18

Confirm sources

2017 % OF NET STORE OPENINGS VS. CLOSINGS

Even Amazon announced a new, small format grocery chain to be rolled out in 2019


- Amazon announced a new grocery chain to

be rolled out starting in 2019 with a smaller

format and strong health & beauty

departments, primarily for urban markets

8

In An Already Tough Food Retail Environment

Cost Pressures

- Freight costs are increasing costs all along the supply chain

- Minimum wages are increasing across the US with several larger

retailers going to $15/hour

- Healthcare coverage and other employment expenses are

increasing faster than general inflation

- Competitive pressures have driven retailers to use new

technology to reduce supply chain costs

Competitive Threats

- Aldi’s and Dollar Stores continue to frustrate conventional

grocers’ pricing strategies

- Lidl hasn’t reached their 100 store goal for 2018 (they now

have “over 60” stores). In March ‘19, Lidl announces new

CEO for US, formerly with Aldi’s in the UK.

- Good Food Holdings (Bristol Farms, Metropolitan Markets)

sale to Emart, out of South Korea

Changing Store Footprint

- New stores are getting smaller (Hyvee, Meijer and others

have announced smaller formats)

- Innovative partnerships – Kohl’s and Aldi’s co-locations

- Some grocers are using closed stores for eCommerce

fulfillment

- While the data is only anecdotal, many independents are

closing marginal stores as they near lease expirations. Some

are replacing conventional formats with limited assortment,

hardware or even pet-supply stores

Slippery Consumer

- Snacking trend impacts where and when food is consumed

- Buying behavior remains a barbell: premium and discount

- Health/wellness/convenience driving diversification of product

offering into fresh/prepared foods / foodservice, a potentially

money-losing proposition

9

Is Retail a Bright Spot in M&A?

• There’s excess capacity that needs to come out of the system given the outlook for consumer buying behavior

• Consider the death of the shopping mall – food is not immune

• Retail locations will be sold – but to whom? Look to other channels with use for traditional grocery footprints (25,000 square feet+)

as future buyers of food retail

• Smaller formats will increase

• There are ‘future-enabling’ transactions yet to be identified

• Management teams have been re-focused

• That’s the current M&A conversation

• Companies are starting to realize “it’s just food”

• Breaking down silos / barriers because the delivery method is changing

• Partnerships, not transactions, are likely in the near-term as the long-term, sustainable game isn’t over; particularly last-mile

solutions

• In food retail, M&A changed over the last couple years; not just scale wins anymore

• Out of the box thinking like Target – Shipt

• Acquisitions that are enabling for the future

The investor market – both public and private – has likes and dislikes

10 Source: FactSet; as of 19-Mar-19

Retail Food Sector Underperforms Overall Market

FOOD RETAIL DISCUSSION

EV / NEXT TWELVE MONTHS EBITDA

• Relative to the overall market valuation of 11.4x, the broad food retail sector is lower value

• Traditional grocery players Kroger and Ahold ranging 6-7x

• Specialty with Sprouts and Vitamin Cottage is fairing better at 9.5x and 7.3x, respectively

• Casey’s valuation reflective of the growth and margin in c-stores

11 Source: Capital IQ, FactSet; as of 19-Mar-19


Focus on Top Line Growth…

2018A - 2019E SALES GROWTH

2018A - 2019E EBITDA GROWTH

Traditional Grocers Natural and Organic Grocers

National Regional

Mass Grocers C-Stores

10.0%

3.2%

7.1%

1.3%

3.9%

2.4% 2.6%

7.2%

5.9%

0.6%

2.2% 2.6%

0.4%

2.9% 2.1%

(0.5%)

6.7%

8.8%

Specialty

12

6.6%

3.8%

5.2% 4.4%

6.8% 5.8%

6.4%

4.2%

6.0% 6.1%

3.8%

5.0% 4.4%

6.8%

5.8% 6.2%

4.2%

6.1%

33.6%

15.1%

n.a.

21.7%

27.0%

n.a

24.3%

13.0%

21.0%

33.9%

15.3%

26.6%

21.6%

27.0%

n.a

24.3%

13.0%

21.4%

Source: Capital IQ, FactSet; as of 19-Mar-19


…While Investment for the Future Occurs

2018A / 2019E GROSS MARGIN

2018A / 2019E EBITDA MARGIN

Traditional Grocers

National Regional

Mass Grocers C-Stores Specialty

13 Source: Capital IQ; as of 19-Mar-19


Relative Valuation is the Market’s View on Winners

EV / EBITDA MULTIPLES

Traditional Grocers

National Regional

Mass Grocers C-Stores Specialty

9.7x

5.2x

7.3x

6.3x 6.6x 5.9x

10.8x

16.3x

10.2x

8.9x

5.1x

7.1x

6.1x 6.5x 5.8x

10.6x

15.3x

9.2x

EV / 2019E EBITDA

EV / 2020E EBITDA

14

11.3x 10.7x 9.2x

7.8x 7.2x 5.7x 5.2x

4.2x 3.6x

10.6x

7.9x 7.7x 7.0x 6.9x 6.1x 5.5x

(US$ millions)

Source: FactSet; as of 7-May-18, public sources

Note: Traditional Grocers Index includes: Ingles, Smart & Final; Specialty Grocers Index includes: Whole Foods, Sprouts, Fresh Market, Natural Grocers.

SECTOR UPDATE & GELSON'S STANDALONE ANALYSIS

Limited, Scaled Retail M&A with Compressed Multiples

PRECEDENT TRANSACTIONS & PUBLIC TRADING LEVELS SHOW COMPRESSION IN GROCERY MULTIPLES

Chart showing precedent transactions

with multiples (and mean/median) for

2010 – 2013 period

- Include target, acquirer, EV, year

Target Target

A

Safeway

(Canada) Gelson’s

Harris

Teeter

Nash

Finch

United

Super-

markets

Target B New

Albertsons

Winn-

Dixie

Whole

Foods Delhaize Roundy’s

Target

C

Fresh

Market

Target

D Safeway

Acquirer Acquirer

A Sobey’s TPG Kroger

Spartan

Stores

New

Albert-

sons

Acquirer

B

AB

Acquisition BI-LO Amazon Ahold Kroger

Acquirer

C Apollo

Acquirer

D Albertson’s

EV $300 $5,800 $394 $2,469 $771 $385 N/A $3,300 $464 $13,710 $11,892 $792 $1,312 $1,312 $1,280 $9,067

Year 2012 2013 2013 2013 2013 2013 2011 2013 2012 2017 2015 2015 2016 2016 2016 2014

Target A / Acquirer A: Earthfare / Oak Hill

Target B / Acquirer B: Haggan / Comvest

Target C / Acquirer C: Cardenas / KKR

Target D / Acquirer D: Save-a-Lot / Onex

Period 2010 - 2013 Period 2014 – 2019 YTD

Overall

Mean: 7.2x

Median: 7.2x

Overall

Mean: 7.4x

Median: 7.0x

Selected Specialty / Regional

Mean: 8.5x

Median: 8.4x

Selected Specialty / Regional

Mean: 7.0x

Median: 7.0x

Denotes Selected Specialty / Regional transactions

• Downward pressure on sector valuation, particularly traditional grocery

• Dearth of large strategic consolidators for traditional assets

15 Source: FactSet; as of 19-Mar-19

Food Distribution is a Valuation Bright Spot

FOOD DISTRIBUTION DISCUSSION

EV / NTM EBITDA

• Relative to the retail market, the broad food distribution sector is meaningfully higher value

• UNFI/SVU stands out as linked to more traditional grocery and operational challenges

• Foodservice players experiencing strong valuations given trends of food away from home

• Convenience stores in distribution in line with overall market valuation

16 Source: Capital IQ, FactSet; as of 19-Mar-19


Stronger Growth in Foodservice Distribution than Retail

2018A - 2019E SALES GROWTH

2018A - 2019E EBITDA GROWTH

3.3% 4.0%

5.9%

8.0%

3.1%

6.5% 6.4%

8.9%

11.7%

8.5%

17

5.9% 4.7%

2.5%

5.5%

1.1%

18.9% 17.7%

13.2%

23.5%

5.4%

Source: Capital IQ, FactSet; as of 19-Mar-19


…At Similarly Tight Margins

2019E GROSS MARGIN

2019E EBITDA MARGIN

18

TargetSkor Food

GroupTarget 1

J.T. Davenport

& Sons

Queensgate

Foodservice

Qzina Specialty

FoodsTarget 2

Allen

BrothersTarget 3

Del Monte

Capitol MeatTarget 4 Target 5 Brakes Group

Pine State

Trading

Company

Jenny Service

CompanyTarget 6 Target 7 Target 8

Services Group

of America

Acquirer Colabor Group Acquirer 1 Core-MarkThe Chefs'

Warehouse

The Chefs'

WarehouseAcquirer 2

Chef's

WarehouseAcquirer 3

Chef's

WarehouseAcquirer 4 Acquirer 5 Sysco Core-Mark PFG Acquirer 6 Acquirer 7 Acquirer 8 U.S. Foods

Date 2011 2012 2012 2013 2013 2013 2013 2014 2015 2015 2015 2016 2016 2016 2017 2017 2018 2018

7.6x 6.8x

6.3x 6.3x

7.2x

9.2x

7.0x

8.0x

10.0x

6.9x

8.6x

12.0x

8.0x

7.0x

10.8x 10.5x

11.9x 12.5x

Target Target 1SunOpta (Canadian

Distribution Assets)Nash Finch Tony's Fine Foods Target 2 Target 3 Target 4 Target 5 Target 6 Unified Grocers Target 7

Associated Grocers

of FloridaSuperValu

Acquirer Acquirer 1 UNFI Spartan Stores UNFI Acquirer 2 Acquirer 3 Acquirer 4 Acquirer 5 Acquirer 6 SuperValu Acquirer 7 SuperValu UNFI

EV (mm's) $190 $67 $797 $195 $188 $225 $850 $230 $218 $375 $89 $180 $2,900

Date Dec-09 May-10 Jul-13 May-14 Jul-14 Oct-14 Nov-15 Dec-15 Nov-16 Apr-17 Aug-17 Oct-17 Jul-18

7.7x 7.5x 8.1x

10.0x

11.8x

10.0x 10.6x

10.0x 9.5x

9.0x 8.1x

9.2x

7.1x

EV / EBITDA

M&A ENVIRONMENT

Stronger Activity in Food Distribution M&A

Pre-emptive Process: Finalize & sign

commitment papers with Tier 1 Buyer, commence

syndication process, and close & fund transaction

Broad Process: Finalize & sign commitment

papers with buyer, commence syndication

process, and close & fund transaction

Broad Process: Deliver commitment papers to

prospective buyers

GROCERY DISTRIBUTION

FOODSERVICE / OTHER DISTRIBUTION

Source: Company filings, press releases, BMO Capital Markets estimates, and CapIQ

Note: Some multiples based on rumored bid range.

1. Multiple includes present value of $260 million in cash tax benefits.

= Specialty = Traditional

Overall Specialty

Mean 9.3x

Median 9.5x

Specialty Traditional

Mean 9.7x

Median 10.0x

Traditional

Mean 8.3x

Median 8.6x

Overall

Mean 8.7x

Median 8.0x

TargetSkor Food

GroupTarget 1

J.T. Davenport

& Sons

Queensgate

Foodservice

Qzina Specialty

FoodsTarget 2

Allen

BrothersTarget 3

Del Monte

Capitol MeatTarget 4 Target 5 Brakes Group

Pine State

Trading

Company

Jenny Service

CompanyTarget 6 Target 7 Target 8

Services Group

of America

Acquirer Colabor Group Acquirer 1 Core-MarkThe Chefs'

Warehouse

The Chefs'

WarehouseAcquirer 2

Chef's

WarehouseAcquirer 3

Chef's

WarehouseAcquirer 4 Acquirer 5 Sysco Core-Mark PFG Acquirer 6 Acquirer 7 Acquirer 8 U.S. Foods

EV (mm's) $34 $54 $38 $22 $33 $580 $30 n.a. $191 $112 $150 $3,100 $88 n.a. $335 n.a. $385 $1,800

Date Mar-11 Aug-12 Dec-12 Jan-13 May-13 Dec-13 Dec-13 Apr-14 Jan-15 Jun-15 Dec-15 Feb-16 Apr-16 Aug-16 Mar-17 Jul-17 Mar-18 Jul-18

7.6x 6.8x

6.3x 6.3x 7.2x

9.2x

7.0x 8.0x

10.0x

6.9x

8.6x

12.0x

8.0x 7.0x

10.8x 10.5x

11.9x 12.5x (1)

Target 1 (Tree of Life) / Acquirer 1

(KeHE)

Target 2 (Nature’s Best) / Acquirer

2 (KeHE)

Target 3 (Lipari) / Acquirer 3

(Sterling Investment Partners)

Target 4 (Mastronardi) / Acquirer 4

(MetalMark)

Target 5 (DPI) / Acquirer 5 (Arbor)

Target 6 (Caito) / Acquirer 6

(SpartanNash)

Target Target 1SunOpta (Canadian

Distribution Assets)Nash Finch Tony's Fine Foods Target 2 Target 3 Target 4 Target 5 Caito Unified Grocers Target 6

Associated Grocers

of FloridaSuperValu Target 7 Target 8

Acquirer Acquirer 1 UNFI Spartan Stores UNFI Acquirer 2 Acquirer 3 Acquirer 4 Acquirer 5 SpartanNash SuperValu Acquirer 6 SuperValu UNFI Acquirer 7 Acquirer 8

Date 2009 2010 2013 2014 2014 2014 2015 2015 2016 2017 2017 2017 2018 2018 2018

7.7x 7.5x 8.1x

10.0x

11.8x

10.0x 10.6x

10.0x 9.5x

9.0x

8.1x

9.2x

7.1x

10.5x ~11.0x

19

Retail will continue to be challenged on various fronts

Retail activity will suffer from lack of consolidators of traditional chains/formats

Will there be an Amazon – Casey’s – Sprouts- type deal in our future?

Watching the distributors’ M&A activity shows them adjusting to the changing retail landscape

Wrap Up

20

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