CASTLE IMPORTING, INC.avalonadvisorsinc.com/files/Castle_Importing...Dec 31, 2011 · This report...

FAIR MARKET VALUE

of

CASTLE IMPORTING, INC.

A California C-Corporation

As ofFebruary 4, 2011

Prepared by John Misuraca

Avalon Advisors, Inc.25602 Alicia Parkway, #435

Laguna Hills, CA 92653-5309949.215.3408

This report was completed on October 24, 2011

Avalon Advisors, Inc. 2

APPRAISER’S CERTIFICATION

Opinion of Value

In the opinion of the undersigned appraiser, using accepted methods of valuation and subject tothe assumptions and limiting conditions incorporated herein, the estimated Fair Market Value ofa 24% interest in Castle Importing, Inc. (a California C-Corporation) as of February 4, 2011 on anon-controlling, non-marketable basis is:

$500,000 roundedFive Hundred Thousand Dollars

Appraiser’s Certification

1. The statements of fact expressed herein are true and correct to the best of the appraiser’sknowledge and belief. The reported analyses, opinions, and conclusions are limited onlyby the reported assumptions and limiting conditions, and are the appraiser’s personal,impartial, unbiased opinions, professional analyses, opinions, and conclusions.

2. Neither the appraiser nor anyone associated with Avalon Advisors, Inc. have any presentor prospective interest in the business that is the subject of the report, nor any personalinterest with respect to the parties, nor any other interest or bias which would impair a fairand unbiased appraisal.

3. This appraisal has been conducted and this report is issued pursuant to the UniformStandards of Professional Appraisal Practice (USAP), the Valuation Standards of theAmerican Institute of Certified Public Accountants (AICPA) and the Valuation Standardsof the National Association of Certified Valuation Analysts (NACVA).

4. No person except the undersigned participated materially in the preparation of this report.

Copies of this report must be signed below by the appraiser in order to be authorized andcomplete.

______________________John MisuracaAvalon Advisors, Inc.


TABLE OF CONTENTSAPPRAISER’S CERTIFICATION______________________________________________ 2

1. INTRODUCTION_________________________________________________________ 4

1.1 Subjects of the Report ........................................................................................................41.2 Engagement Purpose and Scope.........................................................................................41.3 Date of the Valuation..........................................................................................................41.4 Principle Sources of Information........................................................................................41.5 Standard of Value...............................................................................................................41.6 General Assumptions and Limiting Conditions .................................................................4

2. FINANCIAL ANALYSIS OF THE SUBJECT COMPANY ______________________ 6

2.1 Financial Statements and Records Examined.....................................................................62.2 Balance Sheet Analysis ......................................................................................................62.3 Income Statement Analysis ................................................................................................7

3. VALUATION APPROACHES ______________________________________________ 9

3.1 Market Approach................................................................................................................93.2 Income Approach .............................................................................................................103.3 Asset-Based Approach .....................................................................................................10

4. INDICATIONS OF VALUE _______________________________________________ 11

4.1 Market Approach..............................................................................................................114.2 Income Approach .............................................................................................................174.3 Asset Approach ................................................................................................................19

5. CONTROL PREMIUM & MARKETABILITY DISCOUNT ____________________ 22

5.1 Control Premium and Minority Interest Discount............................................................225.2 Discount for Lack of Marketability...............................................................................24

6. CALCULATIONS AND CONCLUSION_____________________________________ 38

6.1 Application of the Control Premium ................................................................................386.2 Application of the Marketability Discount.......................................................................396.3 Conclusion........................................................................................................................41

7. CURRICULUM VITAE: JOHN MISURACA ________________________________ 43

8. EXHIBITS ______________________________________________________________ 44

I. Castle Importing, Inc. – Balance Sheets...........................................................................45II. Castle Importing, Inc. – Income Statements....................................................................46III. National Economic Report – December 2011..................................................................47IV. Grocery Wholesaling in the United States.........................................................................52V. Industry Risk Rating Report– Grocery Wholesaling in the United States ..........................85


1. INTRODUCTION

1.1 Subjects of the Report

The subject of this valuation is Castle Importing, Inc. (referred in this report as “CII” orthe “Company”), a California C-Corporation incorporated on June 21, 1989 andheadquartered at 14450 Miller Avenue, Fontana, California 92336.

The Company is a wholesaler and processor of imported and domestic cheese products.Distribution is primarily to specialty distributors and retailers on the west coast of theUnited States. CII operates on a calendar year ending December 31. It maintains a website at www.castleimporting.com.

1.2 Engagement Purpose and Scope

This purpose of this appraisal is to calculate the Fair Market Value of a 24% non-controlling shareholder interest in CII for estate planning purposes. It has been preparedfor the exclusive and confidential use of CII and their attorneys and financial advisors. Itis not to be used for any other purpose, nor are copies to be made and distributed to thirdparties unrelated to the stated purpose and use.

1.3 Date of the Valuation

The effective date of this valuation is February 4, 2011. The report was prepared andcompleted October 24, 2011.

1.4 Principle Sources of Information

The appraiser was supplied copies of the Castle Importing, Inc. compiled financialstatements for the years 2006 through 2010 (See Exhibits I and II). We also receivedcorporate income tax returns for the years 2006 through 2009. Other informationreceived was 2010 employee compensation, the accounts receivable and accounts payableagings as of December 31, 2010. The Company completed additional informationcovering ownership, demographics, competitive factors and a SWOT (Strengths,Weaknesses, Opportunities and Threats) analysis. The appraiser interviewed VitoBorruso, Chief Executive Officer.

1.5 Standard of Value

The standard of value used in this report is “Fair Market Value,” defined in IRS RevenueRuling 59-60 as the price a hypothetical informed, able and ready buyer is willing to pay ahypothetical informed, able and willing seller, without undue pressure or compulsion tobuy or sell.

1.6 General Assumptions and Limiting Conditions

This analysis is subject to the following general assumptions and limiting conditions:


1. Information furnished by others, upon which all or portions of this analysis isbased, is believed to be reliable but has not been verified except as noted.

2. Castle Importing, Inc. and their representatives warranted to us that theinformation they supplied was complete and accurate to the best of theirknowledge and that the financial statement information reflects the firm’s resultsof operations and financial condition in accordance with generally acceptedaccounting principles, unless otherwise noted. Information supplied bymanagement has been accepted as correct without further verification, and weexpress no opinion on that information.

3. Our analysis and valuation conclusion will serve as a basis for expressing anopinion as to the fair market value of a 24% non-controlling interest in CII (aCalifornia C-Corporation). The analysis and conclusion is restricted to theinternal use of CII and their attorneys and financial advisors and shall not be usedto obtain credit or for any other purpose. Neither our work product nor anyportions thereof, including any conclusions or the identity of our firm, anyindividuals signing or associated with this report, or the professional associationsor organizations with which they are affiliated, shall be disseminated to thirdparties other than CII, the shareholders, their attorneys, financial accounting firmand governmental agencies by any means without our prior written consent andapproval.

4. We or any individual associated with this assignment are not required to givefurther consultation, provide testimony, or appear in court or other legalproceedings unless specific arrangements have been made.

5. Our work product is valid only for the valuation date indicated. We take noresponsibility for changes in market conditions and assume no obligation to reviseour work product to reflect events or conditions which occur subsequent to thevaluation date.

6. Full compliance by the subject Partnership with all applicable federal, state, andlocal zoning and use, occupancy, environmental, and similar laws and regulationsis assumed, unless otherwise stated.

7. This report was prepared under the direction of John Misuraca, CPA. Neither theprofessionals who worked on this engagement nor the partners of AvalonAdvisors, Inc. have any present or contemplated future interest in CII any personalinterest with respect to the parties involved, or any other interest that mightprevent us from performing an unbiased valuation.

8. The amount of fee paid to us for the formulation and reporting of our conclusionsare not contingent upon the values or other opinions communicated.

9. This valuation assumes that the subject Partnership will continue to operate as agoing concern, and that the character of its present business will remain intact.


2. FINANCIAL ANALYSIS OF THE SUBJECT COMPANY

2.1 Financial Statements and Records Examined

The appraiser was supplied copies of the Castle Importing, Inc. compiled financialstatements for the years 2006 through 2010 (See Exhibits I and II). We also receivedcorporate income tax returns for the years 2006 through 2009. Other informationreceived was 2010 employee compensation, the accounts receivable and accounts payableagings as of December 31, 2010.

2.2 Balance Sheet Analysis

For our analysis, we used the balance sheet from December 31, 2010.

In order to gain a better perspective as to the financial position and results of operationsof CII, it is necessary to compare the Company’s performance to other companies in theindustry. To accomplish this purpose, we have selected information contained in the“Annual Statement Studies” published by Robert Morris Associates (RMA). RMAcompiles and publishes financial data on various industries including NAICS Code424410 – “General Line Grocery Merchant Wholesalers”. Even though data published byRMA is not totally consistent with data reported by CII, it is generally accepted as beingrepresentative of the industries on which it reports, and therefore, is a reasonable sourceof financial data for a comparative analysis of CII.

Castle Importing, Inc.

Balance Sheet Comparison with RMA

NAICS Code 424410 - General Line Grocery Merchant Wholesalers

Companies with Assets between 2M to 10M

December 31, 2010

CII RMA DIFFERENCE

Assets

Cash & Equivalents 3.1% 7.6% -4.5%

Trade Receivables (Net) 27.2% 36.0% -8.8%

Inventory 40.8% 32.3% 8.5%

All Other Current 0.3% 3.5% -3.2%

Total Current Assets 71.4% 79.3% -7.9%

Fixed Assets (Net) 28.8% 14.9% 13.9%

Intangibles (Net) 0.0% 1.6% -1.6%

All Other Non-Current -0.2% 4.1% -4.3%

Total Assets 100.0% 100.0% 0.0%


Liabilities & Net Worth

Notes Payable-Short Term 19.0% 16.1% -2.9%

Cur.Mat.-L/T/D 0.0% 2.0% 2.0%

Trade Payables 23.2% 27.2% 4.0%

Income Taxes Payable 3.2% 0.2% -3.0%

All Other Current 4.1% 7.8% 3.7%

Total Current Liabilities 49.5% 53.3% 3.8%

Long-Term Debt 6.9% 9.2% 2.3%

Deferred Taxes 0.0% 0.2% 0.2%

All Other Non-Current 0.0% 5.7% 5.7%

Total Liabilities 56.4% 68.4% 12.0%

Net Worth 43.6% 31.6% 12.0%

Total Liabilities & Net Worth 100.0% 100.0% 0.0%

In reviewing the balance sheet, CII is quite comparable and in some cases exceeding theindustry. On a percentage basis, the Company’s current assets are very similar in total.Fixed assets are almost double the industry, but since CII manufactures much of theirproduct, this is to be expected.

Debt is also very similar to the industry on a percentage basis, with the Company showingless debt and more equity. A prolonged downturn by the economy, such as that seen in2008, could have a very adverse effect on CII, but overall it appears to be a healthycompany.

2.3 Income Statement Analysis

For the income statement comparison, we utilized the 2011 edition of the Almanac ofBusiness and Industrial Financial Ratios for the NAICS code 424400 – Grocery andRelated Product (specifically companies with assets in the 5 to 10 million dollar range).We chose this service since it provides a more detailed breakdown of the incomestatement for our comparison.



Comparison with B&IFR

NAICS 424400 - Grocery and Related Product

Companies 1M to 5M of Assets

Year Ending December 31, 2010

Income Statements CII B&IFR Difference

Net Sales 100.0% 100.0% 0.0%

Cost of Operations 76.8% 84.7% 7.9%

Gross Profit 23.2% 15.3% 7.9%

Operating Expenses:

Salaries and Wages 0.7% 3.6% 2.9%

Taxes Paid 1.8% 1.0% -0.8%

Interest Paid 0.4% 0.3% -0.1%

Depreciation 2.8% 0.5% 2.3%

Amortization and Depletion 0.0% 0.0% 0.0%

Pensions and Other Deferred 0.9% 0.2% -0.7%

Employee Benefits 0.5% 0.3% -0.2%

Advertising 0.5% 0.1% -0.4%

Other Expenses 7.9% 5.7% -2.2%

Officers Compensation 6.0% 1.7% -4.3%

Operating Expenses 21.5% 13.4% -8.1%

Operating Margin 1.7% 1.9% -0.2%

As with the balance sheet comparison, CII is very comparable to the industry and overallslightly better. Officers’ compensation indicates the owners are taking profit out of thecompany through salaries. Otherwise, on a percentage basis, CII is outperforming theindustry by about 4%.

Cost of operations is lower than the industry by about 8%. This could be due toclassification by CII and industry companies. Depreciation expense is higher, but asnoted in the balance sheet analysis, the Company manufactures much of their productunlike most other companies in the industry. In the Other Expenses category, CII travel is0.4% of revenue, due to the need to stay in touch on an ongoing basis with vendors whosend a lot of their product from Italy.


3. VALUATION APPROACHES

According to IRS Revenue Ruling 59-60, “A determination of fair market value…willdepend upon the circumstances in each case.” It goes on to state that no one formulaexists that is applicable for every business. It further states that, “valuation is not an exactscience. A sound valuation will be based upon all relevant facts, but the elements ofcommon sense, informed judgment, and reasonableness must enter into the process…”

In order to comply with this ruling, the National Association of Certified ValuationAnalysts (NACVA) recommends three approaches be considered in a business valuation:Asset based, Market based, and Income based approaches. Each of these approachescontains a number of different methods, and the appraiser must select the methods withineach approach that best fit the company being appraised. Some of the methods andapproaches may not be appropriate for the valuation of a specific company.

The Uniform Standards of Professional Appraisal Practice (USPAP) require the businessappraiser “to use all relevant approaches for which sufficient reliable data are available.”The appraiser must use judgment in selecting the appropriate methods, and then inreconciling the various indicated values obtained in reaching a final estimate of value forthe business.

For the purpose of this report, the following three approaches were considered.

3.1 Market Approach

The market approach references actual transactions in the equity of the enterprise beingvalued or transactions in similar enterprises that are traded in the public and privatemarkets. In using transactions from similar enterprises, there are two primary methods.The first, often referred to as the “Guideline Public Company Method”, involvesidentifying and selecting publicly traded enterprises with financial and operationcharacteristics similar to the enterprise being valued. Once publicly traded enterprises areidentified, valuation multiples can be derived, adjusted for comparability, and thenapplied to the subject enterprise to estimate the value of its equity or invested capital.

The second, often referred to as the Guideline Transactions Method, involves determiningvaluation multiples to the subject enterprise. This approach that is normally applied tovalue privately owned companies is the “Guideline Transaction/Market Data Method.”This method considers the price paid for a similar practice (or practices) as evidence ofthe value that a willing buyer or seller would expect to pay or receive. This methoddepends on the selection of Grocery Wholesaling industry data that is similar to CII inorder to provide a meaningful comparison.


3.2 Income Approach

The income approach serves to estimate value by considering the income (benefits)generated by the business over a period of time. This approach is based on thefundamental valuation principle that the value of a business is equal to the present worthof the future benefits of ownership. Two methods under this approach include acapitalization of current earnings method and discounted future cash flows method.

3.3 Asset-Based Approach

A third approach to the valuation is the asset-based approach. The discrete valuation of anasset using an asset-based approach is based upon the concept of replacement as anindicator of value. A prudent investor would pay no more for an asset than the amount forwhich he or she could replace the asset new. The asset-based approach establishes valuebased on the cost of reproducing or replacing the property, less depreciation fromphysical deterioration and functional obsolescence, if present and measurable. Thisapproach generally provides the most reliable indication of the value of landimprovements, special-purpose buildings, special structures, systems, and specialmachinery and equipment.


4. INDICATIONS OF VALUE

In performing the valuation analysis and arriving at estimates of fair market value, areconciliation of the market, income and asset approaches was used. For the marketapproach, we attempted to use both a Guideline Public Company and GuidelineTransactions analysis. Under the Income Approach, we looked at the Company fromboth the Historical Cash Flows and Discounted Future Cash Flows methods. The assetapproach reflects a book value method. We then reconciled each of these approaches inSection 6.4.

4.1 Market Approach

Guideline Public Company AnalysisAs discussed in the valuation theory section of this report, valuation multiples indicatedby transactions involving the sale of comparable companies can often provide meaningfulinput into a fair market value analysis of a closely-held company. As part of our analysiswe attempted to identify public firms which are reasonably comparable in nature to CII,and analyzed the valuation indications their price multiples imply.

Our best analysis and consultation with the client determined that the best comparisonindustry appears to be NAICS code 424410 – General Line Grocery MerchantWholesalers. Within that code we found six publicly traded companies as follows:

Price /

Fiscal Operating Price / Cash

Company Name Year End SIC NAICS State Business Summary Revenue Cash Flow Revenue Flow

United Natural Foods 2011/07 5141 424410 RI Natural foods company 4,530,015,000 0.45

Nash-Finch 2010/12 5141 424410 MN A wholesale food distributor 4,991,979,000 88,894,000 0.10 5.80

Spartan Stores 2011/03 5141 424410 MI A grocery distributor and grocery retailer 2,533,064,000 67,580,000 0.13 4.90

Core-Mark Holding Company 2010/12 5141 424410 CA Distributor of packaged consumer products 7,266,800,000 42,700,000 0.05 9.30

Amcon Distributing 2010/09 5141 424410 NE Wholesale distributor of consumer products 1,010,538,035 10,405,604 0.04 3.40

Innovative Food Holdings 2010/12 5141 424410 FL Provides perishables and specialty products 9,862,726 -1,757,791 0.16 -0.80

AVERAGE 3,390,376,460 41,564,363 0.16 4.52

MEDIAN 3,531,539,500 42,700,000 0.12 3.40

The number of companies for our comparison is small and other than one company(which is showing negative cash flows) they are many times larger than CII. The ratiosare also all over the spectrum, so relying on these ratios to value our subject Companywill be difficult and unlikely.

$16,858,164 (CII 2010 Revenues) x 0.16 = $2,697,306(Average Price / Revenues ratio)

$16,858,164 (CII 2010 Revenues) x 0.12 = $2,022,980(Median Price / Revenues ratio)


When providing a valuation of a company, all valuations require an analyst to attempt to“normalize” or adjust the financial statements. This is done in order to present financialinformation on a basis that is comparable to that of other companies in the industry andprovide a foundation for developing future expectations about the subject company. Aswith the Price to Revenue analysis, we used the 2010 cash flows amounts and appliedboth the average and median

In order to properly compute cash flows for CII, we felt we needed to make the followingadjustments:

$777,106 (CII 2010 Cash Flows) x 4.52 = $3,512,512(Average Price / Cash Flow ratio)

$777,106 (CII 2010 Cash Flows) x 3.40 = $2,642,160(Median Price / Cash Flow ratio)

Guideline Transactions IdentifiedIn order to identify relevant market transactions that were reasonably comparable to HPL,we researched the BIZCOMPS® Market Transaction Database. We were able to find datacovering the sale of similar Grocery Wholesaling companies. This service reported actualselling prices of 149 companies (NAICS 4224 – General Line Grocery Wholesalers) – alarge sample. These companies had annual revenues of between $52,000 and


$15,000,000 – with an average of $1229,000 and median of $492,000. All of thesecompanies are smaller than CII which had revenues in 2010 of $16,858,164. However,we will compute the value ratios for comparison purposes:

Price / Price /

SIC NAICS Business Description Revenue SDE Price Revenue SDE Sale Date State

6141 42241 Distr-Food Products 15,000 500 1,300 0.09 2.60 8/31/2008 FL

5148 42248 Whsle-Produce 14,321 862 1,400 0.10 1.62 8/28/2008 FL

5141 42241 Distr-Dry Food Products 10,500 830 2,145 0.20 2.58 4/30/2001 FL

5148 42248 Whsle-Produce 8,502 476 1,800 0.21 3.78 10/11/2002 FL

5141 42241 Distr-Food Products 6,500 337 615 0.09 1.82 5/31/1997 CA

5147 42247 Whsle-Meats 6,332 832 740 0.12 0.89 7/31/2006 FL

5141 42241 Distr-Food Products 4,787 610 1,805 0.38 2.96 11/20/2003 GA

5147 42247 Whsle-Meats 4,727 159 175 0.04 1.10 12/10/2007 FL

5141 42241 Distr-Food Products 4,359 303 1,050 0.24 3.47 1/6/2005 MD

5148 42248 Whsle-Fresh Produce 4,100 195 437 0.11 2.24 1/15/2001 CA

5141 42241 Distr-Food Products 3,701 337 557 0.15 1.65 10/9/2003 FL


5149 42249 Distr-Fruit Juices 3,250 337 1,310 0.40 3.89 2/28/1998 OH

5141 42241 Distr-Food Products 2,786 650 674 0.24 1.04 2/10/2003 GA

5141 42249 Distr-Food Products 2,661 206 451 0.17 2.19 10/22/2001 CO

5148 42248 Whsle-Produce 2,661 206 445 0.17 2.16 10/2/2001 CO

5147 42247 Whsle-Meats 2,600 188 335 0.13 1.78 11/2/2006 GA



5141 42241 Distr-Prepared Meals 2,444 187 400 0.16 2.14 3/23/2000 FL

5148 42248 Whsle-Produce 2,271 158 475 0.21 3.01 9/5/2001 FL


5149 42249 Distr-Soft Drinks 2,055 627 380 0.18 0.61 4/1/1997 ID

5149 42249 Mfg-Candy 1,900 210 400 0.21 1.90 9/17/2001 OH


5149 42249 Distr-Beverages 1,837 83 160 0.09 1.93 7/3/2010 RI

5141 42241 Distr-Food Products 1,821 105 750 0.41 7.14 5/22/2008 MN

5148 42248 Distr-Fresh Herbs 1,800 345 775 0.43 2.25 9/30/1997 CA

5141 42241 Distr-Food Products 1,687 205 430 0.25 2.10 9/3/2004 GA


5141 42241 Distr-Import Food Products 1,535 142 324 0.21 2.28 9/1/2002 CA

5141 42241 Distr-Food Products 1,500 257 710 0.47 2.76 1/2/2003 CO


5149 42249 Distr-Snack Food 1,425 71 75 0.05 1.06 3/3/1997 CO

5141 42241 Whsle-Deli Products 1,380 204 480 0.35 2.35 3/30/2003 CA


5149 42249 Whsle-Food Products 1,277 484 545 0.43 1.13 12/1/2005 FL

5141 42241 Distr-Food Service Products 1,217 328 959 0.79 2.92 12/24/2007 FL


5148 42248 Distr-Produce 1,200 146 175 0.15 1.20 2/26/1996 FL


5141 42241 Distr-Hospitality Prod 1,075 277 400 0.37 1.44 7/31/2009 CA

5149 42249 Distr-Food Spices 1,050 180 500 0.48 2.78 6/30/2003 FL

5149 42249 Whsle-Bakery 954 358 593 0.62 1.66 10/3/2003 FL

5141 42241 Distr-Food Products 939 223 483 0.51 2.17 11/19/2004 FL

5141 42241 Distr-Food Products 925 80 180 0.19 2.25 3/14/2008 UT


Price / Price /


5149 42249 Coffee Service Route 846 232 500 0.59 2.16 6/11/2001 FL

5142 42242 Distr-Frozen Food 819 293 731 0.89 2.49 8/27/2002 FL

5149 42249 Distr-Soft Drinks 800 95 187 0.23 1.97 9/1/1996 FL

5149 42249 Distr-Frozen Drinks 780 177 355 0.46 2.01 4/10/2000 FL

5141 42241 Distr-Frozen Food 775 108 164 0.21 1.52 2/9/1998 GA

5149 42249 Distr-Beverages 738 282 518 0.70 1.84 9/24/2008 FL

5149 42249 Whsle-Water/Juice 731 173 175 0.24 1.01 6/27/2001

5149 42249 Distr-Snack Foods 695 207 425 0.61 2.05 3/13/1998 FL



5141 42241 Distr-Bulk Vending 650 70 237 0.36 3.39 1/2/1998 IA


5149 42249 Distr-Restaurant Supplies 619 62 146 0.24 2.35 6/30/1996 CA

5141 42241 Distr-Food Products 608 81 110 0.18 1.36 1/2/2007 GA


5149 42249 Whsle-Food Products 579 154 350 0.60 2.27 2/17/2007 FL

5149 42249 Distr-Coffee/Tea 568 129 300 0.53 2.33 8/25/2004 CA

5149 42249 Distr-Snack Foods 562 156 225 0.40 1.44 7/28/2003 FL


5141 42241 Distr-Dry Food Products 556 60 70 0.13 1.17 6/30/2008 AZ



5149 42249 Whsle-Potato Chips 522 69 120 0.23 1.74 5/31/2002 FL

5149 42249 Distr-Snack Items 504 131 195 0.39 1.49 3/4/2008 FL

5149 42249 Distr-Snack Foods 502 69 85 0.17 1.23 10/1/2002 WA

5141 42241 Distr-Food Products 495 79 60 0.12 0.76 9/26/2007 AZ

5147 42247 Meat Route 495 65 47 0.09 0.72 6/30/2008 AZ

5149 42249 Distr-Snack Foods 494 117 240 0.49 2.05 12/31/2003 UT



5149 42249 Mfg/Distr-Sandwiches 471 50 115 0.24 2.30 3/31/1996 CO


5147 42247 Distr-Meat Products 432 142 215 0.50 1.51 10/19/2007 MT


5149 42249 Distr-Coffee & Tea 409 63 170 0.42 2.70 6/12/2008 NV

5149 42249 Route-24/7 Products 400 75 240 0.60 3.20 12/31/2006 NY

5141 42241 Distr-Food products 397 117 120 0.30 1.03 3/17/2000 FL

5147 42247 Distr-Meat Products 395 99 137 0.35 1.38 12/3/2007 MT

5149 42249 Distr-Snack Items 390 64 65 0.17 1.02 4/24/2007 AZ

5149 42249 Bread Route 388 73 110 0.28 1.51 3/31/2008 FL



5141 42241 Distr-Dry Foods 332 97 50 0.15 0.52 7/7/2009 AZ


5149 42249 Distr-Coffee Products 330 56 102 0.31 1.82 4/29/2008 FL

5141 42241 Distr-Health Foods 325 42 88 0.27 2.10 6/30/1997

5149 42249 Potato Chip Route 324 44 85 0.26 1.93 11/20/2002 FL

5149 42249 Distr-Bread Route 324 58 64 0.20 1.10 7/18/2002 FL

5148 42248 Whsle-Hydroponic Produce 321 104 202 0.63 1.94 8/29/2002 WA


5147 42247 Whsle-Meat Route 312 57 80 0.26 1.40 2/28/1998 FL

5149 42249 Distr-Route Sales 306 55 19 0.06 0.35 9/16/1998 TX

5149 42249 Coffee Route 303 80 350 1.16 4.38 11/2/1998 FL

5141 42241 Distr-Dry Food Products 300 130 232 0.77 1.78 3/31/2009 FL

5149 42249 Distr-Beverages 300 40 58 0.19 1.45 4/30/1997


5145 42245 Distr-Potato Chips 300 110 120 0.40 1.09 4/1/2005 FL



Price / Price /



5149 42249 Whsle-Bakery 285 33 77 0.27 2.33 2/28/2007 GA




5141 42241 Broker-Poultry 263 72 200 0.76 2.78 5/31/2005

5149 42249 Distr-Beverages 260 71 105 0.40 1.48 11/6/2006 MA

5141 42241 Distr-Food Route 260 58 50 0.19 0.86 5/20/2004 VA



5149 42249 Distr-Snack Foods 255 45 112 0.44 2.49 4/5/1999 CA


5149 42249 Distr-Juices/Water 249 152 250 1.00 1.64 4/15/2006 FL

5141 42241 Distr-French Fries 244 85 140 0.57 1.65 2/27/1998 UT


5149 42249 Bread Route 244 65 60 0.25 0.92 5/13/2003 FL

5149 42249 Distr-Coffee Routes 240 50 139 0.58 2.78 6/28/2005 FL


5149 42249 Distr-Food Products 221 35 60 0.27 1.71 5/10/2003 OR


5149 42249 Mfg/Distr-Candy 200 30 55 0.28 1.83 2/29/2000 TX

5141 42241 Broker-Food Products 200 179 225 1.13 1.26 2/28/2003 FL

5141 42241 Distr-Dry Food Products 200 73 59 0.30 0.81 12/21/2007 FL


5145 42245 Distr-Organic Products 180 22 68 0.38 3.09 12/7/2006

5141 42241 Whsle-Food Products 176 38 55 0.31 1.45 5/24/2002 UT

5149 42249 Coffee Delivery 174 25 160 0.92 6.40 4/17/1998 MI

5147 42249 Whsle-Ice Cream 166 53 81 0.49 1.53 12/6/2002 FL

5149 42249 Distr-Soft Drinks 165 99 278 1.68 2.81 7/31/1996 CO

5141 42241 Whsle-Food Products 152 57 98 0.64 1.72 11/25/2002

5147 42249 Whsle-Ice Cream 149 41 45 0.30 1.10 10/31/2001 CA

5149 42249 Distr-Frozen Drinks 146 71 185 1.27 2.61 2/20/1998 OK

5149 42249 Distr-Pancake/Waffle Mix 145 26 50 0.34 1.92 10/2/1997 TN

5149 42249 Bread Route 140 40 60 0.43 1.50 1/13/2003 FL

5149 42249 Whsle-C-Store Supplies 140 40 40 0.29 1.00 6/14/1996 TX

5149 42249 Distr-Snack Route 130 58 65 0.50 1.12 5/31/2001 FL

5141 42241 Distr-C Store Items 120 35 46 0.38 1.31 10/16/2001 TX


5149 42249 Office Coffee Service 106 75 235 2.22 3.13 9/26/2002 CO


5149 42249 Distr-Snack Route 95 46 10 0.11 0.22 1/8/2001 FL

5141 42241 Whsle-Specialty Food 87 40 48 0.55 1.20 6/30/2004 CO


5141 42241 Distr-Snack Items 67 48 63 0.94 1.31 6/30/2005 AZ

5149 42249 Distr-Frozen Drinks 52 21 63 1.21 3.00 2/1/2000

1,229 151 295 0.41 1.89

492 97 175 0.31 1.74

AVERAGE

MEDIAN

The following is an explanation of the entries in the data table:

NAICS Code North American Industry Classification System.Revenue Reported annual sales volume of business sold.SDE Seller’s Discretionary Earnings

(Net profit before taxes plus depreciation, amortization, interest, otherNon-cash expense and non-business related expense)

Sale Price Actual Sales Price (in 000’s).Price/Gross Rev. Ratio of total consideration to reported annual gross revenues.


Price/Earnings Ratio of total consideration to reported seller’s discretionary earnings.

The companies listed had price to revenue ratios ranging from 0.06 to 2.12, with anaverage of 0.41 and a median of 0.31. Applying the ratios to the CII revenues from 2010of $16,858,164 (See Exhibit II) using BIZCOMPS® for the Price/Revenue MarketApproach we get the following:

$16,858,164 (CII 2010 Revenues) x 0.41 = $6,911,847(Average Price/Revenue ratio)

$16,858,164 (CII 2010 Revenues) x 0.31 = $5,226,031(Median Price/Revenue ratio)

For our purposes, Seller’s Discretionary Earnings (SDE) are the same thing as CashFlows except the owners salary is also included. The BIZCOMPS® data had price to SDEratios ranging from 0.22 to 7.14, with an average of 1.89 and a median of 1.74. We thenneed to compute the SDE for 2010:

Taking the 2010 SDE and using BIZCOMPS® for the Price/SDE Market Approach(Median) we get the following:

$1,577,106 (CII 2010 SDE) x 1.89 = $2,980,730(Average Price/SDE ratio)

$1,577,106 (CII o 2010 SDE) x 1.74 = $2,744,164(Average Price/SDE ratio)


4.2 Income Approach

Capitalization of Historical Cash Flows AnalysisCapitalizing is a procedure that converts the current rate of income to value by using areasonable rate of return (capitalization rate) that would likely be required by ahypothetical, informed, able and ready buyer.

Capitalization Rate EstimationThe capitalization rate applied to the forecasted cash flows and terminal value mustadequately reflect the nature of the subject investment and the risk of the underlying cashflows. For purposes of our analysis, the appropriate capitalization rate is a weightedaverage cost of capital, calculated using estimates of required equity rates of return andafter-tax costs of debt based upon a group of peer companies.

A hypothetical buyer would likely expect a reasonable return that would include thefollowing risk factors as identified and published by Ibbotson, “Stocks, Bonds, Bills,Inflation 2011 Yearbook”:

Risk-Free Rate of Return (1) 4.10%Risk Premium

Equity Risk Premium (2) 6.70%Size Premium (3) 4.55%Specific Industry Risk (4) (1.55)%Specific Company Risk (5) 9.00%

Net Cash Flows Discount Rate 22.80%

Sustainable Average Growth Rate Adjustment (6) (2.50%)

Net Cash Flows Capitalization Rate 20.30%

1. Risk-Free Rate: The yield on long-term U.S. Treasury Bonds is considered the“riskless” rate of return for an investment, that is, free from the risk of default. Thereturn is a nominal return, reflecting both the bond’s real return and the impact ofinflation. The rate used should match the horizon for the investment; generally, in agoing concern situation, the horizon is long-term. The rate used is as of the valuationdate; we have used the 20 year U.S. Treasury Bond rate, provided by the FederalReserve Statistical Release, as of December 31, 2010.

2. Equity Risk Premium: The equity risk premium is an additional return that aninvestor expects for the additional risk associated with investing in equities asopposed to investing in riskless assets. While the premium is designed to reflect whatan investor expects in the future, the equity risk premium based on historical data.We have used the equity risk premium as provided by Ibbotson’s Stocks, Bonds, Bills,and Inflation, Valuation Edition 2011 Yearbook. The premium is the differencebetween the historic arithmetic mean total return of their large company stock index(S&P 500) and the historic arithmetic mean income return of long-term governmentbonds.


3. Size Premium: The size premium reflects an additional premium an investorexpects for the added risk of investing in small companies as opposed to largecompanies. The premium is captured in Ibbotson’s Valuation Yearbook, which breaksthe size premium data down into ten deciles based upon market capitalization. We areusing 4.55 percent as our size premium, which comes from the tenth decile; this is thesmallest decile, with market capitalizations ranging from $1.2 million to $236 million.Ibbotson’s breaks down the tenth decile into 10a and 10b. Decile 10a, with a marketcapitalization ranging from $144 million to $236 million, has a size premium of 4.55percent. Decile 10b, which has the smallest companies, has a market capitalizationranging from $1.2 million to $143 million, and a size premium of 10.06 percent.While CII’s size clearly puts it below decile 10b, we are using the tenth decile sizepremium, as this has a larger sample size.

4. Specific Industry Risk: According to Ibbotson’s Valuation Yearbook, theGrocers, General Line category (SIC Code 5141) has an industry premia of -1.55percent.

5. Specific Company Risk: An additional adjustment can be made to recognizerisk factors unique to the particular company being valued. This can be a positiveadjustment to reflect greater risk, or a negative adjustment to reflect reduced risk. Wehave identified the following factors that we feel pose additional risks for CII:

Foreign exchange rate risk – 5.0%.Potential for competition - 4.0%

6. Growth Rate Adjustment: The rate developed to this point is the discount rate,which is the rate applied to future cash flows. To derive the cash flows capitalizationrate used in the single-period earnings model, the long-term, sustainable growth rateof the Company must be deducted. The historical rate has averaged around 2.5percent over the past 10 years (through December 31, 2002). The long-term historicalrate, according to the 2011 Ibbotson Yearbook, has been 3.3 percent.

The growth rate to be used in this adjustment is a rate the Company believes can besustained over the long-term. After considering inflation, the current economicclimate, the Company’s long-term sales rate and management’s judgment, we areapplying a 2.5 percent adjustment to arrive at a net cash flows capitalization rate.

We then take the normalized forecasted cash flows for the year ending December 31,2011 (computed in below) and insert them into our Capitalization of Historical CashFlows model:


Caste Importing, Inc.

Cash Flows

For Years Ending December 31, 2010 2009 2008

Net income 259,785$ 52,286$ (279,934)$

Normalization/Cash Flow Adjustments:

Add: Depreciation 479,249 423,401 486,569

Interest income - (384) (2,623)

Interest expense 79,266 92,134 144,146

Officers salary adjustment 215,223 176,548 221,610

Proceeds from sale of fixed assets - 25,000 21,297

Gain on sale of fixed assets (4,170) (8,843) (21,297)

Purchase of property & equipment (252,247) (188,509) (320,313)

Cash Flows 777,106 571,633 249,455

Weighting 3 2 1

Weighted aveage 2,331,318$ 1,143,266$ 249,455$

Weighted average cash flows 620,673

Capitalization rate-calculuated 20.55%

Valuation before discounts, minority

basis 3,020,307$

The result is we come up with a value using the Capitalization of Historical CashFlows method of $3,020,307 on a Non-Controlling, Marketable basis.

To get the final values for this analysis, we still need to add a control premium andmarketability discount (See Section 5.1 and Section 5.2).

4.3 Asset Approach

For this approach, we calculated the value of CII using the following method:

Book Value (BV) MethodThis analysis is based on the financial accounting concept that owners’ equity isdetermined by subtracting the book value of a company’s liabilities from the book valueof its assets. While the concept is acceptable to many analysts, most agree that themethod has serious flaws. Under generally accepted accounting principles (GAAP), mostassets are recorded at historical cost minus, when appropriate, accumulated depreciationor cumulative impairments. These measures were never intended by the accountingprofession to reflect the current values of assets. Similarly, most long-term liabilities


(bonds payable, for example) are recorded as the present value of the liability using ratesat the time the liability is established. Under GAAP, these rates are not adjusted to reflectmarket changes. Finally, GAAP does not permit the recognition of numerous andfrequently valuable assets such as internally developed trademarks, trade names, logos,patents and goodwill. Thus, balance sheets prepared under GAAP make no attempt toeither include or correctly measure the value of many assets. Thus, by definition, owners’equity will not normally yield a valid measure of the value of the company.


Book Value Balance Sheet

December 31, 2010

ASSETS

Current Assets

Cash 120,784$

Accounts receivable 1,064,840

Other receivable 12,816

Inventory 1,598,894

Deposits on equipment (9,041)

Total Current Assets 2,788,293

Fixed Assets

Property and equipment, net 1,126,146

Total Assets 3,914,439$

LIABILITIES

Current Liabilities

Accounts payable, trade 909,879$

Accrued expense 279,402

Employee savings account 1,890

Long-term debt, current portion 745,242

Long-term debt, net of current portion 271,046

Total Liabilities 2,207,459

NET EQUITY 1,706,980$

In reviewing the CII balance sheet, it appears that the values of their current assets arereflective of market values – accounts receivable are reasonably current, inventories turnover very frequently and do not contain obsolete material. We do not know the marketvalue of the equipment and leasehold improvements, but all the fixed assets are in good


condition and it appears that accumulated depreciation reflects a normal loss of assetvalue due to age and normal wear and tear.

Since we are using a book approach, goodwill is not reflected. Therefore, since oursubject Company is quite profitable, our resulting value is likely to be low or the “floor”value of CII.

Liabilities do not appear to require any adjustments and already reflect fair market value.

As a result, as of December 31, 2011, the Book Value of CII is $1,706,980. We feelthis is a reasonable way to determine our Asset Approach value without separateformal valuations of fixed and intangible assets.


5. MINORITY INTEREST & MARKETABILITY DISCOUNTS

The purpose of a premium or discount is to make an adjustment from some base value.The adjustment should reflect the difference between the characteristics of the subjectinterest (the interest being valued) and those of the base group on which indications ofvalue are based.1

The most common valuation discounts arise from the basic concepts of control andmarketability. A pro rate value of a controlling interest in a closely held company is saidto be worth more than the value of a minority interest because of the prerogatives ofcontrol that generally follow the controlling shares. A minority shareholder, whether in apublicly held or privately held company, is often a passive investor with little or no inputinto how the company is run. An investor will generally pay more (a premium) for therights that are considered to be part of the controlling interest. In addition, a minorityshareholder in a privately held company faces difficulty in finding ready buyers for his orher shares.

Control Premiums and Discounts for lack of control (often referred to as a minorityinterest discount) quantify the level of risk assumed by a controlling or non-controllingshareholder. Discounts for lack of marketability quantify the degree to which liquidity isimpaired relative to more liquid alternative investments.2

5.1 Control Premium and Minority Interest Discount

Owning investment assets through a corporation involves considerably more risk for aminority interest shareholder, compared with owning a minority interest in the underlyingassets. Minority interest stockholders lack many, if not all, of the prerogatives of control.A minority interest discount is a subtraction from the controlling interest fair marketvalue to recognize the inability of a minority interest shareholder to affect some or all ofthe following prerogatives:

Appoint management. Determine management compensation and perquisites. Set policy and change the course of business. Acquire or liquidate assets. Select people with whom to do business and award contracts. Make acquisitions. Liquidate, dissolve, sell out, or recapitalize the Company. Sell or acquire Treasury shares. Register the Company’s stock for a public offering. Declare and pay dividends. Change the articles of incorporation or bylaws.

1 Shannon Pratt, “Business Valuation Discounts and Premiums,” 2001, p. 22 James R. Hitchner, “Financial Application Applications and Models,” 2nd Edition, 2006, p. 375


Block any of the above actions.

Empirically, minority interest discounts can be observed in the public market place bytaking the inverse of control premiums that can be directly observed by analyzing the pre-acquisition and post-acquisition prices of companies involved in a merger or acquisition.

For our analysis, we utilized the Mergerstat® Review, which is published annually byFactSet Mergerstat, LLC (formerly Applied Financial Information LP and Houlihan,Lokey, Howard and Zukin). The year 2010 edition marks the 30th publication anniversary.It is extensively used by valuation professionals and is based on the following:

Extensive analysis of tender offers and completed transactions by industry Published yearly with historical data included Premium paid over market is based on seller’s closing market price five business

days prior to initial announcement of the sale (negative premiums are excluded) May understate the control premiums and implied minority interest discounts

because the stock of the target’s acquisition may begin to rise more than five daysprior to the public announcement

We measure a control premium by the additional percentage price per share paid to obtaincontrol of a company. In the public marketplace, market capitalization is generally basedon the aggregate collective ownership of a large number of minority interest stockholders.Because no single shareholder can “exert control prerogatives (e.g., appoint management,set policies, acquire or liquidate assets, declare or payout dividends), the stock price isindicative of a “minority” interest price. During a merger or acquisition of a company, theacquiring company absorbs a majority of the outstanding shares of stock. The effect of themerger or acquisition is often an increase in the price of shares, and the increase isprimarily attributable to the control prerogatives obtained by the acquirer. To estimate theimplied minority interest discount from the control premium paid in the marketplace, thepercentage difference is calculated from the control and minority interest prices.Mathematically, the formula is:

Implied Minority Interest Discount = 1 - 11 + Control Premium Percentage

The 2011 edition of Mergerstat® Review indicated that the weighted average five-year(2006 to 2010) control premium for the Wholesaling & Distribution industry - is 34.1%(see graph below).


Wholesale & Distribution

Year Premium Companies

2006 22.6 8

2007 48.7 11

2008 25.3 11

2009 31.7 11

2010 40.9 8

Weighted Average 34.1 49

SIC 5000s, 5100s

The control premium of 34.1% implies a minority interest discount of 1/(1 + .341) - 1= 25.4%.

5.2 Discount for Lack of Marketability

There are certain marketability differences between an interest in CII and an interest inthe stock of publicly-traded companies. An owner of publicly-traded securities knows atall times the market value of his or her holding. He or she can sell that holding onvirtually a moment’s notice and receive cash net of brokerage fees within several workingdays.

This would not be the case with an interest in CII. Consequently, liquidating a position inthe Company would be a more costly, uncertain, and time-consuming process thanliquidating stock in publicly-traded entities. An investment in which the owner canachieve liquidity in a timely fashion is worth more than an investment in which the ownercannot liquidate the investment quickly. Privately-held companies sell at a discount thatreflects the additional costs, increased uncertainty, and longer time commitmentsassociated with liquidating these types of investments.

A discount for lack of marketability (DLOM) is used to compensate for the difficulty ofselling shares of stock that are not traded on a stock exchange compared with those thatcan be publicly traded. It is intended to reflect the markets perceived reduction in valuefor not providing liquidity to the shareholder.

A DLOM may also be appropriate when the shares have either legal or contractualrestrictions placed upon them. This may be the result of restricted stock, buy-sellagreements, bank loan restrictions or other types of contracts that restrict the sale of theshares. Even when a 100 percent interest is the valuation subject, a DLOM may beappropriate if the owner cannot change the restrictions on the stock.


The most commonly used sources of data for determining an appropriate level of aDLOM are studies involving restricted stock purchases or initial public offerings.Revenue Ruling 77-287 references the Institutional Investor Study,3

3 From “Discounts Involved in Purchases of Common Stock (1966-1969),” Institutional Investor Study Report of theSecurities and Exchange Commission. H.R. Doc. No. 64, Part 5, 92nd Cong., 1st Sess. 1971, pp. 2444-2456.

which addresses restricted stock issues. Many studies have updated this one.

Restricted stock (or letter stock as it is sometimes called) is stock issued by a corporationthat is not registered with the Securities and Exchange Commission (SEC) and cannot bereadily sold into the public market. The stock is usually issued when a corporation is firstgoing public, making an acquisition, or raising capital. The main reasons thatcorporations issue restricted stock, rather than tradable stock, are to avoid dilution of theirstock price with an excessive number of shares available for sale at any one time and toavoid the costs of registering the securities with the SEC.


The registration exemption of restricting stocks is granted under Section 4(2) of the 1933Securities Act. The intent of Section 4(2) is to allow small corporations the ability toraise capital without incurring the costs of a public offering. Regulation D, a safe harborregulation, which became effective in 1982, falls under section 4(2) of the code andprovides uniformity in federal and state securities laws regarding private placements ofsecurities. Securities bought under Regulation D are subject to restrictions, the mostimportant being that the securities cannot be resold without either registration under theAct, or an exemption.d The exemptions for these securities are granted under Rule 144.

Rule 144 allows the limited sale of unregistered securities after aminimum holding period of two years. Resale is limited to the higher of 1percent of outstanding stock or average weekly volume over a 4 weekperiod prior to the sale, during any three month period. There is noquantity limitation after a four year holding period.e

Therefore, a holder of restricted stock must either register their securities with the SEC orqualify for a 144 exemption, in order to sell their stock on the public market. A holder ofrestricted stock can, however, trade the stock in a private transaction. Historically whentraded privately, the restricted stock transaction was usually required to be registered withthe SEC. However, in 1990, the SEC adopted Rule 144a which relaxed the SEC filingrestrictions on private transactions. The rule allows qualified institutional investors totrade unregistered securities among themselves without filing registration statements.fEffective April 1997, the two year holding period was reduced to one year. This holdingperiod was reduced to six months in December 2007.

The overall effect of these regulations on restricted stock is that when issued, thecorporation is not required to disclose a price and, on some occasions, even when traded,the value of restricted securities is still not a matter of public record.

d Kasmin L. Alli, Ph.D. and Donald J. Thompson, Ph.D. “The Value of the Resale Limitation on Restricted Stock: AnOption Theory Approach,” American Society of Appraisers: Valuation, March 1991, pp. 22-23e Ibid.f Richard A. Brealey and Steward C. Myers, “How Corporations Issue Securities,” Chapter 14, Principles ofCorporate Finance, 5th Edition, McGraw-Hill, Inc. 1996, pp. 399-401.


RESTRICTED STOCK STUDIES

Study Years Average Discount %SEC, Overall Averageg 1966-1969 25.8SEC, Non-Reporting OTC Companies7 1966-1969 32.6Gelmanh 1968-1970 33.0Trouti 1968-1972 33.5j

Moroneyk l 35.6Maherm 1969-1973 35.4Standard Research Consultantsn 1978-1982 45.010

Willamette Management Associates, Inc.o 1981-1984 31.210

Silber Studyp 1981-1988 33.8FMV Studyq 1979 – April 1992 23.0FMV Restricted Stock Studyr 1980-1997 22.3Bruce Johnsons 1991-1995 20.0Colombia Financial Advisorst 1996-February 1997 21.0Colombia Financial Advisors20 May 1997-1998 13.0

g From “Discounts Involved in Purchases of Common Stock (1966-1969),” Institutional Investor Study Report of theSecurities and Exchange Commission. H.R. Doc. No. 64, Part 5, 92nd Cong., 1st Sess. 1971, pp. 2444-2456.h From Milton Gelman, “An Economist-Financial Analyst’s Approach to Valuing Stock of a Closely Held Company,”Journal of Taxation, June 1972, pp. 353-354.i From Robert R. Trout, “Estimation of the Discount Associated with the Transfer of Restricted Securities,” Taxes,June 1977, pp. 381-385.j Median discounts.k From Robert E. Moroney, “Most Courts Overvalue Closely Held Stock,” Taxes, March 1973, pp. 144-154.l Although the years covered in this study are likely to be 1969-1972, no specific years were given in the publishedaccount.m From J. Michael Maher, “Discounts for Lack of Marketability for Closely-Held Business Interests,” Taxes,September 1976, pp. 562-571.nFrom “Revenue Ruling 77-287 Revisited, “SRC Quarterly Reports, Spring 1983, pp. 1-3.o From Williamette Management Associates study (unpublished).p From Williiam L. Silber, “Discounts on Restricted Stock: The Impact of Illiquidity on Stock Prices,” FinancialAnalysts Journal, July-August 1991, pp. 60-64.q Lance S. Hall and Timothy C. Polacek, “Strategies for Obtaining the Largest Discount,” Estate Planning,January/February 1994, pp. 38-44. In spite of the long time period covered, this study analyzed only a little over 100transactions involving companies that were generally not the smallest capitalization companies.r Espen Robak and Lance S. Hall, “Bringing Sanity to Marketability Discounts: A New Data Source, “ValuationStrategies, July/August 2001, pp. 6-13, 45-46.s Bruce Johnson, “Restricted Stock Discounts, 1991-1995, “Shannon Pratt’s Business Valuation Update, March1999, pp. 1-3. Also, “Quantitative Support for Discounts for Lack of Marketability,” Business Valuation Review,December 1999, pp. 152-155.t Kathryn Aschwald, “Restricted Stock Discounts Decline as a Result of 1-Year Holding Period,” Shannon Pratt’sBusiness Valuation Update, May 2000, pp. 1-5. This study focuses on the change in discounts as a result of theholding period reduction from two years to one year.


Revenue Ruling 77-287In 1977, in Revenue Ruling 77-287, the Internal Revenue Service specifically recognizedthe relevance of the data on discounts for restricted stocks. The purpose of the ruling wasto provide information and guidance to taxpayers, Internal Revenue Service personneland others concerned with the valuation, for Federal tax purposes, of securities thatcannot be immediately resold because they are restricted from resale pursuant to Federalsecurity laws.u The ruling specifically acknowledges the conclusions of the SECInstitutional Investor Study and the values of restricted securities purchased byinvestment companies as part of the relevant facts and circumstances that bear upon theworth of restricted stock.

All of the studies concerning restricted stock generally deal with minority blocks of stockin public companies. Therefore, the restricted stock studies may be a useful guide inassessing a discount for lack of marketability to a minority interest. However, a controlvalue may also need to reflect a DLOM, although it probably would be smaller than aDLOM attributable to minority shares. Since a minority interest is more difficult to sellthan a controlling interest, the DLOM is usually larger for minority interests. The averageDLOM ranges between 25 and 45 percent based on the studies discussed previously.Larger discounts may be appropriate if the starting point is a marketable, minority interestvalue based on public guideline company methods.

Bernard Mandelbaum v. CommissionerIn 1995, the Tax Court ruled in the Mandelbaum case (TCM 1995-255). The main issuein this case was the discount for lack of marketability; the taxpayer’s appraiser utilized a70 percent DLOM, while the IRS’s expert utilized a 30 percent discount. Both expertsutilized the restricted stock studies that were available at the time; one expertconcentrated on three particular studies, while the other relied on 10 studies and otheroutside advice. Judge Laro analyzed both experts’ methodologies and chose not to relyon either one. Instead, he provided a list of factors that he believed should be consideredin determining the appropriate DLOM. These factors area as follows:

1. Private versus public sales of stock: This factor was used by the court because thestudies reflect transactions of securities with similar attributes to that of privatelyheld stock. Restricted stock is stock of a public corporation, but to avoid dilutionand registration costs, is not registered for trading privately, mirroring thetransaction characteristics of a closely held company. Because these transactionswere required to be registered with the SEC until 1990, analysis was permitted,resulting in the creation of the studies. As a result of these factors, Judge Larobegan his analysis with a discount of 35 to 45 percent.

2. Financial statement analysis: The purpose of including this factor into the analysisis to reflect the notion that a company with favorable financial characteristicsworld be attractive to willing investors. This attractiveness will result in added

u Revenue Ruling 77-287 (1977-2 C.B 319), Section I.


marketability. On the other hand if the company’s financial position is weak, itwould be less marketable.

3. Nature of the Company, Its History, Its Position in the Industry, and Its EconomicOutlook: Investors will analyze a company’s background, industry, and theeconomic factors that affect it, so that they will have a better idea of what to basefuture expectations on. This is done to determine where the company is heading,and how this will affect its attractiveness to potential investors.

4. Company’s Management: Because the operations and goals of a company aredetermined by management, their experience and involvement is fundamentalwhen assessing attractiveness. The management team is responsible for thecompany’s performance. If investors lack confidence in a company’smanagement, the organization will lose marketability because some investors willnot be interested in stock ownership.

5. Amount of Control in Transferred Shares: When a company’s stock is transferredin blocks, a block that represents control will have additional appeal over a blockwithout such control. This is true because, as a block of stock has more control, apotential investor will have the ability to direct and run a company using his or herprocedures and guidelines. This will affect the attractiveness of a company stock,depending on the type of investor.

6. Restrictions on Transferability of Stock: The more restrictive it is to transfershares, the less marketable the shares will be.

7. Holding Period for Stock: In some instances, a company’s stock may have to beheld for a period of time so that the benefits of ownership can accumulate tocreate a sufficient profit for the investor. Such an event would cause the securityto lose some of its marketability because of the need to maintain ownership. Thisincreases market risk while marketability decreases. The holding period isessential for calculating marketability levels and the resulting DLOM, because itis a direct determinant of how quickly an individual can purchase a stock and turnaround and sell it in the future.

8. Company’s Redemption Policy: This factor is important because it will determineif the company can purchase shares from stockholders so that they can gain accessto cash. This analysis will display how the company can aid in, or detract from,its stock liquidity. This is especially important for privately held firms because ofthe nonexistence of a ready market. If a company readily buys back shares, thiswill increase the liquidity of those shares, thereby increasing marketability.However, if the opposite is true, then the stock of the company is less marketablebecause another option for sale is removed.


9. Costs Associated With Making A Public Offering: When determining the value ofa privately held stock, the cost to make a public offering is typically incorporatedwithin the analysis. This is due to the need for determining which party isrequired to realize the costs of registering the security. In the case where thebuyer must bear the expense, marketability will decrease because some investorswill not consider such a transaction as an option because of the cost. This eventcauses the pool of potential investors to decrease. If the investor does not have toabsorb this cost when making a purchase, the marketability of the stock will begreater.

Initial Public Offering StudiesAnother manner in which the business appraisal community and users of its servicesdetermines discounts for lack of marketability is with the use of closely-held companiesthat underwent an initial public offering (IPO) of its stock. In these instances, the valueof the closely-held stock is measured before and after the company went public.

Robert W. Baird & Co. StudiesRobert W. Baird & Co., a regional investment banking firm has conducted 11 studiesover time periods ranging from 1980 through 2000, comparing the prices in closely-heldstock transactions, when no public market existed, with the prices of subsequent IPOs inthe same stocks. The results over this period of time indicate a mean discount of 47percent and a median discount of 48 percent. However, the mean discounts have rangedfrom 42 to 60 percent, while the median discount has ranged from 40 to 66 percent.

Williamette Management Associates StudyA similar private, unpublished study has been performed by Williamette ManagementAssociates. The discounts in these studies have ranged from a median of -195.8 to 76.2percent. However, in the two years where these extreme discounts were experienced,these sample sizes were only two and seven. If these two years’ results were eliminated,the median discounts ranged from 27.7 to 73.1 percent.

Valuation Advisors – Lack of Marketability Discount StudyValuation Advisors’ studies are sold in a searchable database at Business ValuationResources. Valuation Advisors shows the discounts based on the length of time betweenthe original sale of stock and the ultimate IPO. Based on the data shown in Table 2, it isclear that the longer the amount of time until the liquidity event, in most cases, the higherthe discount. Over the 11 years of compiling this data, the average discounts for the oneto 90 day category have averaged 19.3 percent, while the average over the 1-2 year periodhas been 59 percent.


Time of Transaction 1-90 91-180 181-270 271-365 1-2

Before IPO Days Days Days Days Years

1999 Results

Number of Transactions 149 175 103 92 175

Median Discount 30.8% 53.9% 75.0% 76.9% 82.0%

2000 Results


Median Discount 28.7% 45.1% 61.2% 68.9% 76.6%

2001 Results


Median Discount 14.7% 33.2% 33.4% 52.1% 51.6%

2002 Results


Median Discount 6.2% 17.3% 21.9% 39.5% 55.0%

2003 Results


Median Discount 28.8% 22.2% 38.4% 39.7% 61.4%

2004 Results


Median Discount 16.7% 22.7% 40.0% 56.3% 57.9%

2005 Results


Median Discount 14.8% 26.1% 41.7% 46.1% 45.5%

2006 Results


Median Discount 20.7% 20.8% 40.2% 46.9% 57.2%

20073 Results


Median Discount 11.1% 29.4% 36.3% 47.5% 53.1%

2008 Results


Median Discount 20.3% 19.2% 45.9% 40.4% 49.3%

1999-Transaction Results


Median Discount 19.3% 29.0% 43.4% 51.4% 59.0%

Valuation Advisors Lack of Marketability Discount Study

Transaction Summary Results By Year From 1999-2008

Source: The Valuation Advisors – Discounts for Lack of Marketability Database (July 15, 2009).

The above data clearly reflects that the longer the period of time before a liquidity event(the IPO), the greater the discount. The liquidity of a minority interest in a closely-heldcompany can take a considerable amount of time if a sale of the company is not planned.Therefore, it seems that the discounts from this study approximate 60 percent.


Cost of FloatationThe methods of liquidating an entire company are to execute an IPO of the stock, or tosell the stock in a private transaction. There are several costs associated with executingan IPO, which include:

1. Auditing and accounting fees, to provide potential buyers or underwriters with thefinancial information and assurances they demand.

2. Legal costs, at a minimum to draft all of the necessary documents, and often toclear away potential perceived contingent liabilities and/or to negotiate warranties.

3. Administrative costs on the part of management to deal with the accountants,lawyers, potential buyers, and/or their representatives.

4. Transaction and brokerage costs, if a business broker, investment banker, or othertransactional intermediary is involved.

One of the most comprehensive studies on the costs of public flotation was published bythe SEC in December 1974. It covered 1,599 initial public offerings. The breakdown ofthe study is presented below:

Compensation Other Expense

Size of Issue (Percent of (Percent of

(Millions) Number Gross Proceeds) Gross Proceeds)

Under .50 43 13.24% 10.35%

.50 - .99 227 12.48% 8.26%

1.00 - 1.99 271 10.50% 5.87%

2.00 - 4.99 450 8.19% 3.71%

5.00 - 9.99 287 6.70% 2.03%

10.00 - 19.99 170 5.52% 1.11%

20.00 - 49.99 109 4.41% 0.62%

50.00 - 99.99 30 3.94% 0.31%

100.00 - 499.99 12 3.03% 0.16%

Over 500.00 0 - -

TOTAL/AVERAGES 1599 8.41% 4.02%

SEC Study On The Costs of Flotation


The data shows a significant decline in the level of expense to the size of the issue as thesize of the issue increases. Offerings under $1 million can have expenses as high as 23.6percent of the offering. In contrast, offerings over $500 million on average only, haveexpenses equal to 3.2 percent of the offering.

A second study on the subject was published by Jay R. Ritter in 1987. The results arepresented below:

Underwriting Other Total Cash

Gross Proceeds(a) Number of Discount(b) Expenses© Expenses

($) Offers (%) (%) (%)

100,000 - 1,999,999 68 9.84% 9.64% 19.48%

2,000,000 - 3,999,999 165 9.83% 7.60% 17.43%

4,000,000 - 5,999,999 133 9.10% 5.67% 14.77%

6,000,000 - 9,999,999 122 8.03% 4.31% 12.34%

10,000,000 - 120,174,195 176 7.24% 2.10% 9.34%

All Offers 664 8.67% 5.36% 14.03%

100,000 - 1,999,999 175 10.63% 9.52% 20.15%

2,000,000 - 3,999,999 146 10.00% 6.21% 16.21%

4,000,000 - 5,999,999 23 9.86% 3.71% 13.57%

6,000,000 - 9,999,999 15 9.80% 3.42% 13.22%

10,000,000 - 120,174,195 5 8.03% 2.40% 10.43%

All Offers 364 10.26% 7.48% 17.74%

Best-Effort Offers

Firm Commitment Offers

Direct Expenses of Going Public

As A Percent Of Gross Proceeds

(1977 - 1982)

aGross proceeds categories are nominal; no price level adjustments have been made.bThe underwriting discount is the commission paid by the issuing firm; this is listd on the frontpage of the firm’s prospectus.cThe other expenses figure comprises accountable and nonaccountable fees of the underwriters,cash expenses of the issuing firm for legal, printing, and auditing fees, and other out-of-pocketcosts. These other expenses are described in footnotes on the front page of the issuing firm’sprospectus. None of the expense categories includes the value of warrants granted to theunderwriter, a practice that is common with best-effort offers.Source: Jay R. Ritter, “The Costs of Going Public,” Journal of Financial Economics, January1987: 272


This study again shows a relationship between the size of the offering and the expenses asa percentage of the offering. It is clear that smaller deals incur significantly larger costsas a percentage of gross proceeds.

ConclusionAs far back as 1977, through Revenue Ruling 77-287, the Internal Revenue Servicerecognized the effectiveness of restricted stock study data in providing useful informationfor the quantification of discounts for lack of marketability. The Baird, Williamette andValuation Advisors studies of transactions in closely-held stocks did not exist at thattime, but the IRS and the courts have been receptive to using this data to assist inquantifying discounts for lack of marketability.

The IPO studies are proof that larger discounts can be justified than those quoted from therestricted stock studies. One of the best explanations of why a DLOM varies from case tocase was included in an article published by Robert E. Moroney entitled “Why 220%Discount for Nonmarketability in One Valuation, 100% in Another?”v In Moroney’sarticle., he points out 11 different factors that should be considered in the application of aDLOM. These factors are as follows:

High dividend yield: Companies that pay dividends tend to more marketablethan companies that do not.

Bright growth prospects: Companies that have bright growth prospects areeasier to sell than companies that do not. This makes them more marketable.

Swing value: If a block of stock has swing value, it may be more marketablethan the typical small block of stock. This swing value could include apremium. This can be emphasized where a 2 percent interest exists with two49 percent interest. The 2 percent interest can be worth quite a bit to either49 percent interest if it will give that interest control of the company.

Restrictions on transfer: Restrictions on transfer make the stock lessmarketable due to the difficulty in selling them.

Buy-sell agreements: Buy-sell agreements can go either way. The agreementcan create a market for the stock, making it more marketable, or theagreement can restrict the sale making it less marketable.

Stocks quality grade; The better the quality of the stock, the more marketableit will be. This can be evidenced by comparing the subject company to othersfor supporting strengths and weaknesses.

v Taxes, May 1977.


Controlling stockholders honesty: The integrity of the controlling shareholdercan make a big difference regarding the ability to sell a partial interest in acompany. If the controlling shareholder tends to deal with the otherstockholders honestly, the other interests in that company tend to be moremarketable.

Controlling stockholders friendliness: Similar to the stockholders honesty,the manner in which he or she deals with others can make the stock moremarketable.

Prospects for the corporation: If a corporation has good prospects for thefuture, it will generally be more marketable.

Prospects for the industry: A company that is in an industry with goodprospects will also generally be more marketable.

Mood of the investing public: When the investing public is bullish, they aremore readily willing to make an investment. This can increase themarketability.

Some of these factors overlap with the factors that Judge Laro discussed in theMandelbaum case.

Benchmarking

In this assignment we are appraising majority ownership with full control. Other than themost recent restricted stock studies, the marketability studies have supported discounts of35 to 45 percent. These studies relate to minority interests in companies that are eitherpublic, with restrictions under Rule 144, or private, but about to go public. Therefore, anargument can easily be made to support a higher discount for an interest in a closely-heldcompany that is not going public. The pre-IPO studies have demonstrated higherdiscounts.

We have analyzed the Mandelbaum factors and have considered them as follows:

Private versus public sales of stock: The restricted stock and pre-IPO studies bothindicate that stocks that cannot be immediately resold due to restrictions on the right tosell the stocks into the public marketplace are worth less than stocks that can beconverted to cash within three days. That is what makes these studies relevant in thevaluation of an interest in closely held company. The average discount of the variousstudies is approximately 35 percent and therefore, our benchmark analysis begins withthat discount.

Financial statement analysis: The Company had a track record of profitability but didstruggle in 2008 during the national economic downturn. However, they have a longtrack record of success, so we feel most investors look at CII as a good investment. As aresult, we feel this will decrease the DLOM.


Nature of the Company, Its History, Its Position in the Industry, and Its EconomicOutlook: CII has been incorporated since 1989 – so it has long history. It is alsopositioned well within its industry. Our industry reports for the Grocery Wholesalingindustry in the United States looks very promising (See Exhibits IV and V). As a result,we feel this will decrease the DLOM.

Company’s Management: The Company appears to have a very experienced managementteam that understand the industry and the company inside and out. We feel this willdecrease the DLOM.

Amount of Control in Transferred Shares: There are no restrictions to the transferabilityof company stock. We feel this would decrease the DLOM.

Restrictions on Transferability of Stock: There are no restrictions on the sale of companystock. We feel this would decrease the DLOM.

Holding Period for Stock: There are no holding period restrictions on the company stock.We feel this would decrease the DLOM.

Company’s Redemption Policy: The company does not have a redemption policy. Thiswould decrease the DLOM.

Costs Associated With Making a Public Offering: When determining the value of aprivately held stock, the cost to make a public offering is typically incorporated within theanalysis. Since there are no plans to include the Partnership in a public offering nor is itlikely to happen in the future, we feel this would have no effect on the DLOM.

Dividend Yield: The Company has been providing dividends to shareholders throughpayroll, exceeding that of the industry. Therefore, we feel this will decrease the DLOM.

Growth Prospects: The prospects for the industry and the Company look very good forthe foreseeable future. We feel this would decrease the DLOM.

Stock Quality Grade: There are no special issues with the stock quality. We feel thiswould have no effect on DLOM.

Controlling Shareholder Honesty/Friendliness: The owners of the controlling sharesappear to be honest and friendly toward the minority ownership. This would decrease theDLOM.

Prospects for the Company: Both the near and long term prospects for the Companyappear good. This will decrease the DLOM.

Prospects for the Industry: The prospects in the Grocery Wholesaling industry look verygood for the period from 2011 through 2016 (See Exhibits IV and V). This will decreasethe DLOM.

Mood of the Investing Public: The national economic downturn of 2008 to 2009 hascaused the investing public is be more cautious and to focus their investments inprofitable companies with future growth. However, other than 2008, CII has a history ofsuccess and has great relationships with its customers. We feel this will decrease theDLOM.


Increase No Decrease Weighted

Factor Considered Weighting DLOM Effect DLOM Total

Financial statement analysis 8 X (83)

Nature of company 8 X (8)

Quality of management 7 X (7)

Control in transferred shares 5 X (5)

Restrictions on transferability 3 X (3)

Holding period 1 X (1)

Redemption policy 1 X (1)

Costs associated with public offering 1 X -

Dividend yield 8 X (8)

Growth prospects 9 X (9)

Stock's quality grade 2 X -

Controlling shareholder's honesty 3 X (3)

Prospects for company 9 X (9)

Prospects for industry 7 X (7)

Mood of investing public 7 X (7)

WEIGHTED TOTAL (151)

A review of the factors above indicates a consistent trend toward a lower than averageDLOM.

Overall Conclusion

The valuation analysis primarily applied two methodologies to obtain an overall discountfor lack of marketability: benchmarking against the studies using specific factors found inthe Mandelbaum decision and the Moroney article. The appropriate discount using thismethodology was deemed to be 30 percent.

There are some strengths and weaknesses associated with the various methodologies.The restricted stock studies and pre-IPO studies in general show that there is arelationship between shares of stock that have liquidity and those that do not. However,in most cases, it is very difficult to show the similarities and dissimilarities between thedate analyzed in the various companies in the studies with the subject company. For thisreason, the courts have been very critical of this data. However, if the analyst starts offwith the idea that this shows a relationship between a ready market and a lack of a readymarket, and looks at specific factors about the subject company, a benchmarking analysiscan be extended to reach conclusions. This does not involve specific data from thestudies, but the effect on lack of marketability.

Based on the strengths and weaknesses of the analysis, a DLOM of 31.0 percent wasselected for CII.


6. CALCULATIONS AND CONCLUSION

6.1 Application of the Control Premium

In order to determine the values for reconciliation, we need apply the Minority Discount(Section 5.1) where applicable:

Guideline Public Company Method (See Section 4.1)Since the information comes from public company values, the values already reflect aminority basis and only need to be adjusted for interest percentage:

Price/Revenue Value – Industry Average$2,697,306 (Value) x 24% (Interest Percentage) = $647,353(Value under Non-Controlling, Fully Marketable basis)

Price/Revenue Value – Industry Median$2,022,980 (Value) x 24% (Interest Percentage) = $485,515(Value under Non-Controlling, Fully Marketable basis)

Price/Cash Flows Value – Industry Average$3,512,512 (Value) x 24% (Interest Percentage) = $843,003(Value under Non-Controlling, Fully Marketable basis)

Price/Cash Flows Value – Industry Median$2,642,160 (Value) x 24% (Interest Percentage) = $634,118(Value under Non-Controlling, Fully Marketable basis)

Guideline Transactions Method (See Section 4.1)Since the information comes from guideline company values, the values reflect acontrolling basis and need to be adjusted with a minority discount:

Price/Revenue Value – Industry Average$6,911,847 (Value) x 24% (Interest Percentage) = $1,658,843

$1,658,843 x Minority Discount (1 – 25.4%) = $1,237,497(Value under Non-Controlling, Fully Marketable basis)

Price/Revenue Value – Industry Median$5,226,031 (Value) x 24% (Interest Percentage) = $1,254,247

$1,254,247 x Minority Discount (1 – 25.4%) = $935,668(Value under Non-Controlling, Fully Marketable basis)


Price/SDE Value – Industry Average$2,980,730 (Value) x 24% (Interest Percentage) = $715,375

$715,375 x Minority Discount (1 – 25.4%) = $533,670(Value under Non-Controlling, Fully Marketable basis)

Price/SDE Value – Industry Median$2,744,164 (Value) x 24% (Interest Percentage) = $658,599

$658,599 x Minority Discount (1 – 25.4%) = $491,315(Value under Non-Controlling, Fully Marketable basis)

Historical Cash Flows Method (See Section 4.2)This method reflects business values on a minority basis and only need to be adjusted forinterest percentage:

$3,020,307 (Value) x 24% (Interest Percentage) = $724,874(Value under Non-Controlling, Fully Marketable basis)

Asset Values – Book Value (See Section 4.3)This information reflects values on a control basis, so we need to adjust for the interestpercentage and then apply a minority discount:

$1,706,980 (Value) x 24% (Interest Percentage) = $409,675$409,675 x Minority Discount (1 – 25.4%)) = $305,618

(Value under Non-Controlling, Fully Marketable basis)

6.2 Application of the Marketability Discount

In order to determine the values for reconciliation, we need apply the Discount for Lackof Marketability (Section 5.2) where applicable.

Guideline Public Company MethodSince the information comes from public company transactions, the values need to beadjusted to a non-marketable basis:

Price/Revenue Value – Industry Average$647,353 (Non-Controlling Value) x Marketability Discount (1 - .31) = $446,674

(Value under Non-Controlling, Non-Marketable basis)

Price/Revenue Value – Industry Median$485,515 (Non-Controlling Value) x Marketability Discount (1 - .31) = $335,005



Price/Cash Flows Value – Industry Average$843,003 (Non-Controlling Value) x Marketability Discount (1 - .31) = $581,672


Price/Cash Flows Value – Industry Median$634,118 (Non-Controlling Value) x Marketability Discount (1 - .31) = $437,541


Guideline Transactions Method (See Section 4.1)Since the information comes from guideline private transactions, the values alreadyreflect a non-marketability basis and do not need to be adjusted with a marketabilitydiscount.

Price/Revenue Value – Industry Average(From Section 6.1) $1,237,497


Price/Revenue Value – Industry Median(From Section 6.1) $935,668


Price/SDE Value – Industry Average(From Section 6.1) $533,670


Price/SDE Value – Industry Median(From Section 6.1) $491,315


Historical Cash Flows MethodCalculations under this method reflect a marketable basis and need to be adjusted to non-marketable:

$724,874 (Non-Controlling Value) x Marketability Discount (1 - .31) = $500,163(Value under Non-Controlling, Non-Marketability basis)

Asset Values – Book Value MethodCalculations under this method reflect a marketable basis and need to be adjusted to non-marketable:

$305,618 (Non-Controlling Value) x Marketability Discount (1 - .31) = $210,876(Value under Non-Controlling, Non-Marketability basis)


6.3 Conclusion

The standards clearly indicate that an appraiser cannot simply take a mathematicalaverage, but must evaluate and weight the relative reliability and confidence level of eachvalue indication, using judgment and experience, in order to reach a final conclusion ofvalue.


Approach Indicated Value Weight

MarketGuideline Public - Price/Revenue (Aver.) $ 446,674 0%

- Price/Revenue (Median) $ 335,005 0%

Guideline Public - Price/Cash Flow (Aver.) $ 581,672 0%- Price/Cash Flow (Median) $ 437,541 0%

Guideline Trans. - Price/Revenue (Aver.) $ 1,237,497 0%- Price/Revenue (Median) $ 935,668 0%

Guideline Trans. - Price/Cash Flow (Aver.) $ 533,670 0%- Price/Cash Flow (Median) $ 491,315 0%

IncomeCapitalization of Historical Cash Flows $ 500,163 100%

AssetBook Value $ 210,876 0%

In conclusion, the indicated value range is from $210,876 to $1,237,497.

Most of the values derived from the various methods are reasonably close to each other.Only the Guideline Transactions Price to Revenue ratio provided values not in line. Wefeel this is due to the smaller size of those companies compared to CII. Also, the Price toSellers Discretionary Earnings for that method were more consistent with the othermethods.

Under the Guideline Public Company method we found only six companies with theGrocery Wholesaling designation. Also, since the ratios and operating results of thosecompanies were not consistent, we did not feel this was a good method for valuing CII.

The Income Approach (Capitalization of Historical Cash Flows method) provides a valuederived directly from analysis of the subject company. It uses the actual cash flows aninvestor would expect from this actual investment as opposed to using other companies asa proxy. Therefore, we feel this approach is the best method for valuing CII.


Based on this analysis, we decided to rely 100% on the Capitalization of HistoricalCash Flows Method for the value of CII.

CONCLUSIONBased on our analysis shown in this report, we have determined that the fair marketvalues of a 24% non-controlling interest in Castle Importing, Inc. to be the following:

Castle Importing, Inc.As of February 4, 2011

(Non-controlling Basis, Non-marketable)($500,163) $500,000 rounded

Five Hundred Thousand Dollars


7. CURRICULUM VITAE: JOHN MISURACA

Curriculum VitaeJohn M. Misuraca

Professional Experience & Responsibilities Accounting and consulting services for closely-held business and professionals. Income tax research, planning, preparation, and audit representation. Accounting software selection, planning and implementation.

Education &Training California State University, Long Beach, California. Bachelor of Science degree, 1980 -

Business Administration, Accounting option. California State University, Fullerton, California. Certificate in Forensic Accounting:

Investigative Accounting, Fraud Examination and Litigation Support, December 2006 California State University, Fullerton, California. Certificate in Expert Witness:

Litigation Support and Testimony, June 2008

Professional Licenses & Affiliations Certified Public Accountant, State of California California Society of Certified Public Accountants, member California Society of Certified Public Accountants, State Business Valuation Section,

- Chair, 2010 to 2012- Secretary, 2009 to 2010

National Association of Certified Valuation Analysts, member

Professional Position Partner, Avalon Advisors Inc.

Provide business valuation services including business appraisals, tax and financialreporting, litigation support, employee stock ownership plans and Estate and Gift Taxpurposes

Principal, John Misuraca, CPAJohn Misuraca, Certified Public Accountant, is a sole proprietorship providingaccounting, tax and consulting services since 2001.

Employment History Gulton Industries, Transrex Division, Carson, California, 1980-1981 Smith International, Willis Division, Long Beach, California, 1981-1984 McGladrey & Pullen, Certified Public Accountants, Anaheim, California, 1984-1990 Moen Industries, Santa Fe Springs, California, 1990-1991 Hartwell Corporation, Placentia, California, 1991-1999 Newport Printing Corporation, Irvine, California, 1999-2000 Luminor Corporation, Irvine, California, 2000-2001 John Misuraca, Certified Public Accountant, 2001 to present


8. EXHIBITS

I. Castle Importing, Inc. – Balance Sheets

II. Castle Importing, Inc. – Profit & Loss Statements

III. National Economic Report – December 2010

IV. Grocery Wholesaling in the United States

V. Industry Risk Rating Report – Grocery Wholesaling in the UnitedStates


I. Castle Importing, Inc. – Balance Sheets


Balance Sheets

As of December 31, 2010 2009 2008 2007 2006

ASSETS

Current Assets

Cash 120,784$ 204,687$ 57,670$ 78,185$ 62,914$

Accounts receivable 1,064,840 945,181 804,562 1,021,746 909,996

Other receivable 12,816 - 7,600 1,432 22,705

Inventory 1,598,894 1,368,137 1,305,000 1,877,302 1,109,000

Federal and state inc tax receivable - 805 75,862 64,508 -

Notes receivable, current portion - - - 103,449 99,400

Deposits on equipment (9,041) 25,000 2,780 3,433 89,118

Total Current Assets 2,788,293 2,543,810 2,253,474 3,150,055 2,293,133

Fixed Assets

Property and equipment, net 1,126,146 1,353,148 1,543,025 1,709,160 971,332

Other Assets

Notes receivable-long term - - - 89,421 280,182

Total Assets 3,914,439$ 3,896,958$ 3,796,499$ 4,948,636$ 3,544,647$

LIABILITIES

Current Liabilities

Accounts payable, trade 909,879$ 943,989$ 666,338$ 975,899$ 792,217$

Accrued payroll - - 69,632 - -

Accrued expense 279,402 116,756 - 100,000 227,862

Employee savings account 1,890 2,461 665 1,305 3,429

Bank line of credit - 692,568 500,000 1,000,000 200,000

Long-term debt, current portion 745,242 302,674 515,658 590,422 325,680

Total Current Liabilities 1,936,413 2,058,448 1,752,293 2,667,626 1,549,188

Long-Term Liabilities

Long-term debt, net of current portion 271,046 391,314 649,296 678,231 311,429

Total Liabilities 2,207,459 2,449,762 2,401,589 3,345,857 1,860,617

STOCKHOLDERS' EQUITY

Common stock 40,000 40,000 40,000 40,000 40,000

Retained earnings 1,666,980 1,407,196 1,354,910 1,562,779 1,644,030

Total Stockholders Equity 1,706,980 1,447,196 1,394,910 1,602,779 1,684,030

Total Liabilities & Stockholders' Equity 3,914,439$ 3,896,958$ 3,796,499$ 4,948,636$ 3,544,647$


II. Castle Importing, Inc. – Income Statements


Profit & Loss Statements

For Years Ending December 31, 2010 2009 2008 2007 2006

Sales 16,858,164 14,760,092 13,493,410 13,571,388 12,712,416

Cost of goods sold 12,949,416 11,461,337 10,328,526 10,132,493 9,133,626

Gross profit 3,908,748 3,298,755 3,164,884 3,438,895 3,578,790

Operating expenses 3,520,850 3,250,669 3,728,298 3,554,813 3,493,719

Operating income 387,898 48,086 (563,414) (115,918) 85,071

Other income/(expense) 4,384 12,395 190,101 142,041 18,276

Income before taxes 392,282 60,481 (373,313) 26,123 103,347

Income tax expense 132,497 8,195 (93,379) 35,309 71,806

Net income 259,785 52,286 (279,934) (9,186) 31,541


III. National Economic Report – December 2011

The KeyValueData National Economic Report is written and edited by Kevin R. Hopkins. Mr.Hopkins is a former senior economic advisor to President Reagan. He previously served asDirector of the White House Office of Policy Information and as Senior Staff Member for theWhite House Cabinet Council on Economic Affairs. He has also been a senior contributing editorto Business Week magazine for the past 18 years. He attended the Ph.D. program in Economicsand Mathematics at UCLA.

December 2010 National Economic Report: SummaryThe year-old U.S. recovery from the deepest recession since the Great Depression continues tofalter. The U.S. Department of Commerce reported on June 25 that the U.S. economy grew byjust 3.7% during the first quarter of 2010, down substantially from the revised growth rate of5.6% recorded for the fourth quarter of 2009. Disappointing as this rate was, it slipped againduring the second quarter, with the economy growing by an anemic 1.7%. And then, inNovember, revised third-quarter growth numbers came in, only marginally better, at 2.5%. Inresponse, most analysts, including the U.S. Federal Reserve, have lowered their growth forecastsfor 2010, and numerous economists are openly wondering if the U.S. economy will slip back intorecession. To forestall this possibility, the Federal Reserve recently announced a nearly $1 trillioncash infusion.

One of the most troubling factors in this mix is the burgeoning Federal budget deficit, whichexceeded $1.3 trillion for the second year in a row. As a result of accumulating budget deficits,Federal debt will consume 62% of the nation’s economic output this year, and is on pace toaccount for more than 100% of economic output by 2015. Other areas of concern include thestill-fragile housing markets and faltering consumer confidence, although last month’s extensionof the Bush tax cuts ended that uncertainty. But it is the job market that remains the mostworrisome problem. The unemployment rate did fall in December to 9.4% from 9.8% inNovember, but the economy added only 103,000 jobs in December—well below expectations.Indeed, private-sector job production remains less than hoped, and the economy is adding jobs ata pace that is barely enough to keep up with population growth, much less replace jobs lostduring the recession. A rising chorus of economists project that this grim “new normal” mayendure for many years to come, with the Fed projecting five years before robustness returns.

U.S. Economy Still In Recovery, But Growth Remains TepidIn another of a growing series of signs that the nascent U.S. economic recovery is in peril, theU.S. Bureau of Economic Analysis (BEA) announced in its “advance report” on July 30 that realU.S. gross domestic product (GDP) rose by an annual rate of 2.4% for the second quarter of2010. That rate was down sharply from the revised rate of 3.7% for the first quarter. And, as theAssociated Press reported on August 27, the U.S. economic picture was “about to get a lotbleaker,” as the Commerce Department revised the second-quarter growth figure downward byalmost half, to 1.7%. AP’s conclusion: the U.S. economy now “barely has a pulse.” The news forthe third quarter wasn’t much brighter. In its advance report released on October 29, the BEAestimated that the U.S. economy increased at an annual rate of 2.0% for the third quarter. On


November 23, however, the BEA raised the growth estimate somewhat for the third quarter to2.5%.

In reaction to this concern, the U.S. Federal Reserve cut its projected growth rate for the U.S.economy for 2011 to between 3.5% and 4.2%. In his most recent statement on the subject, FedChairman Ben Bernanke, speaking on January 13, lowered these figures even more, saying thatthe U.S. economy likely would grow by between 3.0% and 4.0% during 2011. Moreover, afterspending the first half of 2010 saying that no additional support actions were necessary, the Fedannounced on November 3 that it was going to attempt to jumpstart the economy by purchasing$600 billion in long-term Treasuries.Unemployment Picture Remains Grim

The U.S. economy added 103,000 jobs in December, the U.S. Labor Department reported onJanuary 7, 2011. That figure was a sharp improvement over the gain of 39,000 job in November.However, it fell far short of economists’ projected gains of 150,000 jobs for the month, withsome economists forecasting job gains in the 300,000 range. “The labor market ended last yearwith a bit of a thud,” Ryan Sweet, an economist at Moody’s Analytics, told Yahoo! Finance.Over the past three months, the economy has added an average of 128,000 jobs a month. That’sbarely enough to keep up with population growth—in fact, nearly twice that many new jobsgenerally are needed to significantly reduce the unemployment rate. Overall, employers added1.1 million jobs in 2010, or about 94,000 a month. The nation still has 7.2 million fewer jobstoday than it did in December 2007, when the recession began.

In addition, the U.S. unemployment rate fell in December to 9.4% from 9.8% in November afterbouncing between 9.5% or 9.6% for the previous four months. Previously, the jobless rate hadfallen to 9.5% in June and July after having ranged between 9.7% and 9.9% for the first fivemonths of 2010. While welcome news, the recent decline in the rate, analyst say, was drivenlargely by the fact that more people gave up looking for work rather than by a large increase inwork opportunities.

For these and other reasons, the Federal Reserve has become more pessimistic about the U.S.jobs outlook. In its most recent formal assessment, the U.S. Federal Reserve projected that theU.S. unemployment rate would range between 8.3% to 8.7% for 2011 (versus an earlier forecastof 8.1% to 8.5%) and, for 2012, between 7.1% and 7.5% (versus an earlier forecast of 6.6% to7.1%). Putting the point more bluntly, Fed Chairman Ben Bernanke declared on December 5 that,“at the rate we’re going, it could be four, five years before we are back to a more normalunemployment rate.”

Concerns Grow Over Federal Debt LevelsThe Obama Administration reported on October 15 that the Federal budget deficit for the just-completed fiscal year was $1.3 trillion. Although down some $122 billion from last year’srecord-setting deficit, the fiscal 2010 number is still the second highest in U.S. history. Looked atanother way, the United States now has to borrow 37% of every dollar it spends. As for overalldebt levels, the U.S. Treasury Department reported on its official web site that, as of December31, 2010, the U.S. national debt stood at $14.025 trillion—surpassing the $14 trillion mark for


the first time in history and exceeding by $300 million the U.S. Treasury Department’s forecastjust three months earlier. It took just seven months for the national debt to increase from $13trillion on June 1, 2010, to $14 trillion by year-end. As a result, the debt is fast-approaching thestatutory ceiling of $14.294 trillion set by Congress and signed into law by President Obama lastFebruary.

Bush Tax Cuts ExtendedThe uncertainty over the extension of the Bush-era tax cuts ended in December when Congressapproved and the President, on December 17, signed Mr. Obama’s compromise extensionproposal. The law contains a number of new tax changes—both new and extended—as well asemergency help for the jobless. However, the extension is just for two years, and so the same taxbattle will be fought anew at the end of President Obama’s current term of office.

The Financial Crisis ContinuesMore banks failed in the United States last year than in any year since 1982, during the savings-and-loan crisis, the U.S. Federal Deposit Insurance Corp. (FDIC) announced on December 28.Altogether, 157 banks closed their doors, up from 140 in 2009. As recently as 2006, before thefinancial bubble burst, there were no closures. In addition, the FDIC’s list of “problem banks”—those whose weaknesses threaten their continued financial viability—stood at 860 as ofSeptember 30, the highest level since 1993. Historically, about a fifth of banks on the watch listend up failing. However, while bank failures have left the FDIC insurance fund in the red, theagency predicts that it will have more than enough money to meet the anticipated cost of bankfailures through 2014.

Stocks Finish Off A Solid YearThe above financial concerns notwithstanding, U.S. stocks wound up turning in another solidyear in 2010, with the Dow Jones Industrial Average gaining 11.0%, the Standard & Poor’s 500-stock index adding 12.8%, and the Nasdaq Composite Index climbing by 17.4%. According to ayear-end wrap-up by The Wall Street Journal, “Amid stumbles and scares, U.S. stocks clamberedto a second straight year of gains, in which the Dow reached levels not seen since the fall ofLehman Brothers in September 2008. Nevertheless, ‘it was a pretty hard-earned 11%,’” as oneanalyst told The Journal.

Industrial Production Edges UpIndustrial production increased by 0.8% in December after having risen by 0.3% in November.For the fourth quarter as a whole, industrial production increased at an annual rate of 2.4%, aslower pace than in the earlier quarters of the year. In the manufacturing sector, output moved upby 0.4% in December with gains in both durables and nondurables. Excluding motor vehiclesand parts, factory output increased by 0.5%. The output of mines advanced by 0.4% while theoutput of utilities surged by 4.3%, as unusually cold weather boosted the demand for heating. At94.9% of its 2007 average, industrial production in December was 5.9% above its level of a yearearlier.


Automakers Finish Year On A Strong NoteMost automakers ended a challenging 2010 with a strong sales month in December, raising hopesthat the industry could be carrying some momentum into the new year. American automakersGeneral Motors, Ford Motor, and Chrysler Group all posted solid gains that met or toppedforecasts. The one major automaker bucking the positive trend was Toyota, which posted adecline in sales for both December and the full year, as it continued to suffer from the hangoverof its recall problems earlier in the year. Hyundai, Honda, and Nissan also ended the year withstrong sales.

Housing Market Rebounds In NovemberAfter rising by 6.6% to an adjusted annual rate of 307,000 in September and then falling back toan annual pace of just 275,000 in October, new home sales rebounded somewhat in November,according to the U.S. Commerce Department, rising to a seasonally adjusted rate of 290,000—again of 5.5%. Similarly, after tumbling by 2.2% in October, existing home sales rebounded inNovember: the number of signed contracts was up by 3.0% over October levels, according to theNational Association of Realtors.Consumer Confidence Measures Mixed

The Conference Board Consumer Confidence Index, which had improved in November,decreased slightly in December. The Index now stands at 52.5 (1985=100), down from 54.2 inNovember. The Present Situation Index declined to 23.5 from 25.4, while the Expectations Indexdecreased to 71.9 from 73.6. In contrast, the similarly conceived Thomson Reuters/University ofMichigan’s Consumer Sentiment Index was 74.5 in December 2010, up from 71.6 in Novemberand from 67.7 in October. The index increased by 9.4% for the entire year, with the gains weredue largely to more favorable plans for buying durable goods. By contrast, the organization’sExpectations Index, while up by 4.2% for December, was down by 2.0% for the whole year.

Consumer Spending Remains StagnantAccording to a U.S. Department of Labor report released on October 6, middle-class Americansmade their deepest spending cuts in more than two decades, slashing spending on suchdiscretionary items as restaurant meals and alcohol. Overall, households in the middle fifth of thepopulation sliced their average annual spending to $41,150, the Labor Department said, a levelthat was down by 3.1% from 2007 and by 3.5% from 2008. Consumer spending has reboundedsince then, but only slightly: it rose by 0.2% in September after 0.5% gains in July and August,according to Commerce Department data. For last year as a whole, the Department subsequentlyreported, consumer spending was down by 2.8% year-over-year.

Retail Sales Continue to ImproveAccording to a January 15 report from the U.S. Census Bureau, U.S. retail sales increased by0.6% in December after an 0.8% gain in November. The largest gains came in building materials,autos, gasoline, and furniture, while purchases of food, electronics, and clothing slipped.Additionally, online sales on Cyber Monday (the Monday following Thanksgiving) surged by19.4% from the levels of last year, according to findings by Coremetrics, a research group that isa unit of IBM.


Inflation Jumps In December, But Fed Not WorriedOn a seasonally adjusted basis, the Consumer Price Index (CPI) for all items increased by 0.5%in December—one of the steepest jumps in months—following a 0.1% gain in November and a0.2% rise in October. The index for all items less food and energy rose by 0.1% in Decemberafter a 0.1% gain in November and after having been unchanged in October. Previously, onOctober 16, Federal Reserve Chairman Ben Bernanke had projected that the U.S. inflation ratewas likely to remain below the Federal Reserve’s 2.0% goal for the foreseeable future.Participants in the December 3 Chicago Fed Economic Outlook Symposium similarly forecastthat inflation would climb to 1.6% in 2011 after averaging 0.9% this year.

Exhibits: Grocery Wholesaling in the United States


IV. Grocery Wholesaling in the United States

See following pages for industry report prepared by IBIS World.

WWW.IBISWORLD.COM� Grocery�Wholesaling�in�the�US July 2011 1

IBISWorld Industry Report 42441Grocery Wholesaling in the USJuly�2011� Mary�Gotaas

Hurting market: Rising costs and pricing pressure from supermarkets will cut into growth

2� About�this�Industry2 Industry Definition

2 Main Activities

2 Similar Industries

2 Additional Resources

3� Industry�at�a�Glance

4� Industry�Performance4 Executive Summary

4 Key External Drivers

5 Current Performance

8 Industry Outlook

10 Industry Life Cycle

12� Products�&�Markets12 Supply Chain

12 Products & Services

13 Demand Determinants

14 Major Markets

15 International Trade

16 Business Locations

18� Competitive�Landscape18 Market Share Concentration

18 Key Success Factors

18 Cost Structure Benchmarks

19 Basis of Competition

20 Barriers to Entry

20 Industry Globalization

21� Major�Companies21 C&S Wholesale Grocers Inc.

22 Supervalu Inc.

23 Wakefern Food Corporation

27� Operating�Conditions27 Capital Intensity

28 Technology & Systems

28 Revenue Volatility

29 Regulation & Policy

29 Industry Assistance

30� Key�Statistics30 Industry Data

30 Annual Change

30 Key Ratios

31� Jargon�&�Glossary

www.ibisworld.com��|��1-800-330-3772��| ��[email protected]


Grocery wholesalers act as the middlemen between food producers and retailers. They do little to transform products and are intermediaries in merchandise distribution. The products that industry

wholesalers sell and distribute include general-line grocery products; establishments do not specialize. Trade usually includes dry groceries, perishable food and non-food products that are found in grocery stores.

The�primary�activities�of�this�industry�are

Wholesaling general-line groceries

Wholesaling dry groceries

Wholesaling perishable food products

Wholesaling non-food products

42442 Frozen�Food�Wholesaling�in�the�USFrozen food wholesalers supply supermarkets, grocery stores, convenience stores and all other food retailers with frozen food.

42443 Dairy�Wholesaling�in�the�USDairy wholesalers link manufacturers and retailers, specifically supermarkets, grocery stores and convenience stores.

42445 Confectionery�Wholesaling�in�the�USThese distributors source confectionery from domestic or international producers and supply them to retailers.

Industry�Definition

Main�Activities�

Similar�Industries

About�this�Industry

The�major�products�and�services�in�this�industry�are

Beverages

Canned food

Fresh meat

Frozen food

Household items

Other

Other grocery products

Specialist food

Additional�Resources For�additional�information�on�this�industry

www.awmanet.org�American Wholesalers Marketing Association

www.naw.org�National Association of Wholesaler-Distributors

www.usda.gov�US Department of Agriculture


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Demand from supermarkets and grocery stores

SOURCE: WWW.IBISWORLD.COM

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Revenue vs. employment growth

Products and services segmentation (2011)

27%Other grocery products9%

Household items

16%Specialist food

8%Other

3%Beverages

15%Canned food

11%Fresh meat

11%Frozen food


Key�Statistics�Snapshot

Industry�at�a�GlanceGrocery�Wholesaling�in�2011

Industry�Structure Life Cycle Stage Decline

Revenue Volatility Low

Capital Intensity Low

Industry Assistance Low

Concentration Level Low

Regulation Level Medium

Technology Change Medium

Barriers to Entry Medium

Industry Globalization Low

Competition Level High

Revenue

$104.5bnProfit

$1.6bnWages

$7.1bnBusinesses

2,835

Annual�Growth�11-16

-0.8%Annual�Growth�06-11

-2.5%

Key�External�DriversDemand�from�supermarkets�and�grocery�storesDemand�from�food�services�and�drinking�placesPer�capita�disposable�incomeWholesale�bypass�Population

Market�ShareC&S Wholesale Grocers Inc. 19.1%

Supervalu Inc. 8.3%

Wakefern Food Corporation 8.1%

p. 21

p. 4

FOR ADDITIONAL STATISTICS AND TIME SERIES SEE THE APPENDIX ON PAGE 30



Key�External�Drivers Demand from supermarkets and grocery storesThe Grocery Wholesaling industry is sensitive to downstream demand from supermarkets and grocery stores, since this sector represents more than 60% of demand for grocery wholesale. Any increase in demand at the supermarket and grocery store level directly increases demand at the wholesale level. This driver is expected to increase slowly over 2011.

Demand from food services and drinking placesThe Grocery Wholesaling industry is sensitive to downstream demand for food services, including cafes, restaurants, food service contractors, caterers and mobile food services. An increase in demand for grocery items at the food service level will boost demand at the grocery wholesale level. This driver is expected to increase over 2011, representing a potential opportunity for the industry.

Executive�Summary

The Grocery Wholesaling industry is contracting as intense competition and rising production costs drive food manufacturers and supermarkets to cut out the middleman. Though this is a typical cost-cutting measure, current economic pressures are forcing all sides of the grocery supply chain to become more aggressive with wholesale bypass. As manufacturers and retailers become more involved in distribution, demand and revenue for the grocery wholesaling sector declines. Over the

five years to 2011, industry revenue is expected to decline by an average of 2.5% per year, including a 0.1% drop in 2011 to $104.5 billion.

At the retail end, the US recession is changing the mix of grocery items purchased, creating a flow-on effect to the Grocery Wholesaling industry. Because of economic insecurity (highlighted by a weakening labor market, low household-income growth and poor consumer sentiment), households are switching to lower-

margin foods and reducing overall purchases. This trend is adversely affecting the industry’s profit, which fell from $174.0 million in 2006 to an expected $135.0 million in 2011. Additionally, it has negatively affected the number of establishments, which is estimated to decline 2.7% per year over the five years to 2011. This drop reflects major industry shrinkage and implies that upstream and downstream industries are increasingly finding ways to cut out the wholesaler.

At the same time, because of low industry returns and the weak economy, wholesalers are raising market share by taking it away from existing grocery distributors. This trend is often reflected in industry acquisitions and consolidation, which have increased major players’ market share. The challenging operating environment has forced unprofitable wholesalers out of the market, however, which is illustrated in falling wholesaler numbers. Moving forward, consolidation will likely increase as competition intensifies. Over the next five years, IBISWorld forecasts that total revenue will continue declining at an average annual rate of 0.8% to $100.2 billion in 2016.

Industry�PerformanceExecutive�Summary�� |�� Key�External�Drivers�� |�� Current�PerformanceIndustry�Outlook�� |�� Life�Cycle�Stage

� Economic pressures and new supply chain models are removing the role of the middleman


Industry�Performance

Current�Performance

Grocery wholesalers supply retailers with grocery and nonfood items. While it was formerly an important link between manufacturers and retailers, the Grocery Wholesaling industry is now in decline. Despite the anticipated economic recovery in 2011, industry revenue is still expected to decline by 0.1% to $104.5 billion in 2011. In fact, revenue has been declining at an average annual rate of 2.5% from 2006 to 2011. High competition and a low-margin business

structure characterize the industry, and profitability is generated through large volumes of low profit margin goods.

Wholesalers compete with local, regional and national food distributors and vertically integrated national and regional chains. For instance, the international food manufacturer Sara Lee distributes bread and frozen foods directly to retailers, and Supervalu is a national food retailer and distributor that does not need wholesaling services.

Key�External�Driverscontinued

Per capita disposable incomeThe level of and movement in household disposable income influence the Grocery Wholesaling industry. Consumers purchase a greater variety of groceries with more disposable income, which increases retail demand and subsequently wholesale demand. This driver is expected to increase slowly over 2011.

Wholesale bypassThe Grocery Wholesaling industry faces upstream competition from food manufacturers and downstream competition from food retailers that make direct supply agreements with each other and bypass the independent

wholesaler. The large supermarket retailers and food manufacturers drive this process, putting pressure on the Grocery Wholesaling industry. This driver is expected to increase over 2011, resulting in a potential threat for the industry.

PopulationGrocery wholesaling products are sensitive to population growth, especially regarding the food segments. An increasing population will demand more food and household products therefore increasing the amount of products a grocery store needs to purchase from wholesalers. This driver is expected to increase slowly over 2011.

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Current�Performancecontinued

The industry’s overall demise is attributed to three factors. The first factor is wholesale bypass, where grocery producers and retailers work directly with each other to eliminate the middleman.

Also, depressed markets coupled with a severe state of product saturation have reduced industry earnings. Last, large distribution operations are acquiring underperforming wholesalers.

Bypassing�the�middleman

A competitive operating environment and the overall shrinking wholesale sector have made it difficult for grocery wholesalers to retain robust returns as retailers and manufacturers continually cut out the supply chain’s middle link. Large supermarkets are driving the wholesale bypass trend as they seek to reduce internal costs and improve margins. By eliminating the wholesaler, supermarkets pay less for grocery items, since they can buy directly from manufacturers and growers.

The steady yearly decline in revenue highlights the industry’s gradual demise. For example, IBISWorld estimates that revenue declined 2.6% over 2010 following declines of 3.8% during 2009 and 2.2% in 2008. From 2006 to 2007, industry revenue declined 3.9%. Overall

increases in global food prices and the general economic slowdown punctuated these years, reducing demand at the retail end to negatively affect the wholesale end.

Survival�of�the�fittest Acquisitions by large and well-established companies typify the past five years. The industry exists in a competitive climate of rising production and operating costs and falling profit. The adverse operating environment has allowed better-established wholesalers to expand their market share; however, those that have underperformed have scaled back or exited the market, causing the industry to contract.

In addition to reducing its size, consolidation has also changed the industry’s structure. A few big companies that have large distribution networks crowded out many small companies and

also increased their direct involvement in the retail sector. Consolidation allowed these firms to form national networks, control buying power and use profit to meet the needs of larger customers. Furthermore, the difference between retailers and wholesalers has continued to blur since an increasing number of retailers operate warehouse clubs and hypermarkets (superstores that combine a supermarket with a department store) that perform many wholesale activities. At the same time, many wholesalers are buying their own retail operations to establish secure demand chains and minimize risk.

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Survival�of�the�fittestcontinued

Since 2006, wholesalers and retailers have consolidated to take advantage of economies of scale and increase market share. According to industry publication Food Institute’s “Food Business Mergers and Acquisitions” report, 83 grocery wholesaler mergers and acquisitions occurred between 2003 and 2008, including Supervalu’s acquisition of rival supermarket Albertsons in 2008 and Unified Grocers’ purchase of Seattle-based Associated Grocers in 2007.

IBISWorld estimates that the wholesaling industry was the second-most active industry in the United States for merger and acquisition activity between 2004 and 2008. Consolidation allowed wholesalers to expand geographically and service a broader and changing customer mix. In 2006, the industry’s top four major players accounted for just less than 30% of market share, but IBISWorld estimates that this concentration will rise to nearly 40% in 2011.

Nontraditional�food�retailers�enter�the�market

Shopping patterns continued to change over the five years to 2011 with the expansion of food retailing by discount mass-merchandise stores like Walmart, warehouse clubs and convenience stores like 7-Eleven. Because of these changes, wholesalers have additional sources to distribute their grocery products; however, a growing number of low-cost retailers are now self-distributing and internalizing the wholesale function. According to industry sources, weekly trips to supermarkets, specialty food stores, wholesale clubs, mass merchandisers and convenience stores have all increased, but weekly spending only increased at mass merchandisers and convenience stores, while spending fell at supermarkets, specialty food stores and wholesale clubs.

In addition to changing shopping habits since 2006, several wholesalers have sought to purchase retail grocery establishments to ensure downstream demand for their products. For example, wholesaler Richfood acquired the Super Rite Foods grocery chain, which

Supervalu then acquired. Companies closed underperforming operations, and acquisitions occurred vertically and horizontally. Such consolidation led to efficiency gains and reduced costs, enabling wholesalers to distribute a wider range of products to customers. The expansion of food retailing to discount mass-merchandise warehouse clubs and convenience stores has provided additional markets for wholesaler competition. However, retailers are increasingly self-distributing and bypassing the wholesale sector to deal directly with manufacturers, pressuring the industry. In response, establishments are offering a wider variety of products, increasing logistics services and seeking to reduce costs.

Profitability�and�size Over the five years to 2011, industry profitability has fallen. High commodity and raw material prices combined with high energy and transportation costs

have raised overall production costs, which are passed on to grocery wholesalers. At the same time, supermarkets pressure wholesalers for

� Grocery wholesalers are acquiring retail outlets to ensure downstream demand for their products



Profitability�and�sizecontinued

lower-priced goods, and costs are increasing on the production end. These factors combine to squeeze industry profit. Over 2011, the recessionary economic conditions shifted grocery purchases toward lower-margin food and further diluted earnings.

From 2006 to 2011, the total number of grocery suppliers is estimated to fall an

average annualized rate of 2.7% per year to total 3,045 locations. Contributing factors include consolidation of existing firms and underperforming locations closing or exiting the market. As such, employment numbers are estimated to decline at an average rate of 1.5% per year to total 118,755 over the same period.

Industry�Outlook

The industry’s future looks bleak, as the recession’s effects have caused retailers and producers to look for cost-cutting strategies. Since purchasing food and non-food items via wholesalers adds to the final cost of goods, large grocery stores are seeking to eliminate the middleman. This trend is contributing to

the decline in industry revenue, which is projected to continue shrinking at an average of 0.8% per year over the five years to 2016. As a result, what was nearly a $200.0 billion industry in 1997 is forecast to shrink just $100.2 billion by the end of 2016, despite a marginal recovery of 0.6% in 2012 to $105.1 billion.

Catering�to�the�customer

Wholesale bypass is projected to accelerate over the next five years. In order to differentiate themselves, some wholesalers will move into niche markets and launch new formats that cater to growing ethnic communities such as Hispanics and Asians. For example, Unified Western Grocers, one of the top 10 US food wholesalers, acquired a specialty wholesaler to meet the needs of retailers catering to these communities. Other companies, such as Nash Finch, also developed new formats to service the Hispanic market. Through 2016, IBISWorld anticipates that companies will continue to focus their attention on these niche markets.

Ethnic diversity in the United States will continue to increase over the next five years. In 2009 the industry association FoodProcessing.com stated that about half of the population’s increase over the next 10 years will be attributed to the Hispanic demographic. Meanwhile, according to the US Department of Agriculture (USDA)

Economic Research Services’ latest “US Food Marketing System” report, traditional grocery stores have underserved the Hispanic market. This trend suggests that the demand for ethnic foods will increase, favorably influencing the Grocery Wholesaling industry. Also, niche relationships with manufacturers of distinct foods may boost demand for wholesalers. Many grocery stores already have ethnic food aisles but this is projected to increase in the next five years as more ethnic food is demanded and mainstream supermarkets wish to fulfill that gap.

The number of consumers eating out increased consistently over the years leading up to the recession but then

� Wholesalers will cater to growing ethnic communities to differentiate themselves



Catering�to�the�customercontinued

dropped. While difficult economic times caused individuals to eat out less, IBISWorld expects this factor will regain momentum through 2016. As such, wholesalers will need to reposition themselves in a bid to capture new buyers in the commercial settings of restaurants and fast food chains, and food outlets will form a growing portion of the industry’s customer base.

Over the five years to 2016, wholesalers will continue to expand their range of services to customers, such as

pricing, advertising and marketing. However, rising costs and demand for more services will place wholesale profit under pressure. As such, firms that fail to improve efficiency and deliver increased value to customers will come under greater financial pressure, so wholesalers will need to find better ways to reduce costs and improve services for existing customers while targeting new ones. By 2016, IBISWorld projects that the industry’s total profit margin will shrink to just 1.0% of total revenue.

Self-distributing�retailers

As supermarket chains rapidly consolidate, shrinking the industry’s customer base, many grocery wholesalers will continue to acquire retailers. Over the five-year period, retail chains with their own distribution facilities will also increase. Known as self-distributing retailers, they are able to shift more products per hour in their own warehouses compared with the average third-party wholesaler. According to the USDA, self-distributing lowers labor and operating costs as a proportion of total sales.

Competition among industry participants will continue to intensify over the next five years as more companies expand and acquire other operators. For example, competition has risen in a

number of areas as a result of new stores opening in places that are already adequately serviced. Increased competition will cause establishments to move toward supplying other niche services for their clients. For example, the number of establishments that provide a range of high-tech logistics services to their clients is projected to increase. Overall, IBISWorld forecasts that the number of industry establishments will contract at an average annual rate of 1.0% to reach 2,895 over the five years to 2016.

� Increased competition will lead players to expand their offerings to retailers


Industry�PerformanceThe strong trend toward industry consolidation has resulted in an overall contraction

High levels of existing competition have diluted industry earnings

Difficult trading conditions have caused grocery distributors to consolidate or exit the market

The industry has continually underperformed relative to the domestic economy

Life�Cycle�Stage


30

25

20

15

10

5

0

–5

–10–10 100 20–5 155 25 30

%�G

row

th�o

f�pro

fi�t/G

DP

%�Growth�of�establishments

DeclineCrash or Grow?

Potential�Hidden�GemsFuture Industries

Quality�GrowthHigh growth in economic importance; weaker companies close down; developed technology and markets

Time�WastersHobby Industries

MaturityCompany consolidation;level of economic importance stable

Shake-out

Shake-out

Quantity�GrowthMany new companies; minor growth in economic importance; substantial technology change

Key�Features�of�a�Decline�Industry

Revenue grows slower than economyFalling company numbers; large fi rms dominateLittle technology & process changeDeclining per capita consumption of goodStable & clearly segmented products & brands

Frozen�Food�WholesalingSupermarkets�&�Grocery�Stores

Chocolate�Production

Dairy�Wholesaling Convenience�Stores

Grocery�Wholesaling



Industry�Life�Cycle The Grocery Wholesaling industry has exceeded its maturity and is now in the decline phase of its lifecycle. High product saturation has caused distributors to take market share away from each other. Overall industry changes, such as increased mergers and greater incorporation of wholesaling activities into retail operations, have weakened sales and increased competitive pressure for companies and their customers. Relatively static demand in recent years has fueled this trend. Consolidation has continued to change the industry’s structure, replacing small companies with national and professionally managed organizations. Grocery wholesalers’

contribution to the economy’s overall performance, as measured by industry value added, is in decline. Over the 10-year period to 2016, revenue is forecast to inch forward just 0.4% per year to $100.2 billion. This trend implies that the industry is underperforming compared with the overall economy, which is expected to grow about 2.0% annually over the same period.

In the five years to 2011, the number of industry establishments is anticipated to decrease by an average rate of 2.7% per year. This fall is largely due to the continuing trend of consolidation within the industry as some wholesalers merge their businesses or acquire other companies to expand existing operations.

�This industry is Declining


Products�&�Services Two types of wholesalers provide services in this industry. Merchant wholesalers buy and resell goods from their own warehouse facilities, and manufacturers’ sales branches and offices (MSBO) are maintained by manufacturers who sell their goods at the wholesale level. Merchant wholesalers account for the majority of industry sales, but this share is sharply decreasing because large MSBOs are gaining market share with their streamlining capabilities.

Groceries dominate sales, accounting for an estimated 80.0% of industry revenue in 2011. Canned food sales represent the largest amount of revenue for the industry. This segment’s percentage of sales has increased in the past five years as many Americans have demanded canned foods during the recession. These products are relatively inexpensive and can keep for a long time. During the economic recession when money was

�Products�&�MarketsSupply�Chain�� |�� Products�&�Services�� |�� Demand�DeterminantsMajor�Markets�� |�� International�Trade�� |�� Business�Locations

KEY�BUYING�INDUSTRIES

44511� Supermarkets�&�Grocery�Stores�in�the�US�Demands a variety of products such as food and household detergents from this industry.

44512� Convenience�Stores�in�the�US�Demands a variety of grocery products from this industry.

44521� Meat�Markets�in�the�US�Demands a variety of meat products such as beef, veal and lamb from this industry.

44522� Fish�&�Seafood�Markets�in�the�US�Demands a variety of fish and seafood products from this industry.

44523� Fruit�&�Vegetable�Markets�in�the�US�Demands a variety of fresh fruit and vegetables from this industry.

44529� Specialty�Food�Stores�in�the�US�Demands a variety of food products from this industry.

KEY�SELLING�INDUSTRIES

31135� Chocolate�Production�in�the�US�Supplies confectionary products such as candy, nuts and chips to this industry.

31142� Canned�Fruit�&�Vegetable�Processing�in�the�US�Supplies canned products to this industry.

31151� Dairy�Product�Production�in�the�US�Supplies dairy products to this industry.

31181� Bread�Production�in�the�US�Supplies bread and bakery products to this industry.

31192a� Coffee�Production�in�the�US�Supplies coffee products to this industry.

31192b� Tea�Production�in�the�US�Supplies tea products to this industry.

31211a� Soda�Production�in�the�US�Supplies soft drink products to this industry.

31211b� Bottled�Water�Production�in�the�US�Supplies bottled water products to this industry.

31211c� Juice�Production�in�the�US�Supplies fruit juice products to this industry.

Supply�Chain


Products�&�Markets

DemandDeterminants

Distribution activities are sensitive to downstream demand from supermarkets and grocery stores, since this sector represents more than 50% of demand for grocery wholesalers. Any increase in demand at the supermarket and grocery store level will directly increase demand at the wholesale level. However, increasing production, energy and food

costs have had a strong influence on the final price of consumables. As a result, food prices have significantly increased over the last decade. In order to retain earnings, retailers and wholesalers have cut the middleman out. Wholesale bypass has become an effective cost-cutting measure; manufacturers sell goods directly to retailers, influencing the level

Products�&�Servicescontinued

tight, many consumers purchased canned food over fresh produce.

Other food products distributed include specialty foods which account for 16.0% of revenue, and frozen foods which accounts for 11.0%. Both of these segments are expected to grow in the next five years as the economy strengthens and consumers increase their spending. Frozen food sales will especially expand as Americans’ lives become busier and they demand more food that is easy to make and time efficient.

Food sales also include products such as dairy products, fresh meats, fruit and vegetables and more. Bread and bakery goods represent a very small percentage of revenue as many of these goods are distributed by the manufacturer or are made on-site at grocery stores.

Beverages account for the smallest share of sales in 2011, at less than 3.0%, which includes soft drinks, bottled water and other beverages. This segment has remained relatively steady in terms of sales over the past five years and is expected to remain steady in the next five year period.

Other segments of this industry include non-food products that are sold in grocery stores, such as household items, tobacco and cosmetics. Establishments are currently seeking to diversify and increase the range of goods that they wholesale in order to gain more market share. Therefore, segments including dairy products, fresh meat, seafood, fruits and vegetables have all increased in importance for this industry.

Products and services segmentation (2011)

Total $104.5bn

27%Other grocery products

9%Household items

16%Specialist food

8%Other

3%Beverages

15%Canned food

11%Fresh meat

11%Frozen food




Major�Markets

The biggest customersGrocery and non-food items are largely distributed to supermarkets, grocery, convenience and specialty food stores in the United States. Accounting for about 57.1% of revenue, these stores have traditionally been the largest market for the products of grocery wholesalers, and they stock a wide range of products distributed by the industry. The retail

market has increased from 1997 where retailers accounted for 40.0% of the industry’s demand. While demand has increased, it has not been anywhere near the potential growth. In fact, demand from retailers has been stunted as an increasing number of large retailers integrate wholesale activities into their in-house operations, and bypass wholesalers. Over the last decade, the

DemandDeterminantscontinued

of industry demand. Large retailers are increasingly sourcing supplies directly to reduce costs, which has reduced demand for wholesalers in general. Wholesale bypass is not an isolated event for grocery wholesalers, but it affects the entire US wholesaler sector.

In addition to demand changes, income is also a significant demand determinant for grocery wholesalers. Demand for groceries at the retail level is affected by changes in household disposable income, consumer sentiment and the price of food relative to other consumption items, which creates a flow-on effect to the wholesale chain. When household disposable income declines, the rate of growth of expenditure on food slows.

Prices tend to fluctuate and are one of the key factors that affect demand. When prices decline as supplies increase, there is often little change in the overall level of demand. However, demand can be adversely affected when prices increase.

Consumers favor fresh produce or pre-prepared foods that are designed to match the quality of fresh foods over highly processed, high-fat products. This trend is occurring because of increased variety and consumers becoming more health conscious. While canned fruit consumption per capita has declined over the five years to 2010, canned vegetables consumption per capita has increased over the period. Additionally, fresh varieties of fruit and vegetables have increased during the past five years.

Major market segmentation (2011)

Total $104.5bn

57.1%Supermarkets and other

grocery retailers 25%Food service outlets

11.4%Other wholesalers

3.4%Federal, state and local

government bodies

3.1%Business and household

consumption




International�Trade This industry supplies the domestic market. The value of imports and exports exchanged is accounted for at the manufacturing level. US grocery

wholesalers source a wide variety of food; therefore, trade statistics are available in individual product manufacturing industry reports.

Major�Marketscontinued

entry of nontraditional retailers like discount stores has created another avenue for demand.

The second largest market segment of this industry is food service outlets, accounting for 25.0% of revenue. The customer base of this segment is quite diverse, ranging from single outlets to small retail chains, and it represents a growing proportion of the market. Consumers are expected to increase their visits to restaurants and other food service outlets in the next five years as the economy recovers and Americans expand their spending. As such, industry sales to this market are expected to grow in the next five year period.

Non-retail outletsOther wholesalers account for about 11.4% of industry revenue. This segment includes small specialty wholesalers that

generally buy products from the larger, higher profile wholesalers instead of at the manufacturing level, before on-selling these products to specialty retailers. Federal, state and local government bodies account for 3.4% of revenue. This segment includes schools and prisons. Households that buy directly from distributors represent a very small share of industry demand. IBISWorld estimates that this segment accounts for less than 1%. The distribution among household incomes suggests that those earning an annual income of over $70,000 make up the largest consumer group, accounting for nearly 20%. On the other end of the scale, those that earn relatively less or fall within the income band of less than $5,000 account for a smaller share of food consumption, with about 7.5% of total supermarket sales in 2011.


�Products�&�Markets

Business�Locations�2011

MO1.5

West

West

West

Rocky Mountains Plains

Southwest

Southeast

New England

Great Lakes

VT0.1

MA2.7

RI0.4

NJ4.3

DE0.3

NH0.3

CT0.8

MD2.2

DC0.5

1

5

3

7

2

6

4

8 9

Additional�States�(as marked on map)

AZ1.6

CA15.0

NV1.0

OR1.0

WA2.3

MT0.5

NE0.5

MN1.2

IA0.4

OH2.7 VA

1.9

FL8.5

KS0.6

CO1.2

UT0.6

ID0.4

TX6.6

OK0.8

NC2.0

AK0.3

WY0.1

TN1.5

KY0.8

GA3.1

IL5.3

ME0.3

ND0.3

WI0.8 MI

2.6 PA3.9

WV0.3

SD0.1

NM0.4

AR0.8

MS0.4

AL1.0

SC1.0

LA0.9

HI1.1

IN1.3

NY11.8 5

67

8

321

4

9


Mid- Atlantic

Industry�establishments��(%)�

� Less�than�3%� 3%�to�less�than�10%� 10%�to�less�than�20%� 20%�or�more


�Products�&�Markets

Business�Locations IBISWorld estimates that in 2011, the Grocery Wholesaling industry is largely concentrated in the West, Mid-Atlantic and Southeast regions, which account for 65.9% of total establishments. The Great Lakes region follows with 12.8%. Industry concentration is relatively consistent with population. The Southeast region accounts for about 22.1% of the total population, the West 20.7% and the Mid-Atlantic 23.1%. Concentration is also consistent with the broader wholesale industry, which establishes itself in highly populated areas. This factor enables wholesalers to be close to key market segments such as grocery stores and other retail outlets located in highly populated areas. In addition, wholesalers need to be near key markets for delivery purposes.

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30

0

10

20

Sout

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Wes

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Gre

at L

akes

Mid

-Atla

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New

Eng

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Plai

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Rock

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Sout

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Establishments Population

Establishments vs. population



Cost�Structure�Benchmarks

Industry profit is based upon the profit before tax recorded by operators. Profit varies between players, depending on the distribution facility’s size. High revenue with low value adding and returns is typical of most wholesaling industries. Therefore, in order to make a profit, wholesalers need to have a high turnaround, which is why efficiency and high volumes are important in the food

wholesaling business. In 2011, profit margins are estimated to be at 1.5%, remaining stagnant from the previous year. Agflation, which is inflation of agricultural commodities, has an adverse effect on profit for food wholesalers, with higher production costs like energy and transportation costs being passed on throughout the supply chain.

Key�Success�Factors Having contacts within key marketsEstablishing links with a number of retail outlets ensures a reliable level of demand for wholesale grocery products.

Prompt delivery to marketEstablishments need to deliver their goods quickly and efficiently, especially because some foods are perishable.

Effective quality controlEstablishments need to ensure the goods they are wholesaling maintain their quality.

Ability to control stock on handThe ability to service the industry quickly with the right product and to control

inventory management is crucial for wholesalers’ success.

Guaranteed supply of key inputsHaving access to, or contracts with, reliable manufacturers and processors is a key success factor for grocery wholesalers.

Having a cost effective distribution systemHaving efficient warehouse and distribution systems is important in all wholesaling industries.

Use of specialist equipment or facilitiesThe level of technology adopted, such as computerized inventory control, is an important factor in grocery wholesaling.

Market�Share�Concentration

Overall, the Grocery Wholesaling industry has a low level of concentration, with the top four major players accounting for just less than 40.0% of total revenue over 2011. In this already mature environment, industry firms are striving to gain every possible growth opportunity. Minor growth in concentration is occurring as large companies acquire smaller distributors to gain market share. For instance, Unified Grocers acquired Seattle-based Associated Grocers in 2007. With the rising level of consolidation occurring

in this industry, it is likely that concentration will increase over the five years to 2016.

The product lines of larger wholesalers, such as C & S Whole Grocers, generally include a wide range of products so that the company can meet all of its customers’ needs. Smaller firms carry more niche products to cater to smaller specialty stores. Although larger wholesalers are expected to distribute more specialized goods in the next five years as they compete with manufacturers who self distribute their own products.

Competitive�LandscapeMarket�Share�Concentration�� |�� Key�Success�Factors�� |�� Cost�Structure�BenchmarksBasis�of�Competition�� |�� Barriers�to�Entry�� |�� Industry�Globalization

Level��Concentration in this industry is Low

�IBISWorld identifies 250 Key Success Factors for a business. The most important for this industry are:


Competitive�Landscape

Basis�of�Competition Grocery wholesalers compete primarily on price and service. Price competition occurs due to the number of competitors that are often located close to each other. Prices are determined by supply and demand. If there is an excess of supply, then prices are depressed; if there is a shortage, prices are more buoyant.

The quality and seasonality of produce also affects prices. Wholesalers compete for buyers by offering competitive prices and groceries of a consistent quality. The quality of the services of wholesalers, including timeliness and reliability, are also a basis of competition.

Industry establishments are also beginning to compete on the basis of technology. This aspect includes the ability to integrate with retail technology systems, particularly so transactions can be efficiently monitored and measured electronically. Establishments are becoming increasingly involved in complementary services, such as advanced logistics.

Other factors that are closely linked include the effects of promotions and consumers’ concerns about their health. A healthy lifestyle and access to low-fat, cholesterol-free food are becoming

Cost�Structure�Benchmarkscontinued

CostsPurchases account for the largest expense item within the Grocery Wholesaling industry, representing 80.0% of revenue. The majority of products classified in this industry are perishable (i.e. food). Thus, wholesalers shift items to retailers as quickly as possible to preserve freshness. Purchase costs can fluctuate especially in relation to food items, particularly during periods of economic uncertainty or unfavorable weather conditions. Freight costs can also fluctuate, usually due to fuel prices.

Depreciation is a small expense for this industry, which is typical of the wholesaling sector because it has minimal capital costs. Capital

expenditure usually comes in the form of computerized inventory systems and shelves to store stock, and refrigeration and freezers to store food items. Other expenses include marketing, insurance and freight costs. Some of these costs, such as marketing, can be reduced in periods when other expenses are high. The distribution of products to retailers primarily involves using manual labor instead of computer technology that is used to track inventory levels. Accounting for the third largest industry expense, wages as a proportion of total revenue have been declining, with five-year trends illustrating a rise from 5.4% in 2006 to 6.8% in 2011.

Industry�Costs�and�Average�Sector�Costs■�Profi�t■�Rent■�Utilities■�Depreciation■�Other■�Wages■�Purchases

Industry�Costs�(2011)�

Average�Costs�of�all�Industries�in�sector�(2011)�

1.5Profit

80.06.89.6

0.5

1.6

4.7Profit

78.25.08.2

1.31.8


0 100%

0.8

Level�&�Trend��Competition in this industry is High and the trend is Increasing


Competitive�Landscape

Industry�Globalization

This industry is deemed to have a low level of globalization, since the major players and smaller participants are

domestically owned. The value of any imports or exports is accounted for at the manufacturing level.

Barriers�to�Entry The barriers to entry for this industry are currently medium and are expected to remain at that level for the next five years. One barrier to entry is the level of competition. Existing competition is quite high, given the number of players operating in the industry. With so many firms, it’s difficult for a new company to start in this industry especially because many existing industry players have signed supply contracts with large retail chains and food service providers, guaranteeing themselves a market for their products.

The cost of establishing a warehouse and distribution system is also a major barrier as firms will need a large amount of space to store their goods before distribution. Costs can also increase if an electronic inventory system is installed,

such as computerized tracking software, computers and bar coding.

Large retailers that shift to using high-tech systems such as radio frequency identification (RFID) technology to track and identify goods increasingly require wholesalers to use compatible technology. The cost of establishing these systems is also a barrier to entry.

Basis�of�Competitioncontinued

increasingly important to consumers. Therefore, product differentiation has played an important role.

Owners of franchised outlets and vertically integrated companies often do not have a choice as to who supplies their goods; however, independent retailers may have more of a choice; and they are

more likely to be affected by the reasons mentioned above. In order to ensure a market for their goods, many large wholesalers have purchased retail supermarket chains. This factor occurred in 2007, when major player Associated Wholesale Grocers purchased 20 retail outlets from Albertsons.

Barriers�to�Entry�checklist� LevelCompetition HighConcentration LowLife Cycle Stage DeclineCapital Intensity LowTechnology Change MediumRegulation & Policy MediumIndustry Assistance Low


Level�&�Trend��Barriers to Entry in this industry are Medium and Steady

Level�&�Trend��Globalization in this industry is Low and the trend is Steady


Player�Performance New England’s largest food wholesaler, C&S Wholesale Grocers Inc. delivers more than 35,000 grocery products to about 5,000 independent supermarkets, supermarket chains and wholesale clubs. In 2008, C&S partnered with The Great Atlantic & Pacific Tea Co. (AP) in a 10-year deal to combine their supply agreements. Presently, the company is one of the largest food wholesalers in the United States. The company operates in the Grocery Wholesaling industry through the supply of 53,000 grocery products to about 5,000 independent supermarkets in the United States. C&S operates 70 distribution centers in twelve states. In 2009, the company expanded its retail operations by acquiring Bruno’s Supermarkets (out of bankruptcy), a regional supermarket chain of 55 stores. More specifically, it acquired another distribution business, Penn Traffic’s wholesale food distribution in late 2008.

Financial performanceIn the five years to 2011, IBISWorld expects company revenue to grow by an average of 2.1% per year. Due to the company being private IBISWorld is unable to provide a detailed year-on-year analysis. The company has continued its stronghold as a merchant food wholesaler, remaining highly competitive despite the fierce pressure from MSBOs and weaker consumer demand. In 2010, revenue declined to $19.4 billion. IBISWorld estimates that revenue declined because of increased competition and more companies bypassing wholesalers and buying directly from manufacturers. In 2009 and 2008, revenue fluctuated due to uncertain demand in grocery stores during the recession and more markets buying directly from manufacturers.

At the end of fiscal 2007, consolidated company revenue rose by 8.3% to $19.5 billion. Over the same fiscal period, total

�Major�CompaniesC&S�Wholesale�Grocers�Inc.�� |�� Supervalu�Inc.Wakefern�Food�Corporation�� |�� Other�Companies

64.5%Other

C&S�Wholesale�Grocers�Inc.�19.1%

Supervalu�Inc.�8.3%

Wakefern�Food�Corporation�8.1%


Major�players(Market share)

C&S�Wholesale�Grocers�Inc.�–�fi�nancial�performance

YearRevenue�($ billion) (% change) Employees (% change)

2006 18.0 18.4 20,000 11.1

2007 19.5 8.3 17,000 -15.0

2008 19.0 -2.6 20,000 17.6

2009 19.9 4.7 22,000 10.0

2010* 19.4 -2.5 22,000 N/C

2011* 20.0 3.1 23,000 4.5

*EstimateSOURCE: HOOVERS.COM

C&S�Wholesale�Grocers�Inc.��Market share: 19.1%


Major�Companies

Player�Performance Starting out as a grocery distributor in 1926 in the Midwest, Supervalu Inc. expanded its operations to include food retail. Presently, the company is a multidimensional food wholesaler and retailer that operates more than 2,400 stores and generates more than $40 billion. Supply operations primarily include the wholesale distribution of groceries to independent retailers, where at the end of the previous fiscal period, the company was affiliated with about 2,200 stores as their primary grocery supplier, and an additional 500 stores as a secondary grocery supplier, in addition to the company’s own supermarkets. The company distributes a large range of food and non-food products, including groceries, meats, dairy products, frozen foods, fresh fruits and vegetables, health and beauty aids, general merchandise, seasonal items and tobacco products.

Announcements in early 2009 indicate the intention to close about 50 stores nationwide. Tough operating conditions

attributed to the severe economic downturn have caused the company to embark on cost-cutting strategies on underperforming outlets. As part of the company’s efforts to scale back spending, the company plans to open fewer stores and delay remodeling.

Financial performanceOver the five years to 2011, company revenue has about doubled, averaging an increase of 13.5% per year to $37.5 billion. Much of this gain came from the major 2007 acquisition of Albertsons. While the company had its struggles during the recession due to weaker consumer demand, its distribution division is expected to hold steady through the end of 2011 and beyond. IBISWorld expects 23% of revenue to be derived from wholesale services in 2011.

In fiscal 2010, sales declined primarily because of lower downstream demand from consumers. The company also faced heightened value-focused

Player�Performancecontinued

employment fell by 15.0% to 17,000 people. Consolidated revenue was significantly higher over 2006, up by 8.4% to $18.0 billion, largely coming from acquisition growth and strong volume growth across all 12 states. The

company’s ability to consistently achieve high growth has been attributed to its efforts in purchasing new warehouses in key locations. For example in 2005, the company acquired 100 retail stores from BI-LO and Bruno’s.

Supervalu�Inc.��Market share: 8.3%

Supervalu�Inc.�–�fi�nancial�performance

YearRevenue�($ billion) (% change)

Net�Income�($ million) (% change)

2005-06 19.9 2.1 206 -46.6

2006-07 37.4 87.9 452 119.2

2007-08 44.1 17.9 593 31.2

2008-09 44.6 1.1 -2,855 N/C

2009-10 40.6 -9.0 393 N/C

2010-11 37.5 -7.6 -1,510 N/C

*Year-end�FebruarySOURCE: HOOVERS.COM


Major�Companies

Player�Performance Wakefern Food Corporation distributes more than 20,000 name-brand products and 3,000 products under the ShopRite label, to about 200 ShopRite supermarkets in five eastern states. IBISWorld estimates wholesale operations in the United States generate about 90.0% of revenue. In 2007, the company acquired about 10 underperforming retail locations from Stop & Shop. Located in South Jersey, the stores were rebranded under the ShopRite banner, which was established in 1946 when seven independent grocers formed a cooperative to lower costs and increase their buying power. Presently, Wakefern is the largest retailer-owned supermarket cooperative in the United States and is currently owned by 38 independent grocers that operate 190 supermarkets under the ShopRite banner in the Mid-Atlantic region.

While the corporation began as a way of purchasing products at lower prices, in 1951 Wakefern members began to purchase and pool advertising space under a common store name: ShopRite. Members also began to form groups

within the co-op to purchase and remodel failed supermarkets. Some of these groups became quite strong, and in 1968 one such group, Supermarkets General Corporation, broke away from the co-op.

Wakefern continued to focus on supplying low-priced products to retailers and developed its own label brands. In the 1980s, Wakefern also expanded its range to non-food products, opening a new non-food distribution center in New Jersey. In 1995, Wakefern launched its ShopRite MasterCard, and in 1999, partnered with internet website, Priceline.com. In 2002, ShopRite acquired the assets of Big V Supermarkets, which was previously Wakefern’s biggest customer, after they filed for Chapter 11 bankruptcy protection in 2000.

Financial performanceOver the five years to 2011, IBISWorld estimates that company revenue will increase 2.5% per year to $8.5 billion. Due to the company being private IBISWorld is unable to provide an in-depth year on year analysis. Weaker


competition and more manufacturers deciding to self-distribute.

Company financials struggled over fiscal 2009, with consolidated revenue experiencing a marginal increase of 1.2% while the Supervalu generated a net loss of $2.9 billion. Gross profit as a share of net sales was down to 22.7% in fiscal 2009 from 22.9% in the previous fiscal period. The net loss occurred due to the closure of stores as reflected by 7.3% drop in company employment. Sales from the company’s wholesale operations fell by 0.7%.

Consolidated company revenue rose significantly over fiscal 2006 and fiscal 2007, which jumped by 88.3%. This increase was primarily attributed to the

acquisition of rival supermarket Albertsons for about $11.4 billion. The acquisition greatly increased the size of the company and significantly changed the mix of the segment’s revenue and results. Over fiscal 2008, consolidated sales amounted to $44.0 billion, up by 17.8% from the previous fiscal period, while the company generated a net income gain of $593.0 million. The share of wholesale revenue amounted to $9.7 billion, up by 3.4% from fiscal 2007. This increase in wholesale revenue was attributed to new business growth partly offset by customer attrition. Since fiscal 2006, the share of sales generated from grocery wholesaling declined from 46.5% to 22.0% by the end of fiscal 2008.

Wakefern�Food�Corporation��Market share: 8.1%


Major�Companies

Other�Companies Unified Grocers Inc.Estimated market share: 4.0%Unified Grocers Inc. is a retailer-owned grocery wholesale cooperative that serves about 3,000 supermarkets, specialty and convenience stores and offers about 80,000 items, including meat, dairy, fresh produce, general merchandise and specialty items. The company adopted an expansion strategy, acquiring Seattle-based Associated Grocers in 2007 for $40.0 million. Unified Grocers evolved from a group of 15 independent Southern Californian grocers that formed a purchasing cooperative in 1922 to compete against large grocery chains. Since then, the cooperative has expanded through various acquisitions.

In addition to acquisitions, Unified Grocers expanded its product lines to include private labels in 1947 and added non-food goods in 1950. During the 1960s and 1970s, the company added a

meat center, a frozen food and deli warehouse, a produce distribution center, a central bakery and specialty foods warehouse.

Due to the company being private, IBISWorld is unable to give a detailed financial analysis. Revenue is expected to grow in 2011 as the company expands its customer base. In 2010, revenue was expected to come to $3.8 billion. Sales volume decreased because of low consumer spending and many Americans were financially frugal and cautious. During 2009 revenue totaled $3.9 billion. Consolidated company revenue rose by 31.0% to $4.1 billion in 2008. The increase was due to a 25.7% sales growth related to the sales from the acquisition of Associated Grocers. Income generated from wholesale activities reached $60.8 million at the end of fiscal 2008, compared with $51.5 million the year before. The increase in


demand due to the recession has made the company’s performance volatile. Nonetheless, unit sales of inexpensive grocery products have risen for the company as households cut back on spending by purchasing more groceries. In 2010 the company reached $11.8 billion in retail sales and $9.6 billion in warehouse sales. During the year the company gained at least 11 retail stores and two new members to its retail cooperative. This expansion positively affected the company. In 2009 the company reported $8.4 billion in warehouse sales and 2008 the company expanded their customer list the New York City-based Gristedes Markets which improved the company’s warehouse sales.

Over fiscal 2007, consolidated revenue surged by 32%, largely because the company purchased 10 new retail

stores from Stop & Shop. Positive growth continued in 2006 because of strong demand, with revenue increasing by 3.6% to $7.5 billion.

Wakefern�Food�Corporation�Warehouse�sales�–�fi�nancial�performance

Year*Revenue�($ billion) (% change)

2005-06 7.5 4.2

2006-07 9.9 32.0

2007-08 8.0 -19.2

2008-09 8.4 5.0

2009-10 9.6 14.3

2010-11** 8.5 -11.5

*Year-end�October;�**EstimateSOURCE: HOOVERS.COM


Major�Companies

Other�Companiescontinued

operating income primarily occurred because of the rise in sales as a result of growth in the existing customer base, an increase in inventory. However, this rise in income was partly offset by higher fuel costs, decreased earnings in certain company investments and additional costs incurred from a number of different activities. IBISWorld estimates that about 90.0% of revenue is generated from grocery distribution operations.

Nash Finch CompanyEstimated market share: 2.5%Nash Finch is a grocery distributor that serves about 1,600 retail stores in more than 25 states. Distribution is conducted through more than 15 distribution centers in the Midwest, Great Lakes and Southeast regions. Established in the mid-1800s, the company has expanded and generated about $2.2 billion in food distribution in 2010.

Distribution revenue declined in 2010 due to some customers switching over to another supplier. Excluding the effect of customer transition, food distribution declined 4.7%. In Fiscal 2009 distribution sales decreased by 3.6% due to the decrease in sales to existing customers as some product prices deflated. Food distribution sales accounted for a little less over fiscal 2008, about 58.3% compared with 59.4%. This growth was at the expense of a rise in sales generated from distribution activities to the military. Over 2008, food distribution reached $2.7 billion, up by 1.8% from the previous period, due to new account gains and an increase in sales to existing customers. IBISWorld expects revenue for Nash Finch to go up for 2009 largely due to demand generated from the military segment. Higher sales combined with an improvement on gross margins will help generate a net gain for the year.

Spartan StoresEstimated market share: 2.0%Established in 1917, a group of independent food retailers established the Grand Rapids Wholesale Grocery Company, now called Spartan Stores, in a bid to gain lower food prices by purchasing together on a cooperative basis. Publicly listed in 2000 and no longer operating as a cooperative, Spartan Stores distributes products to nearly 400 grocery stores in the Great Lakes region and convenience stores in another six states. The company also operates 400 independent supermarkets. Presently, it accounts for less than 3.0% of market share. Over the years, it has expanded via acquisitions; for example in 2006, Spartan stores acquired D&W Food Centers Inc., a Michigan-based retail grocery operator with 20 retail stores in western Michigan. In 2007, the company added an additional customer to its distribution list to service Martin’s Super Markets and supply the Indiana chain with dry goods, frozen foods and private-label products. Revenue totaled $2.37 billion in 2007, an increase of 16.2% from the previous year. This growth came about primarily as a result of the D&W acquisition, increased sales to existing distribution customers and new distribution customer business. Net income totaled $25.2 million, an increase of 38.0% from the previous year, reflecting reduced costs and improved sales. At the end of fiscal 2008 (ending in March) the company generated a net income gain of $34.3 million. Higher net income reflected the increase in the net profit margin rate. Over fiscal 2009, revenue amounted to $2.6 billion, up by 4.0%, while the company generated a net gain of $38.8 million. In 2010 revenue remained flat at $2.6 billion. Revenue is expected to be relatively the same in 2011 compared to previous years as customers continue to purchase from this distributor.


Major�Companies

Other�Companiescontinued

Alex LessEstimated market share: Less than 2.0%At the lower end of the scale, with a concentration of less than 2.0%, Alex Less distributes grocery products to its 600 customers, some of the more popular ones include IGA and Galaxy Food Centers. Established in 1931, the company has grown to generate more than $2.0 billion.

Fleming Companies Inc.Company exit in 2003Fleming Companies Inc. was previously one of the largest food wholesalers in the United States. It distributed branded and private-label grocery and nondurable

products to retailers operating in about 3,000 supermarkets, 6,800 convenience stores and more than 2,000 supercenters, discount stores, drug stores, specialty stores and other stores across the country. In April 2003, Fleming announced it had filed a petition for reorganization under Chapter 11 of the US Bankruptcy Code, and in August 2003, it sold all of its grocery wholesaling operations. Part of the company’s demise is due to the bankruptcy of mass merchandiser Kmart, which was Fleming’s largest customer and accounted for 20.0% of total sales. Kmart’s bankruptcy affected Fleming’s financial position considerably.


Capital�Intensity Expenditure on capital for this industry comes in the form of computerized inventory systems, shelves and refrigerators and freezers to store food items. The industry’s use of capital has been increasing through technological advancements, which have enabled computers to take over tasks traditionally performed by labor, such as ordering. There will always be a need for some labor components to be involved in checking that orders are correct.

Labor costs are incurred through the transportation of products to customers, taking orders and maintaining inventory levels. The predominant function of the overall wholesaling industry is to get the

product to the market. This process involves taking, preparing, checking and

�Operating�ConditionsCapital�Intensity�� |�� Technology�&�Systems�� |�� Revenue�VolatilityRegulation�&�Policy�� |�� Industry�Assistance

Tools�of�the�Trade:�Growth�Strategies�for�Success


Labo

r�Int

ensi

veCapital�Intensive

Change�in�Share�of�the�Economy

New�Age�Economy

Recreation,�Personal�Services,�Health�and�Education. Firms benefi t from personal wealth so stable macroeconomic conditions are imperative. Brand awareness and niche labor skills are key to product differentiation.

Traditional�Service�Economy

Wholesale�and�Retail. Reliant on labor rather than capital to sell goods. Functions cannot be outsourced therefore fi rms must use new technology or improve staff training to increase revenue growth.

Old�Economy

Agriculture�and�Manufacturing.�Traded goods can be produced using cheap labor abroad. To expand fi rms must merge or acquire others to exploit economies of scale, or specialize in niche, high-value products.

Investment�Economy

Information,�Communications,�Mining,�Finance�and�Real�Estate.�To increase revenue fi rms need superior debt management, a stable macroeconomic environment and a sound investment plan.

Frozen�Food�Wholesaling

Supermarkets�&�Grocery�Stores

Chocolate�Production

Dairy�WholesalingConvenience�Stores


Capital intensity

0.5

0.0

0.1

0.2

0.3

0.4

SOURCE: WWW.IBISWORLD.COMDotted line shows a high level of capital intensity

Capital units per labor unit

Grocery Wholesaling

Wholesale Trade

Economy

Level��The level of capital intensity is Low


Operating�Conditions

Revenue�Volatility

Technology&�Systems

The wholesale sector has experienced significant technological advancements, which are mainly concentrated on the computerized automation of inventory control. A fully automated inventory control system records inventories, selects products and determines minimum order quantities. Known as continuous replenishment practices, many of the industry’s larger customers use computers linked to the supplier to monitor and re-order various products. Other technological developments such as electronic data interchange (EDI), bar codes and the internet assist in product management and efficient replacement.

EDI allows for instant electronic transfer of data between customers and wholesalers. However, the implementation costs are high, and it has not been used widely enough to experience significant benefits. RFID technology is expected to take over from

bar codes as the primary method of identification and tracking of goods in this industry. RFID technology allows for non-contact reading, real-time data collection and lasts longer in difficult conditions. The Department of Defense has announced that it will require all suppliers to use RFID tags on shipments to the military, and major retailers are also switching to RFID technology.

The industry is also increasingly using transport management systems. These systems are located onboard delivery vehicles and increase the efficiency of product delivery. This industry is also changing how its existing equipment is used and adapted to accommodate the needs of customers.

For example, delivery vehicles can now contain sections at different temperatures, so different types of goods can be delivered from the same truck at the same time.

Capital�Intensitycontinued

shipping orders to customers. These roles are highly labor intensive. Capital costs are usually higher for the

wholesale of perishable goods such as food, since specialist freight equipment such as refrigerated trucks are required.

Level��The level of Technology Change is Medium


Volatility�vs�Growth

Reve

nue�

vola

tility

*�(%

)�

1000

100

10

1

0.1

Five�year�annualized�revenue�growth�(%)�–30 –10 10 30 50 70

Hazardous

Stagnant

Rollercoaster

Blue�Chip

* Axis is in logarithmic scale


A higher level of revenue volatility implies greater industry risk. Volatility can negatively affect long-term strategic decisions, such as the time frame for capital investment.

When a fi rm makes poor investment decisions it may face underutilized capacity if demand suddenly falls, or capacity constraints if it rises quickly.

Level��The level of Volatility is Low


Operating�Conditions

Industry�Assistance Retail operators purchase goods from importers and wholesalers after the tariff has already been applied. As such, fluctuations in the tariff rate only change, depending on where the good is purchased from; therefore they have no significant effect on industry revenue. Various industry associations that relate

to this industry exist; however, these are focused at producers, rather than the wholesale sector.

General wholesale sector associations include the National Association of Wholesaler-Distributors and the American Wholesale Marketers Association.

Regulation�&�Policy General regulations that Congress placed into effect and apply to this industry include: the Sherman Antitrust Act, the Wilson Act, the Clayton Act, the Robinson-Patman Act and other regulations that deal with unfair competition. Individual states have enacted their own antitrust laws to ensure that consumers are not disadvantaged in relation to prices and competition between players. Regulations that apply to this industry depend on the products distributed. Products such as hardware, home furnishings, office equipment and confectionery have no specific regulations that apply. Food distributors have to adhere to a range of regulations, most notably the Federal Food, Drug, and Cosmetic Act, regarding

the receipt, storage and distribution of produce. Fish, seafood, poultry meat and dairy products must adhere to a range of sanitation storage requirements that are enforced by checks from inspectors. In addition, food wholesalers are subject to state and local regulations such as the licensing of facilities, enforcement by state and local health agencies of state and local standards and regulation of the wholesaler’s trade practices in connection with the sale of their products.

Industry operators are also subject to regulation by the US Food and Drug Administration, the US Department of Agriculture, the Occupational Health and Safety Administration, the Environment Protection Agency and other federal, state and local agencies.

Revenue�Volatilitycontinued

Industry volatility is a function of downstream demand, particularly from supermarkets; grocery, specialty and convenience stores; and discount warehouse chains. Grocery and non-grocery consumption patterns drive changes in any of these retail channels. For example, fluctuations in household

disposable income will create a flow-on effect to suppliers. Presently, consumption patterns of grocery items have been growing at a steady rate over the years. An increase in population and the entry of non-traditional retailers into the food retail market has created a steady increase in demand for grocery distribution.

Level�&�Trend��The level of Regulation is Medium and the trend is Steady

Level�&�Trend��The level of Industry Assistance is Low and the trend is Steady


�Key�StatisticsRevenue�

($m)

Industry�Value�Added�

($m)Establish-

ments Enterprises Employment Exports ImportsWages�($m)

Domestic�Demand

Volume�of�Items�Distributed�

2002 141,580.1 11,594.4 4,334 3,385 172,514 -- -- 8,337.9 N/A 97,4192003 136,332.5 10,231.8 4,334 2,991 134,048 -- -- 6,687.0 N/A 93,8482004 129,188.6 9,372.0 3,377 3,037 131,994 -- -- 6,658.8 N/A 88,9272005 121,094.9 9,339.7 3,436 3,049 124,459 -- -- 6,312.6 N/A 83,3892006 118,690.7 8,737.4 3,492 3,075 127,897 -- -- 6,363.7 N/A 81,7962007 114,071.2 9,445.1 3,488 3,151 136,572 -- -- 6,935.3 N/A 78,7752008 111,551.6 9,554.1 3,117 2,902 121,582 -- -- 7,154.7 N/A 75,2502009 107,328.3 8,525.1 2,996 2,782 116,844 -- -- 6,984.8 N/A 77,3732010 104,561.7 8,807.0 2,968 2,756 115,752 -- -- 7,037.9 N/A 74,2002011 104,494.8 8,924.0 3,045 2,835 118,755 -- -- 7,119.0 N/A 73,5002012 105,121.8 8,934.0 3,016 2,808 117,624 -- -- 7,146.0 N/A 72,8002013 102,598.9 8,838.0 2,987 2,781 116,493 -- -- 7,172.0 N/A 72,1002014 99,520.9 8,845.0 2,958 2,754 115,362 -- -- 7,099.0 N/A 71,4002015 98,426.2 8,748.0 2,929 2,727 114,382 -- -- 7,025.0 N/A 70,7002016 100,197.8 8,725.0 2,895 2,710 114,026 -- -- 7,000.0 N/A 70,300Sector�Rank 16/67 23/67 44/67 37/67 13/67 N/A N/A 12/67 N/A N/AEconomy�Rank 75/703 259/703 405/702 373/702 254/703 N/A N/A 180/703 N/A N/A

IVA/Revenue�(%)

Imports/Demand�

(%)Exports/Revenue�

(%)

Revenue�per�Employee�

($’000)Wages/Revenue�

(%)Employees�

per�Est.Average�Wage�

($)

Share�of�the�Economy�

(%)2002 8.19 N/A N/A 820.69 5.89 39.80 48,331.73 0.102003 7.51 N/A N/A 1,017.04 4.90 30.93 49,885.12 0.092004 7.25 N/A N/A 978.75 5.15 39.09 50,447.75 0.082005 7.71 N/A N/A 972.97 5.21 36.22 50,720.32 0.072006 7.36 N/A N/A 928.02 5.36 36.63 49,756.44 0.072007 8.28 N/A N/A 835.25 6.08 39.15 50,781.27 0.072008 8.56 N/A N/A 917.50 6.41 39.01 58,846.70 0.072009 7.94 N/A N/A 918.56 6.51 39.00 59,778.85 0.072010 8.42 N/A N/A 903.33 6.73 39.00 60,801.54 0.072011 8.54 N/A N/A 879.92 6.81 39.00 59,946.95 0.072012 8.50 N/A N/A 893.71 6.80 39.00 60,752.91 0.062013 8.61 N/A N/A 880.73 6.99 39.00 61,565.93 0.062014 8.89 N/A N/A 862.68 7.13 39.00 61,536.73 0.062015 8.89 N/A N/A 860.50 7.14 39.05 61,417.01 0.062016 8.71 N/A N/A 878.73 6.99 39.39 61,389.51 0.06Sector�Rank 57/67 N/A N/A 31/67 32/67 2/67 21/67 23/67Economy�Rank 690/703 N/A N/A 84/703 612/703 181/702 165/703 259/703

Figures are inflation-adjusted 2011 dollars. Rank refers to 2011 data.

Revenue�(%)

Industry�Value�Added�

(%)

Establish-ments�

(%)Enterprises�

(%)Employment�

(%)Exports�

(%)Imports�

(%)Wages�

(%)

Domestic�Demand�

(%)

Volume�of�Items�Distributed��

(%)2003 -3.7 -11.8 0.0 -11.6 -22.3 N/A N/A -19.8 N/A -3.72004 -5.2 -8.4 -22.1 1.5 -1.5 N/A N/A -0.4 N/A -5.22005 -6.3 -0.3 1.7 0.4 -5.7 N/A N/A -5.2 N/A -6.22006 -2.0 -6.4 1.6 0.9 2.8 N/A N/A 0.8 N/A -1.92007 -3.9 8.1 -0.1 2.5 6.8 N/A N/A 9.0 N/A -3.72008 -2.2 1.2 -10.6 -7.9 -11.0 N/A N/A 3.2 N/A -4.52009 -3.8 -10.8 -3.9 -4.1 -3.9 N/A N/A -2.4 N/A 2.82010 -2.6 3.3 -0.9 -0.9 -0.9 N/A N/A 0.8 N/A -4.12011 -0.1 1.3 2.6 2.9 2.6 N/A N/A 1.2 N/A -0.92012 0.6 0.1 -1.0 -1.0 -1.0 N/A N/A 0.4 N/A -1.02013 -2.4 -1.1 -1.0 -1.0 -1.0 N/A N/A 0.4 N/A -1.02014 -3.0 0.1 -1.0 -1.0 -1.0 N/A N/A -1.0 N/A -1.02015 -1.1 -1.1 -1.0 -1.0 -0.8 N/A N/A -1.0 N/A -1.02016 1.8 -0.3 -1.2 -0.6 -0.3 N/A N/A -0.4 N/A -0.6Sector�Rank 60/67 50/67 4/67 2/67 3/67 N/A N/A 24/67 N/A N/AEconomy�Rank 604/703 523/703 120/702 99/702 134/703 N/A N/A 436/703 N/A N/A

Annual�Change

Key�Ratios

Industry�Data



Jargon�&�Glossary

BARRIERS�TO�ENTRY Barriers to entry can be High, Medium or Low. High means new companies struggle to enter an industry, while Low means it is easy for a firm to enter an industry.

CAPITAL/LABOR�INTENSITY An indicator of how much capital is used in production as opposed to labor. Level is stated as High, Medium or Low. High is a ratio of less than $3 of wage costs for every $1 of depreciation; Medium is $3 – $8 of wage costs to $1 of depreciation; Low is greater than $8 of wage costs for every $1 of depreciation.

CONSTANT�PRICES The dollar figures in the Key Statistics table, including forecasts, are adjusted for inflation using 2011 as the base year. This removes the impact of changes in the purchasing power of the dollar, leaving only the ‘real’ growth or decline in industry metrics. The inflation adjustments in IBISWorld’s reports are made using the US Bureau of Economic Analysis’ implicit GDP price deflator.

DOMESTIC�DEMAND The use of goods and services within the US; the sum of imports and domestic production minus exports.

EARNINGS�BEFORE�INTEREST�AND�TAX�(EBIT)� IBISWorld uses EBIT as an indicator of a company’s profitability. It is calculated as revenue minus expenses, excluding tax and interest.

EMPLOYMENT The number of working proprietors, partners, permanent, part-time, temporary and casual employees, and managerial and executive employees.

ENTERPRISE A division that is separately managed and keeps management accounts. The most relevant measure of the number of firms in an industry.

ESTABLISHMENT The smallest type of accounting unit within an Enterprise; usually consists of one or more locations in a state or territory of the country in which it operates.

EXPORTS The total sales and transfers of goods produced by an industry that are exported.

IMPORTS The value of goods and services imported with the amount payable to non-residents.

INDUSTRY�CONCENTRATION IBISWorld bases concentration on the top four firms. Concentration is identified as High, Medium or Low. High means the top four players account for over 70% of revenue; Medium is 40 –70% of revenue; Low is less than 40%.

INDUSTRY�REVENUE The total sales revenue of the industry, including sales (exclusive of excise and sales tax) of goods and services; plus transfers to other firms of the same business; plus subsidies on production; plus all other operating income from outside the firm (such as commission income, repair and service income, and rent, leasing and hiring income); plus capital work done by rental or lease. Receipts from interest royalties, dividends and the sale of fixed tangible assets are excluded.

INDUSTRY�VALUE�ADDED The market value of goods and services produced by an industry minus the cost of goods and services used in the production process, which leaves the gross product of the industry (also called its Value Added).

INTERNATIONAL�TRADE The level is determined by: Exports/Revenue: Low is 0 –5%; Medium is 5 –20%; High is over 20%. Imports/Domestic Demand: Low is 0 –5%; Medium is 5 –35%; and High is over 35%.

LIFE�CYCLE All industries go through periods of Growth, Maturity and Decline. An average life cycle lasts 70 years. Maturity is the longest stage at 40 years with Growth and Decline at 15 years each.

NON-EMPLOYING�ESTABLISHMENT Businesses with no paid employment and payroll are known as non-employing establishments. These are mostly set-up by self employed individuals.

VOLATILITY The level of volatility is determined by the percentage change in revenue over the past five years. Volatility levels: Very High is greater than ±20%; High Volatility is between ±10% and ±20%; Moderate Volatility is between ±3% and ±10%; and Low Volatility is less than ±3%.

WAGES The gross total wages and salaries of all employees of the establishment.

Industry�Jargon

IBISWorld�Glossary

AGFLATION A combination of agriculture and inflation occurring when increased demand from human consumption increases the price of food.

CO-OPERATIVE Also referred to as a co-op, it is an association of trade professionals who are united voluntarily to meet a common economic goal.

ELECTRONIC�DATA�INTERCHANGE�(EDI)� A technology that allows for the instant electronic transfer of data between customers and wholesalers.

HYPERMARKET A superstore that combines a supermarket and a department store.

MANUFACTURERS’�SALES�BRANCHES�AND�OFFICES�(MSBO)� A grocery manufacturer that maintains merchant wholesale operations for its own products.

RADIO�FREQUENCY�IDENTIFICATION�(RFID)� A technology that identifies and tracks goods through the distribution and inventory processes.

WHOLESALE�BYPASS A growing trend in which retailers make supply agreements with each other or directly with manufacturers to completely bypass the intermediary independent wholesaler.

Disclaimer

This product has been supplied by IBISWorld Inc. (‘IBISWorld’) solely for use by its authorized licenses strictly in accordance with their license agreements with IBISWorld. IBISWorld makes no representation to any other person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability which cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use

of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Inc. The publication is sold on the basis that the purchaser agrees not to copy the material contained within it for other than the purchasers own purposes. In the event that the purchaser uses or quotes from the material in this publication – in papers, reports, or opinions prepared for any other person – it is agreed that it will be sourced to: IBISWorld Inc.

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Exhibits: Grocery Wholesaling in the United States


V. Industry Risk Rating Report– Grocery Wholesaling in theUnited States

See following pages for industry report prepared by IBIS World.

CONTENTS

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October 2011

www.ibisworld.com | 1-800-330-3772 | [email protected]

IBISWorld Industry Risk Rating Report 42441 Grocery Wholesaling in the US October 2011

Risk Overview ...............................................................................................................................2

Industry Definition & Activities ................................................................................................................... 2 Industry Risk Score.................................................................................................................................... 2 Risk Rating Analysis .................................................................................................................................. 2

Structural Risk ..............................................................................................................................5 Barriers to Entry......................................................................................................................................... 5 Basis of Competition.................................................................................................................................. 6 Domestic and International Markets .......................................................................................................... 6 Industry Assistance.................................................................................................................................... 7 Life Cycle................................................................................................................................................... 7 Industry Volatility........................................................................................................................................ 7

Growth Risk...................................................................................................................................8 Growth Analysis......................................................................................................................................... 8

Sensitivity Risk .............................................................................................................................9 Demand from supermarkets and grocery stores ....................................................................................... 9 Per capita disposable income.................................................................................................................. 11 Population................................................................................................................................................ 14

IBISWorld Industry Risk Scoring Methodology........................................................................17 What is Industry Risk ............................................................................................................................... 17 Methodology ............................................................................................................................................ 17 Risk Levels .............................................................................................................................................. 17

Grocery Wholesaling in the US

WWW.IBISWORLD.COM Grocery Wholesaling in the US October 2011 2

Risk Overview Industry Definition & Activities Grocery wholesalers act as the middlemen between food producers and retailers. They do little to transform products and are intermediaries in merchandise distribution. The products that industry wholesalers sell and distribute include general-line grocery products; establishments do not specialize. Trade usually includes dry groceries, perishable food and non-food products that are found in grocery stores. The primary activities of this industry are: • Wholesaling general-line groceries • Wholesaling dry groceries • Wholesaling perishable food products • Wholesaling non-food products

Industry Risk Score Forecast Period: December 31, 2012 To calculate the overall risk score, IBISWorld assesses the risks pertaining to industry structure (structural risk), expected future performance (growth risk) and economic forces (sensitivity risk). Risk scores are based on a scale of 1 to 9, where 1 represents the lowest risk and 9 the highest. The three types of risk are scored separately, then weighted and combined to derive the overall risk score.

Risk Score Structural Risk 5.57 Growth Risk 5.76 External Sensitivity Risk 5.94 Overall Industry Risk Score 5.80

Risk Rating Analysis Risk Score Trend Analysis Overall risk in the Grocery Wholesaling industry is forecast to be MEDIUM-HIGH over 2012. The primary negative factors affecting this industry are a decline life cycle stage and high competition. Overall risk will be lower than the HIGH level of the previous year, a result of favorable movements in per capita disposable income as well as demand from food services and drinking places. Additionally, growth risk is projected to fall. Risk Score Context In 2012, the average risk score for all US industries is expected to be in the MEDIUM-LOW band. Furthermore, the risk score for the Wholesale Trade sector, which includes this industry, is at a MEDIUM level. Therefore, the level of risk in the Grocery Wholesaling industry will be higher than that of the US economy and the Wholesale Trade sector. Structural Risk Analysis


Structural risk will be MEDIUM-HIGH over the outlook period. The biggest source of difficulty with the industry is the decline life cycle stage, which indicates weakening demand. This creates an environment that is tough to navigate successfully, requiring equivalent cost cutting and strong resource management just to maintain narrow profit margins. Furthermore, the difficulty is exacerbated by a high level of competition. Businesses competing fiercely for market share are forced to incur expenses to differentiate their offerings, keep prices low to entice demand or both. The result is a greater likelihood of declining revenue and lower profits. However, a positive for operators is the low revenue volatility. This suggests steady demand, easing the burden of cash flow management even during broader economic downturns. Growth Risk Analysis Growth risk is expected to be MEDIUM-HIGH over the outlook period. IBISWorld forecasts that annual industry revenue will grow 0.6% to $105.1 billion. In comparison, revenue shrank 1.3% per year between 2009 and 2011. Sensitivity Risk Analysis Sensitivity risk is forecast to be HIGH over the outlook period, down marginally from 2011. The two factors with the most significant impacts on the industry are demand from supermarkets and grocery stores and tertiary Industry Markets - Wholesale Bypass - Grocery Items. When there is a rise in demand from supermarkets and grocery stores, risk will fall; whereas a rise in tertiary Industry Markets - Wholesale Bypass - Grocery Items will cause industry risk to increase. Demand from supermarkets and grocery stores: The Grocery Wholesaling industry is sensitive to downstream demand from supermarkets and grocery stores, since this sector represents more than 60% of demand for grocery wholesale. Any increase in demand at the supermarket and grocery store level directly increases demand at the wholesale level. This factor's contribution to risk is expected to increase in the coming year. Demand from food services and drinking places: The Grocery Wholesaling industry is sensitive to downstream demand for food services, including cafes, restaurants, food service contractors, caterers and mobile food services. An increase in demand for grocery items at the food service level will boost demand at the grocery wholesale level. This factor's contribution to risk is expected to decrease in the coming year. Per capita disposable income: The level of and movement in household disposable income influence the Grocery Wholesaling industry. Consumers purchase a greater variety of groceries with more disposable income, which increases retail demand and subsequently wholesale demand. This factor's contribution to risk is expected to decrease in the coming year. Tertiary Industry Markets - Wholesale Bypass - Grocery Items: The Grocery Wholesaling industry faces upstream competition from food manufacturers and downstream competition from food retailers that make direct supply agreements with each other and bypass the independent wholesaler. The large supermarket retailers and food manufacturers drive this process, putting pressure on the Grocery Wholesaling industry. This factor's contribution to risk is expected to remain the same in the coming year. Population: Grocery wholesaling products are sensitive to population growth, especially regarding the food segments. An increasing population will demand more food and household products therefore increasing the amount of products a grocery store needs to purchase from wholesalers. This factor's contribution to risk is expected to increase in the coming year.


1

2

3

4

5

6

7

8

9

Ris

k R

atin

g

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Industry Risk Division Risk: Wholesale Trade in the US Economy Risk: Entire US Economy

42441 - Grocery Wholesaling in the US


Structural Risk An industry's structural score measures the impact of the fundamental characteristics common to all industries. These seven components are scored separately, then weighted and combined to derive the structural risk score.

Structure Variable Level Trend Score Weight (%)Barriers to Entry medium steady 5 13 Competition high 9 20 Industry Exports low steady 1 7 Industry Imports low steady 2 7 Level of Assistance low steady 7 13 Life Cycle Stage decline 9 20 Volatility of Industry low 1 20 Overall Structural Risk Score 5.57

Barriers to Entry Barriers to entry in this industry are medium Barriers to entry in this industry are steady

The barriers to entry for this industry are currently medium and are expected to remain at that level for the next five years. One barrier to entry is the level of competition. Existing competition is quite high, given the number of players operating in the industry. With so many firms, it's difficult for a new company to start in this industry especially because many existing industry players have signed supply contracts with large retail chains and food service providers, guaranteeing themselves a market for their products. The cost of establishing a warehouse and distribution system is also a major barrier as firms will need a large amount of space to store their goods before distribution. Costs can also increase if an electronic inventory system is installed, such as computerized tracking software, computers and bar coding. Large retailers that shift to using high-tech systems such as radio frequency identification (RFID) technology to track and identify goods increasingly require wholesalers to use compatible technology. The cost of establishing these systems is also a barrier to entry.


Basis of Competition Competition in this industry is high Competition in this industry is increasing

Grocery wholesalers compete primarily on price and service. Price competition occurs due to the number of competitors that are often located close to each other. Prices are determined by supply and demand. If there is an excess of supply, then prices are depressed; if there is a shortage, prices are more buoyant. The quality and seasonality of produce also affects prices. Wholesalers compete for buyers by offering competitive prices and groceries of a consistent quality. The quality of the services of wholesalers, including timeliness and reliability, are also a basis of competition. Industry establishments are also beginning to compete on the basis of technology. This aspect includes the ability to integrate with retail technology systems, particularly so transactions can be efficiently monitored and measured electronically. Establishments are becoming increasingly involved in complementary services, such as advanced logistics. Other factors that are closely linked include the effects of promotions and consumers' concerns about their health. A healthy lifestyle and access to low-fat, cholesterol-free food are becoming increasingly important to consumers. Therefore, product differentiation has played an important role. Owners of franchised outlets and vertically integrated companies often do not have a choice as to who supplies their goods; however, independent retailers may have more of a choice; and they are more likely to be affected by the reasons mentioned above. In order to ensure a market for their goods, many large wholesalers have purchased retail supermarket chains. This factor occurred in 2007, when major player Associated Wholesale Grocers purchased 20 retail outlets from Albertsons.

Domestic and International Markets Exports Exports in this industry are low Exports in this industry are steady Imports Imports in this industry are low Imports in this industry are steady

This industry supplies the domestic market. The value of imports and exports exchanged is accounted for at the manufacturing level. US grocery wholesalers source a wide variety of food; therefore, trade statistics are available in individual product manufacturing industry reports.


Industry Assistance The level of Industry Assistance is low The trend of Industry Assistance is steady There are no specific tariffs for this industry

Retail operators purchase goods from importers and wholesalers after the tariff has already been applied. As such, fluctuations in the tariff rate only change, depending on where the good is purchased from; therefore they have no significant effect on industry revenue. Various industry associations that relate to this industry exist; however, these are focused at producers, rather than the wholesale sector. General wholesale sector associations include the National Association of Wholesaler-Distributors and the American Wholesale Marketers Association.

Life Cycle The life cycle stage is decline Life Cycle Reasons • The strong trend toward industry consolidation has resulted in an overall contraction • High levels of existing competition have diluted industry earnings • Difficult trading conditions have caused grocery distributors to consolidate or exit the market • The industry has continually underperformed relative to the domestic economy The Grocery Wholesaling industry has exceeded its maturity and is now in the decline phase of its lifecycle. High product saturation has caused distributors to take market share away from each other. Overall industry changes, such as increased mergers and greater incorporation of wholesaling activities into retail operations, have weakened sales and increased competitive pressure for companies and their customers. Relatively static demand in recent years has fueled this trend. Consolidation has continued to change the industry's structure, replacing small companies with national and professionally managed organizations. Grocery wholesalers' contribution to the economy's overall performance, as measured by industry value added, is in decline. Over the 10-year period to 2016, revenue is forecast to inch forward just 0.4% per year to $100.2 billion. This trend implies that the industry is underperforming compared with the overall economy, which is expected to grow about 2.0% annually over the same period. In the five years to 2011, the number of industry establishments is anticipated to decrease by an average rate of 2.7% per year. This fall is largely due to the continuing trend of consolidation within the industry as some wholesalers merge their businesses or acquire other companies to expand existing operations.

Industry Volatility The level of volatility is low

Industry volatility is a function of downstream demand, particularly from supermarkets; grocery, specialty and convenience stores; and discount warehouse chains. Grocery and non-grocery consumption patterns drive changes in any of these retail channels. For example, fluctuations in household disposable income will create a flow-on effect to suppliers. Presently, consumption patterns of grocery items have been growing at a steady rate over the years. An increase in population and the entry of non-traditional retailers into the food retail market has created a steady increase in demand for grocery distribution.


Growth Risk The growth risk score evaluates forecasted industry revenue growth against past performance as well as expected growth for all other industries. A high industry growth rate is associated with lower risk for operators in that industry.

Time Period % Score Recent Growth 2009-2011 -1.3 5.89 Forecast Growth 2011-2012 0.6 5.72 Overall Growth Risk Score 5.76

Growth Analysis The Grocery Wholesaling industry is contracting as intense competition and rising production costs drive food manufacturers and supermarkets to cut out the middleman. Though this is a typical cost-cutting measure, current economic pressures are forcing all sides of the grocery supply chain to become more aggressive with wholesale bypass. As manufacturers and retailers become more involved in distribution, demand and revenue for the grocery wholesaling sector declines. Over the five years to 2011, industry revenue is expected to decline by an average of 2.5% per year, including a 0.1% drop in 2011 to $104.5 billion. At the retail end, the US recession is changing the mix of grocery items purchased, creating a flow-on effect to the Grocery Wholesaling industry. Because of economic insecurity (highlighted by a weakening labor market, low household-income growth and poor consumer sentiment), households are switching to lower-margin foods and reducing overall purchases. This trend is adversely affecting the industry's profit, which fell from $174.0 million in 2006 to an expected $135.0 million in 2011. Additionally, it has negatively affected the number of establishments, which is estimated to decline 2.7% per year over the five years to 2011. This drop reflects major industry shrinkage and implies that upstream and downstream industries are increasingly finding ways to cut out the wholesaler. At the same time, because of low industry returns and the weak economy, wholesalers are raising market share by taking it away from existing grocery distributors. This trend is often reflected in industry acquisitions and consolidation, which have increased major players' market share. The challenging operating environment has forced unprofitable wholesalers out of the market, however, which is illustrated in falling wholesaler numbers. Moving forward, consolidation will likely increase as competition intensifies. Over the next five years, IBISWorld forecasts that total revenue will continue declining at an average annual rate of 0.8% to $100.2 billion in 2016.


Sensitivity Risk IBISWorld has identified and weighted the most significant external factors affecting industry performance. These factors are scored separately, then weighted and combined to derive the sensitivity risk score.

Sensitivities Weight Score WeightedScore

Demand from supermarkets and grocery stores 30.00 7.58 2.27 Demand from food services and drinking places 20.00 3.25 0.65 Per capita disposable income 20.00 4.04 0.81 Tertiary Industry Markets - Wholesale Bypass - Grocery Items 20.00 7.00 1.40 Population 10.00 8.06 0.81 Overall External Sensitivities Risk Score 5.94

Demand from supermarkets and grocery stores Industry revenue in 2011: $494,622.00 million dollars 2006-2011 compound growth : 0.36% Forecast revenue for 2016: $496,859.00 million dollars 2011-2016 compound growth : 0.09% The Supermarket and Grocery Stores industry makes up the largest food retail channel in the United States. These establishments are primarily engaged in retailing general lines of food products, including fresh and prepared meats, poultry and seafood, canned and frozen foods, fresh fruits and vegetables and various dairy products. Performance Summary Accounting for nearly 75.0% of the country's $680.0 billion food retail market, supermarkets and grocery stores dominate food sales in the United States. The industry is flooded with establishments, with supermarkets aiming to grab market share by securing locations in neighborhoods so residents can shop conveniently. The performance of this industry is largely reflected in the nature of goods retailed by supermarkets, which include homogeneous food and household items. Operating in a highly competitive and saturated product market, industry growth is in the mature phase of its life cycle. Over the five years to 2011, industry revenue is expected to inch up just 0.4% per year on average, reaching $494.6 billion. In the latter half of the period between 2006 and 2011, changing consumer spending patterns have aided the industry. The recession has driven families and individuals to take a more conservative approach to food spending and eating out, in particular, benefiting the Supermarkets and Grocery Stores industry. During the recession, consumer trends shifted toward eating more meals at home, so grocery shopping increased as a result. While the industry experienced slight growth in those years, it was not completely immune to the faltering economy. Total revenue inched forward in 2008 and 2009, but industry profit steadily declined as a result of the rising costs of inputs, utilities and transportation. In 2011, profit is expected to average about 2.0% of revenue at $10.0 billion, and revenue is expected to drop by 2.5% from 2010.


Food and beverages are necessities and IBISWorld forecasts that they will generate a consistent level of demand in the coming five years, but that does not mean that the industry is not affected by changes in the economy. During times of low consumer sentiment and unfavorable economic conditions, consumers purchase lower-priced goods instead of premium brands or even reduce spending altogether. As the nation pulls out of the recession, consumers will start eating out more, particularly as individuals work longer hours and require the convenience of restaurants or take-out meals. These trends will translate to reduced demand at supermarkets and grocery stores. Consequently, IBISWorld forecasts that this industry will remain relatively stagnant over the five years to 2016, with revenue growing at an average rate of 0.1% per year to $496.9 billion.

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Year $ million % Change

1999 485,196.7 2000 482,966.3 -0.46 2001 490,425.8 1.54 2002 483,850.9 -1.34 2003 483,818.1 -0.01 2004 484,361.2 0.11 2005 487,539.7 0.66 2006 485,857.5 -0.35 2007 494,144.8 1.71 2008 507,121.4 2.63

Year $ million % Change

2009 508,640.5 0.30 2010 507,399.8 -0.24 2011 494,622.0 -2.52 2012 491,194.0 -0.69 2013 489,912.0 -0.26 2014 488,036.0 -0.38 2015 492,916.0 1.00 2016 496,859.0 0.80 2017 500,863.0 0.81

Per capita disposable income Estimated Value in 2011: $33,561 2006-2011 Compound Growth: 0.79% Forecast Value for 2016: $36,351 2011-2016 Compound Growth: 1.61% Per capita disposable income determines an individual's ability to purchase goods or services. It is calculated by taking income earned from all sources (wages, government transfers, rental income etc) minus taxes, savings and some non-tax payments (fines, forfeitures and donations etc) and dividing by the total US population. The data for this report is sourced from the Bureau of Economic Analysis and presented in chained 2005 dollars. Current Performance The financial meltdown and subsequent recession snapped a seventeen year streak of positive growth in disposable incomes. The primary drag on incomes was felt by millions of Americans who lost their jobs or were unable to join the workforce for the first time. Job losses started in the financial sector but quickly spread from Wall Street to Main Street as credit tightened and businesses saw demand wither in the face of uncertainty. The national unemployment rate climbed from 4.6% in 2007 to 9.3% in 2009, crippling spending power across the United States and through all income brackets. Even Americans who retained their jobs were afflicted by stagnant wages, furloughs and diminished nest eggs. Given the possibility of an even bleaker future, individuals increased their savings rate from a low of 1.4% in 2005 to 5.9% in 2008, reducing the amount available for purchasing goods or services. The impact of job losses and higher savings were partially offset by a larger safety net, with government assistance programs extended and expanded to unprecedented levels. However, these programs could only partially negate the impact of the economic collapse, with disposable income growth slipping by 0.3% in 2009. But conditions stabilized in 2010, allowing some of the storm clouds hanging over disposable


income levels to retreat. Firstly, corporate profits surged, generating profits for owners and restoring battered stock portfolios. This eased pressure on businesses to keep wage costs down and boosted consumer sentiment, leading to both higher earned incomes and receding savings rate. Consequently, per capita disposable income edged up by an anemic but positive 0.5% in 2010. These initial signs of recovery are expected to make further gains in 2011 paving the way for a more robust rebound. IBISWorld forecasts that the savings rate is forecast to slide back to 5.1%, while new job creation drives the national unemployment rate to 8.8% for 2011. Combined with continued improvement in corporate profits and stock returns, wage pressures will also ease enabling disposable incomes to expand at a more “normal” 1.6%. Outlook IBISWorld expects economic indicators that drive disposable income levels to steadily strengthen over the outlook period. However, future growth will be tempered relative to the boom leading up to the recent downturn. This is because the belief in ever rising house prices and unsound lending practices that created the bubble will not be present to inflate natural growth. Consequently, positive job growth and lower savings will lead positive growth, but only at an annualized rate of 1.6% per year (compared to 2.0% in the five years to 2006). Furthermore, growth per capita disposable income levels will be hindered by the inevitably higher tax rates needed to balance the fiscal deficit and pay for the dual stimulus packages. Data Volatility Per capita disposable income displays a low level of volatility. It is important to note that this measure looks only at income available for spending, after taxes and savings. This feature has allowed for American spending income to be extremely stable over the long term as individuals are able to tap into savings accounts and alternate income streams (e.g. unemployment payments from the government) to maintain their lifestyles in the short term. Additionally, due to the progressive income tax in the US, individuals with lowered incomes pay a smaller proportion in taxes and thus retain a greater share for potential expenditures. Meanwhile, in more prosperous times, these factors work in reverse and constrain disposable income from rising quickly.


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Per capita disposable income


Year $ % Change

1981 19,173 1982 19,406 1.22 1983 19,868 2.38 1984 21,105 6.23 1985 21,571 2.21 1986 22,083 2.37 1987 22,246 0.74 1988 22,997 3.38 1989 23,385 1.69 1990 23,568 0.78 1991 23,453 -0.49 1992 23,958 2.15 1993 24,044 0.36 1994 24,517 1.97 1995 24,951 1.77 1996 25,475 2.10 1997 26,061 2.30 1998 27,299 4.75 1999 27,805 1.85

Year $ % Change

2000 28,899 3.93 2001 29,299 1.38 2002 29,976 2.31 2003 30,442 1.55 2004 31,193 2.47 2005 31,318 0.40 2006 32,271 3.04 2007 32,693 1.31 2008 32,946 0.77 2009 32,878 -0.21 2010 33,025 0.45 2011 33,561 1.62 2012 34,229 1.99 2013 34,728 1.46 2014 35,377 1.87 2015 35,778 1.13 2016 36,351 1.60 2017 36,606 0.70

Population Estimated Value in 2011: 312.3 million 2006-2011 Compound Growth: 0.89% Forecasted Value for 2016: 325.5 million 2011-2016 Compound Growth: 0.83% The data for this report, including forecasts, are sourced from the US Census Bureau. The estimates provided refer to the population as of July 1st for that year. The forecasts in this report assume constant net international migration of approximately 975,000 individuals a year for the outlook period. The Census Bureau also publishes estimates under the zero, low and high net migration scenarios. Current Performance The US population has grown steadily at just under 1% a year. The population growth rate has eased over the long term as family sizes have shrunk, which is reflected in the number of births individuals sliding from to a projected all time low of approximately 13 per thousand in 2011. This is down from over 16 births per thousand individuals in 1990. Even so the population has expanded as longevity has increased thanks to rampant medical innovation and improved health awareness. Eating better and additional treatments have resulted in a greater number of Americans enjoying old age for a longer period. Combined with


slowing new births, the balance has shifted towards an aging population, with the median age in the US rising incrementally each year. A considerable portion of the growth in population throughout the history of the nation has occurred via immigration. According to the Department of Homeland Security’s Yearbook of Immigration Statistics, the US has seen an influx of approximately 1.1 million legal permanent residents in each of the previous five years. The country of origin with the single largest contribution for legal immigration into the US is Mexico at just under 15% of the total each year. Additionally, there are a large number of undocumented illegal immigrants. The total number is estimated to be between 10 million and 15 million, also comprised predominately by individuals from Mexico. However, due to their undocumented status, more precise data is not available. Outlook The US Census expects the patterns that which have shaped the American population over the last decade to persist over the outlook period. Specifically, it projects that growth will ease at a very slow rate, driven by a decline in birth rates while deaths as a proportion of the population remain flat. Consequently, the population will be increasingly comprised by individuals over the age of 65 and the median age will rise. The census forecasts that by 2015, senior adults will make up 14.5% of the total populace, up from 13.0% in 2010 and 12.4% in 2000. For further discussion on each of these individual demographic categories, please see their respective IBISWorld reports. Data Volatility Population data exhibits a very low level of volatility. The total population is a function of birth rates, immigration patterns and death rates. These factors shift only gradually and thus their impact on population is spread over a number of years, lending it stability.

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Population


Year Millions % Change

1991 258.0 1992 260.9 1.12 1993 263.7 1.07 1994 266.3 0.99 1995 268.8 0.94 1996 271.3 0.93 1997 273.9 0.96 1998 276.5 0.95 1999 279.0 0.90 2000 282.2 1.15 2001 285.1 1.03 2002 287.9 0.98 2003 290.4 0.87 2004 293.3 1.00

Year Millions % Change

2005 295.9 0.89 2006 298.8 0.98 2007 301.6 0.94 2008 304.1 0.83 2009 307.0 0.95 2010 309.6 0.85 2011 312.3 0.87 2012 314.9 0.83 2013 317.6 0.86 2014 320.2 0.82 2015 322.9 0.84 2016 325.5 0.81 2017 328.1 0.80


IBISWorld Industry Risk Scoring Methodology What is Industry Risk IBISWorld Industry Risk evaluates the inherent risks associated with hundreds of different industries in the United States. Industry Risk is assumed to be "the difficulty or otherwise of the operating environment". This approach is new in that it analyses non-financial information surrounding each industry. The Industry Risk score is forward looking, and the score looks at expected Industry Risk over the next 12-18 months. The methodology is based on industry classifications and is designed to identify and quantify risks inherent in specific industries both now and into the 12 month forecast. Industry-based information would, for example, enable the examination of a loan book (portfolio) with regards to risk, which would enable a more sophisticated assessment of risk spread and pricing to risk. Alternatively, individual exposures can be better evaluated using an assessment of structure and key drivers of change in the industry of the exposure.

Methodology To calculate the overall risk score, IBISWorld assesses the risks pertaining to industry structure (structural risk), expected performance (growth risk) and economic forces (sensitivity risk). Risk scores are on a scale of 1 to 9, where 1 represents the lowest risk and 9 the highest. The three types of risk are scored separately, then weighted and combined to derive the overall risk score. Structure Score: An industry's structural score measures the impact of the fundamental characteristics common to all industries. These seven components are scored separately, then weighted and combined to derive the structural risk score. This component contributes 25% of the overall score. Growth Score: The growth risk score evaluates forecasted industry revenue growth against past performance as well as expected growth for all other industries. A high industry growth rate is associated with lower risk for operators in that industry. This component contributes 25% of the overall score. Sensitivity Score: IBISWorld has identified and weighted the most significant external factors affecting industry performance. These factors are scored separately, then weighted and combined to derive the sensitivity risk score. Examples include input costs, number of housing starts, commodity prices, etc. This component contributes 50% of the overall score.

Risk Levels Risk Score Level of Risk

1 - 3 Very Low >3 - 4.1 Low

>4.1 - 4.7 Medium - Low >4.7 - 5.3 Medium >5.3 - 5.9 Medium - High >5.9 - 7 High >7 - 9 Very High

Grocery Wholesaling in the US


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