Per-Case Allowances on Purchases Made Outside of Deal Dates Warehouse Deliveries

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1 September 20, 2013 Dear Supplier: Safeway s billing guidelines for promotional allowances and other discounts are presented below for your information and reference. These guidelines were developed from a review of generally accepted industry practices and will apply to all of Safeway s supplier relationships. We feel these procedures are part of a fair and reasonable effort by Safeway to receive all compensation to which we are entitled. To ensure that all of our suppliers are aware of this information, these Best Practices are available on our Supplier website as well as IBM s Deal Management application. As a condition of using the Deal Management tool, suppliers are required to acknowledge their understanding of these Best Practice Guidelines. Per-Case Allowances on Purchases Made Outside of Deal Dates Safeway purchases the majority of product ( Product ) eligible for per-case allowances during the stated deal dates ( In Deal ); however, due to the time required for logistics, handling, and processing, promotional Product may be ordered, shipped, and/or received on days before or after the stated deal dates. We will, therefore, consider In Deal Product to include any and all product ordered within the order dates, shipped within the ship dates, or received within the arrival dates, as well as any additional Product ordered for the purpose of supporting the performance ( Performance ) called for under the promotional offer, subject to the following guidelines: Warehouse Deliveries If a purchase is the only receiving in a Safeway division prior to the start of a Performance, Safeway will consider such Product to be In Deal if it is received during the seven days prior to the deal dates. Safeway will include Product received outside the seven-day period referred to above if scan data confirms that such Product supported the Performance. If a requested Performance extends beyond the deal dates, Safeway will consider Product to be In Deal if it is received on or before the day before the Performance ends. Large promotional deliveries (at least two times the average weekly movement for the Product) received within 5 days before the Deal period will also be treated as Deal Product. Promotional buys and inventory replenishments necessitated by Performance should be eligible for the applicable allowances. 1

2 Direct Store Deliveries Store deliveries made two days prior to the Performance will be treated as In Deal Product, even if the first arrival date of the Deal is the same as the Performance start date of the deal. This twoday window, referred to as the Load-In Period, represents the days needed by the store to build promotional displays and strategically stock Product in anticipation of the pending Performance. If a delivery is the only receiving at a Safeway retail store prior to the start of Performance, Safeway will consider such Product to be In Deal if it is received during the five days prior to the Performance start. Safeway will include Product received outside the five-day period referred to above if scan data confirms that any such Product supported the Performance. In some cases, product replenishments, which occur after the performance ends, will be claimed but only if scan sales support claiming the additional delivery. Performance sometimes extends beyond the deal dates; in these instances, Safeway will consider Product to be In Deal if it is delivered to the stores during Performance, up to and including the day that the Performance ends. Large promotional deliveries that are equal to or greater than three times the average turn order will also be treated as Deal Product. Family groupings will be used to calculate turn orders on a store by store basis (in most cases). Promotional buys and inventory replenishments necessitated by Performance should be eligible for the applicable allowances. ** Please note: Different guidelines may apply with respect to per case allowances for certain perishable product purchased outside of the deal dates. ** Inventory for Safeway s Eastern division is handled by a third party. For this reason, Safeway will bill per-case billback allowances according to store deliveries in this division rather than purchases. Shippers and Displays Safeway regularly analyzes Product costs and promotional allowances for Product delivered on shippers or other display units, in order to assure appropriate costs and allowances are received (as they apply to Performance and other supplier offers). Product delivered on shippers is quite often priced lower than the equivalent open stock. Safeway will calculate the shipper (or display) net cost based on the lower of the shipper invoiced net cost or the open stock invoiced net cost. Scan Allowances Scan allowances will apply to Product sold, on a per unit basis, during the promotional period specified on the Notice of Promotional Allowances ("NOPA"). Because promotions are often started early in order to build displays and/or extended to cover a holiday or three day ad, we will consider the full Performance to be covered by the Deal for up to three additional days (four additional days for Dominick s) without requesting a revised NOPA. 2

3 Safeway requires that all scan allowances be offered on total units scanned during the Performance. Scan allowance billing calculations are based on normalized scan data, which may include upward or downward adjustments to raw scan data for duplicative, unusual or missing data. Safeway will occasionally experience promotional overstocks in our retail stores and/or warehouses. When this occurs, Category Management will work with supplier representatives to negotiate a strategy to rebalance inventory. In most cases, we will (i) return excess warehouse inventory to vendor/supplier and (ii) expect scan allowance support (equal to at least 100% of the normal In Deal allowance) for excess store inventory sold at a reduced retail. To remain competitive, Safeway strives to purchase product at the best possible price (consistent with maintaining supply-chain integrity.) In some instances, product may be purchased from a wholesaler or distributor. Safeway will apply scan allowances to all units of the applicable SKU(s) sold, whether procured from supplier or from an alternate source. Special Promotional Programs As technology continues to evolve and social media becomes more significant in successful promotions, Safeway will aggressively pursue new and exciting ways to promote Product and to generate sales. Safeway will continue to develop innovative promotional programs and will expect the financial and operational support of our suppliers in executing these programs. Examples may include: corporate presence in social media, digital couponing, Just 4 U personalized savings program, Buy X/Save Y promotions, targeted home mailers, etc. Items Left Off the Deal Product grouping is a standard industry practice that facilitates accounting, promotional planning, and consumer understanding. Occasionally, an item belonging to a promotional family is omitted from a NOPA, especially in instances where an item is new or is discontinued. Despite such omission, the supplier will be responsible for supporting the promotion of each family item subject to the performance. At the time of billing, Safeway may request a revised NOPA that includes the missed item(s). New Items Safeway expects suppliers to help offset the costs associated with introducing new items (i.e. warehousing, pricing, reconfiguring shelves, etc.). Safeway s Category Management will negotiate placement (lump sum) or other introductory allowances (12 week minimum), which will help ensure that new items are successfully launched. If a temporary price reduction is expected by the supplier, additional incremental allowances should be offered. Discontinued Product Suppliers are expected to pick up and credit Safeway for warehouse inventory of discontinued Product. Discontinued Product remaining in the stores, with the exception of perishables and certain 3

4 other items, will be sent to the Product Reclamation Center (PRC) and the supplier will be billed for the current list cost of the Product plus Safeway s handling fees. DSD suppliers are expected to pick up and credit Safeway for all store inventory of discontinued Product. Safeway expects all allowances and rebates (including those applicable to items in the same family group ) to continue for each discontinued item until discontinuance allowances begin. Freight Allowances Safeway calculates freight allowances based on the ordered weight of the purchase order. Because Safeway s decision to pick up product is made with the intention of picking up a full truckload, we expect the full freight allowance (the allowance applicable to the full order), even if the order is shorted. Safeway will take steps to ensure that all earned freight allowances are received. Allowances may include, but are not limited to: pick-up allowances, plant-direct allowances, unloading allowances and truckload allowances. Invoice Level Allowances/Discounts In accordance with current industry practices, Safeway will calculate all invoice level allowances and discounts based on gross invoice amounts. By calculating allowances and discounts on gross, Safeway is assured of receiving 100% of all off-invoice allowances offered. This includes cash discounts, spoils/damage allowances, trade discounts, etc. Cash Discounts on Gross Invoice payment terms begin upon receipt of goods for delivered goods and upon the purchase order due date for goods picked up by Safeway (or its agent), assuming that the product is available for pick up on the due date. Spoilage/Damages Allowances on Gross Certain allowances, including allowances for swell, spoilage, and damage ( Swell Allowances ), are intended to compensate retailers for unsalable merchandise. Because no fewer items are damaged or spoiled during promotions, this allowance should not be reduced by off-invoice allowances. Safeway reserves the right to renegotiate Swell Allowances with suppliers if we determine that the Swell Allowance provided does not cover the cost of product being returned through the product reclamation center or discarded due to damage or spoilage. Damage or spoilage to Product that is not covered by the Swell Allowance will be subject, at supplier s expense, to Safeway s Product Reclamation process. 4

5 Product Reclamation Center Safeway expects compensation from the supplier for all damaged, dated, spoiled and discontinued Product. If Safeway is not compensated via Swell Allowance, the affected Product will be subject to Safeway s Product Reclamation Center or other appropriate disposal procedures. Except where Safeway has published other standards, Safeway follows Product Reclamation Center best practices established by the Food Marketing Institute (FMI) and the Grocery Manufacturers of America (GMA). The supplier will be billed for the full cost of the Product plus handling fees in accordance with the FMI and GMA guidelines. Swell Allowances cover routine, day-to-day damages and spoilage. They do not cover discontinued product, recalls, overstocks, resets, or defective Product. The supplier shall remain responsible for all costs of such product withdrawals and will compensate Safeway for any and all such costs incurred by Safeway. Cost Differences Safeway will audit supplier invoices to ensure that purchase orders reflect the correct bracket price based on ordered quantities. Pricing brackets will be determined by the product quantities ordered, rather than the quantities shipped. If a supplier short causes an invoice to be cut at a higher price bracket, Safeway shall be entitled to generate a downward adjustment so that such invoice reflects the appropriate pricing bracket. Supplier is expected to ensure that all purchase orders shipping together (consolidated orders) receive the combined bracket price. Safeway will adjust downward any invoices that fail to reflect such consolidated order pricing downward. When a less than truckload (LTL) order is shipped with a full truckload, the LTL order should also be subject to the full truckload bracket price. Safeway may at any time audit supplier invoices to ensure that the price charged on a purchase order (or invoiced delivery) accurately reflects the price Safeway expects to pay. Each supplier is expected to be proactive and address purchase order inaccuracies prior to invoicing. This process will streamline payment and reduce the need for billbacks. In most instances, Safeway will generate a billing adjustment to correct invoicing discrepancies prior to payment; payment, however, shall not be deemed as agreement by Safeway to the invoiced amounts. Price and Deal Protection Price Declines - Safeway is entitled to, and may bill back to the supplier, the decline in value of Safeway inventory caused by a supplier cost reduction ( Price Protection ). If, prior to a price decline, Safeway has been provided a copy of the supplier s Price Protection policy which clearly spells out the calculation method used by the supplier and Safeway does not, within a reasonable time thereafter, object to such method, the process for recovering such Price Protection will be as described in that policy. For suppliers that have not provided a Price Protection policy or have a policy of not offering Price Protection, Price Protection will be recovered according to Safeway s standard practices and will be calculated using the following formula: [Warehouse Stock + Store Stock + Stock in Transit] X [Old List Cost - New List Cost] 5

6 Where: 1. Warehouse stock equals the inventory on-hand as of the effective date of the price decline. 2. Store stock will be defined as the calculated average of store inventory. 3. Stock in Transit will be defined as the calculated average of inventory in transit. 4. The per-case rate at which inventory levels are protected will not reflect adjustments for off-invoice and billback allowances in effect at the time of the price decline. Our intention is to keep promotional offers separate from list cost adjustments. (NOTE: Offers intended to support long term pricing programs will be evaluated based on the net price after relevant allowances. Insufficient buy-in windows may result in Price Protection claims). 5. Safeway s practice is to re-value the inventory at the new lower list cost and bill the supplier for the inventory devaluation. Due to volatility in pricing, consideration will be given to goods openly traded on the commodity markets. Price increases - Safeway expects adequate advance notice, in most cases at least thirty (30) days, of all supplier list cost increases. We must have sufficient time to react appropriately during changing market conditions, including (but not limited to) re-pricing at retail. Because such re-pricing is extremely difficult during certain seasons, Safeway imposes a product cost moratorium at certain times during the year. Safeway also expects adequate advance notice of any supplier allocations, and expects that all such allocations will be reasonable in light of Safeway s normal purchase volume and any promotions or increased demand conditions anticipated. Please note the price increase policy above has been updated and is in effect as of January, The new policy ( Cost Adjustment Policy ) can be found on the Safeway vendor portal at the following link: [insert link here]. This vendor letter will be updated shortly to reflect the new policy as well. Deal protection - Price increases should not apply to items while they are In Deal. If a supplier announces a price increase to become effective during or immediately before a promotion, Safeway will not (unless otherwise agreed) recognize that increase until completion of the Performance. Since the Performance was planned and executed with supplier s concurrence, based upon the original net price, we intend to keep Safeway whole with respect to promotions. In the instance of long term pricing programs, a cost increase could necessitate a higher allowance in order to maintain the same margin. Product Returned to Vendor Safeway takes the position that billback allowances requiring Performance will not be paid back to the supplier when a Return to Vendor (RTV) occurs. Exceptions may be made if the supplier can substantiate that returned allowances revert to the Safeway trade fund to be applied toward future promotional activity. RTV s (aka Warehouse Shipping Orders or WSO s) will be calculated at the current list cost and may be adjusted by current or prior off-invoice allowances. 6

7 Shorted Product Safeway will bill allowances at order quantities unless such allowances are waived, in advance, by Safeway s Category Management. If a supplier shorts a purchase order immediately prior to a price increase, Safeway reserves the right to bill back the quantity shorted at the lower price on a subsequent purchase order. Deal Revisions/Cancellations A supplier s submission of an allowance offer becomes a contract upon Safeway s acceptance. As such, modifying or canceling a Deal after a Performance has begun, or after preparations for such Performance have commenced, is not an acceptable practice and will not be permitted without Safeway s written approval. Audit Practices Safeway reserves the right to conduct a regular review of all items described in this document and to audit supplier s compliance therewith. Safeway will abide by the industry standard in regard to timing, which is supported by FMI and GMA, ensuring that all reviews be commenced within 24 months after the end of the calendar year. Of course, certain situations may require additional time for both parties to complete the appropriate review. We hope this document provides a better understanding of our billing practices. Please understand that no guidelines are all encompassing. While this is an attempt to share some of our practices, it does not address every conceivable situation. Since these guidelines are not intended to be all-inclusive, Safeway reserves the right to adjust them as necessary to fit different situations. In the instances where a supplier s policy conflicts with Safeway s Best Practices, Safeway s Best Practices will prevail. Please direct questions concerning these guidelines to the Allowance Audit/Billing Department at the following address: vendor_issues.aa.nasc@safeway.com or mail to: P.O. Box 29055, Phoenix, AZ Sincerely, David Lee President and General Manager, Non-Perishables Tom Schwilke President and General Manager, Perishables David Bond Senior Vice President, Finance & Control 7