STATE OF THE RETAIL INDUSTRY:

STATE OF THE RETAIL INDUSTRY: General Findings

Contents What s Inside?............................. 4 Executive Summary........................ 6 Why Reputation Matters................. 10 The Return on Reputation Indicator......... 11 Shaping the Environment................. 15 Retail Industry Reputation Model.......... 24 Retail Reputation Index.................. 26 Navigating a Path Forward............... 28 Reputation Matrix....................... 29 About the Study: Methodology............ 44 About APCO Worldwide & RILA........... 46

What s Inside? Retail Reputation Model: How we define and measure retail reputation The foundation of APCO s Retail Return on Reputation Indicator is a robust model that measures the extent to which all stakeholders believe the industry (and individual retail companies) are meeting the unique and specific expectations they have for companies in the retail sector.. The model is comprised of 24 key drivers defined by 40 discrete attributes that were measured in the study. Retail Reputation Index: The overall measure of the industry s reputation A highly reliable measure of overall reputation for the industry and individual retail companies that ranges from 0 to 100. The Reputation Index takes into account how the industry (or individual company) is rated along each of the 24 reputation factors in the Retail Industry Model and the relative impact each factor plays in defining reputation. 4 ROR Indicator: State of the Retail Industry General Findings Report

Return on Reputation Indicator: The analysis connecting. reputation to key outcomes A methodology and interactive module that measures and depicts the relationship between reputation and several key outcomes that are critical to the operating environment and business success. An interactive tool can be found on www.rorindicator.com that graphically demonstrates the predicted impact of. moving the needle literally on each. of the key outcomes. Reputation Matrix: Plots a path forward for protecting. and enhancing reputation The Reputation Matrix isolates the priorities for building reputation by mapping the drivers that represent strengths. and weaknesses against their relative importance to each stakeholder. ROR Indicator: State of the Retail Industry General Findings Report 5

Executive Summary 6 ROR Indicator: State of the Retail Industry General Findings Report

Executive Summary The retail industry is beginning to show modest signs of recovery. However, consumers remain cautious. Consumer confidence is improving, yet overall trust in companies continues to decline while the expectations all stakeholders have of companies continue to rise. Amid this complex and ever-changing environment, the industry and its major companies need to address the expectations stakeholders have in order to protect and enhance reputation and ultimately improve business outcomes. Reputation depends upon meeting the unique expectations all stakeholders have of an industry or its constituent companies. Understanding these expectations. and the impact that meeting these expectations has on the business environment is key to successful operation within that environment. Managing reputation requires an integrated approach that takes into account the expectations of all stakeholders and how this leads to meaningful outcomes. For example, it is difficult to build new stores and grow if community activists are rallying against the idea, policy-makers are standing in the way, or if the store cannot attract and retain employees. APCO s Return on Reputation (ROR) Indicator study of the retail sector was conducted among nearly 10,000 respondents, offering a 360-degree view of reputation across all stakeholders, including consumers, community activists, policy-makers, retail employees, and investors and analysts. In addition to understanding the most important expectations across these stakeholders that drive reputation for the industry and individual companies, the study answers the critical question of why reputation matters. The ROR Indicator reveals that reputation can increase consumer spending and loyalty, drive community support, improve the support of policy-makers on proposals favorable to the industry, help the industry earn the benefit of the doubt in the event of litigation, engage employees in ways that help avoid high replacement costs and has a tangible effect on a company s market capitalization. APCO s study shows that managing reputation by meeting the ever growing and evolving expectations stakeholders have for companies is more than a moral responsibility. The ROR Indicator shows us that meeting societal expectations impacts everything from how much consumers spend, to building support on the key policy issues that matter to the industry, to building employee engagement, and ultimately shaping shareholder value. Margery Kraus, Founder and CEO, APCO Worldwide Our reputation is arguably the industry s most important asset. Proactively managing our reputation allows us to keep the lines of communication open with all of our stakeholders so that we can improve the environment in which we operate. We can no longer simply respond to challenges and issues when they arise, but must work to build a reservoir of goodwill that allows us to engage more effectively and productively over time. Sandy Kennedy, President, Retail Industry Leaders Association ROR Indicator: State of the Retail Industry General Findings Report 7

Specifically, the study measures how reputation can: Lead to greater spending by consumers (increase annual spending by the average consumer by $133 per year for every point increase in the industry s reputation) Mobilize community activists to become your Advocates (add an additional 94,600 community activists who actively and vocally advocate on behalf of the industry for every point increase in the industry s reputation) Increase the level of support among policy-makers on the most important policy issues facing the industry (increase the proportion of policy-makers who support the industry on most policy proposals by nearly a percentage-point for every point increase in the industry s reputation) Gain the benefit of the doubt among Americans when crises arise (add more than six million additional people who are likely to give the industry the benefit of the doubt for every point increase in reputation) Enhance employee engagement and retention (add more than half a million retail employees who are most likely to remain on the job for every point increase in the industry s reputation) Maximize shareholder value and increase market value (increase market capitalization by 0.4%, on average, for every point increase in the industry s reputation) In addition to demonstrating key outcomes contingent upon reputation, APCO s ROR Indicator study for the retail sector uncovers key strengths of the retail industry, as well as unveiling critical opportunities to improve reputation. Meeting the Needs of Shoppers For all stakeholder audiences, serving the needs of shoppers is what the industry does best and is critical to its reputation. Delivering high-quality products to consumers, particularly new, innovative products of the future, is core to defining the industry s reputation. The value retailers offer their customers not only is key to driving shoppers to the store, but also shows that the industry is helping enhance our standard of living. Despite recent headline-grabbing issues, product safety emerges as a strength of the industry across all audiences. This suggests that the retail industry is meeting the product safety challenge and weathering the crisis well among all stakeholders. In fact, among investors and analysts, who tend to prioritize issues that pose the greatest risk, product safety is the single most important driver. Customer service, convenience and cleanliness also emerge in the study as key strengths that are important in defining the reputation of the industry. Giving Back Philanthropic efforts through supporting local charities and causes, donating a share of its corporate profits to charitable giving, and encouraging and supporting employees to volunteer for charitable causes, has a profound impact in shaping the industry s reputation. APCO s reputation research for dozens of Fortune 500 companies in other industries rarely finds philanthropy to be as important as it is for this sector. Despite increasing expectations society has for what companies are expected to do to give back, the retail industry is meeting the very high expectations of stakeholders, and represents a core reputation strength. Expectations to give back are especially important among retail employees. For many retail companies, employees play a very important role in giving back to their communities through employee volunteerism programs. The data reinforces that employees are also members of the communities and are often recipients of the philanthropic efforts by retailers. Philanthropy can generate significant pride in their employers and, as a result, plays a very important role in defining reputation that in turn helps to enhance employee engagement and recruit new employees. Partnering with Communities While the industry is meeting expectations for giving back through its philanthropic activities, the study shows that the industry still needs to be seen as a partner in solving the key issues facing communities. The industry s most important opportunity to enhance reputation is building ties with local communities and cooperating with local governments to address community 8 ROR Indicator: State of the Retail Industry General Findings Report

concerns. Most audiences surveyed expect to see retailers act in a more collaborative and cooperative way with local communities and governments. Listening to the community and entering into a dialogue on community concerns is the top priority for most audiences and an area where the industry has yet to fully meet most stakeholders expectations. Listening and collaborating is not enough, however. The study shows that the industry is not yet meeting expectations for addressing land use issues. On average, the industry is viewed more negatively than positively for working to ensure that stores take up less land and space. Audiences also expect retailers to plan ahead when building stores to reduce traffic and congestion, and build stores that blend into the local community. Retailers are expected to be leaders in developing creative and innovative solutions to suburban sprawl and blight. Land Use is the single most important driver of reputation among community activists, and addressing these expectations is critical to the industry s ability to mobilize advocates on its behalf and reduce the number of vocal critics speaking out against new stores and the industry as a whole. Responsibility to Employees Employment issues are undoubtedly one of the most challenging issues for the industry. Across all audiences, fair wages are a fundamental expectation of the industry, yet one that the industry is not meeting. However, the industry is seen more favorably in the area of providing opportunities for job advancement. Highlighting an industry s success stories and emphasizing the chances an employee has to move up through the ranks could help repair perceived weaknesses in wages offered. Interestingly, Labor Relations (how the industry is viewed in dealing fairly with employees who wish to unionize) has very little impact on the industry s reputation for all audiences except policy-makers. The study suggests that labor relations issues have much less impact than what we might expect. Environment Stakeholder expectations for addressing environmental issues continue to grow for all industries. The study clearly shows that environmental expectations are particularly important in defining the reputation of the retail sector. While individual audiences differ in their environmental priorities, overall the most impactful way to demonstrate environmental responsibility is through efforts to promote energy efficiency. The data suggests an opportunity to build greater awareness of the industry s leadership in this area to enhance reputation. Almost as important as Energy Efficiency in demonstrating environmental leadership, Green Products emerge as one of the top opportunities for building reputation. Despite recent efforts by some retailers to promote green products, the study shows that there is room for improvement in communicating the industry s leadership. Demonstrating leadership on green products is especially important for policymakers and can help to build the reputation capital needed to create a more favorable policy environment. Employees also place a high premium on green products when assessing the reputation of the industry. Although slightly less important in defining reputation than the other environmental drivers, the industry is generally viewed as meeting expectations for responsible waste and recycling practices. The industry receives particularly high marks for offering recyclable bags. Addressing waste and recycling issues is the most important environmental expectation for community activists and a key strength that should be leveraged to mobilize more advocates on the industry s behalf. Using the ROR Indicator to understand the totality of what comprises reputation and how reputation affects key outcomes will allow the retail industry to be proactive in conditioning its operating environment in order to realize a real return on reputation equity. ROR Indicator: State of the Retail Industry General Findings Report 9

Why Reputation Matters Reputation Outcomes c o n s u m e r b e h a v i o r c o m m u n i t y a c t i v i s m policy environment litigation environment employee e n g a g e m e n t financial v a l u e What impact does reputation have on consumer behavior? What impact does reputation have on driving community support or opposition? What impact does reputation have on driving favorable policy outcomes on specific policy and regulatory proposals? What impact does reputation have on leading Americans to give the industry and companies the benefit of the doubt when crises arise? What impact does reputation have on driving employee retention and recruitment? What impact does reputation have on shaping overall market/ shareholder value? Marketers have long understood the value and importance of brand equity. An enormous amount of time and money is expended to maximize the brand equity of products and services. Now, companies are embracing the importance of their reputation equity. While brand equity is essential to driving consumer behavior, reputation equity shapes the entire environment in which companies operate. Put another way, brand equity is focused on driving outcomes among one stakeholder audience (consumers), while reputation equity drives outcomes across all stakeholder audiences. Reputation equity is particularly important in the retail sector since stakeholders interact with these companies in many more ways than simply purchasing products. Retail companies have a significant presence and impact in communities where people live, they employ a significant proportion of the overall population, they partner with suppliers all over the world and ultimately provide consumers with the products they need. APCO s Return on Reputation Indicator study of the retail industry helps answer the critical questions that can help manage reputation: What are the core drivers that define the reputation of retailers? Which of these drivers are most important in shaping reputation for each stakeholder audience to prioritize resources in managing reputation? What are the key strengths that can be leveraged to protect reputation, and the key opportunities for enhancing reputation? However, the study helps answer one of the most important questions: what is the objective of reputation management and why does reputation matter? By answering these important questions, we can now quantitatively determine your Return on Reputation equity. 10 ROR Indicator: State of the Retail Industry General Findings Report

The Return on Reputation Indicator ROR Indicator: State of the Retail Industry General Findings Report 11

The Return on Reputation Indicator APCO s Return on Reputation Indicator is a methodology to understand the relationship between the reputation of companies in various industries and several key outcomes that are critical to their operating environment and business success. Unlike other tools that simply measure reputation across one or two audiences, APCO s ROR Indicator looks at reputation across a broad, complete range of all key stakeholders, and how reputation leads to changes in behavior by each group. The behavior of these stakeholders helps determine the operating environment of companies, which in turn can lead to profound impacts on business outcomes. The ROR Indicator study for the retail industry collected data from nearly 10,000 respondents representing all key stakeholder audiences, measuring the role reputation plays in predicting favorable business outcomes. Analysis of this data shows a statistically significant relationship between reputation and those key business outcomes. The ROR Indicator tool goes beyond tables and charts to represent the relationship between reputation and key outcomes in a dynamic, customizable way. An interactive tool can be found on www.rorindicator.com that graphically demonstrates the predicted impact of moving the needle literally on reputation on each of the key business outcomes. What impact does reputation have on consumer behavior? SPENDING For every 1-point increase in Reputation Index, the average consumer will spend $133.05 more per year [Margin of error=+/- $25.14] LOYALTY A 1-point increase in Reputation Index corresponds with an average increase in brand loyalty of.48% points [Margin of error=+/- 0.2 percentage-points] PROMOTERS A 1-point increase in the Reputation Index corresponds with an average 4 percentage point increase in the number of promoters (consumers who recommend the retailer to others) [Margin of error=+/- 0.002 percentage-points] What impact does reputation have on driving community support or opposition? ADVOCATES A 1-point increase in the Reputation Index will lead to approximately 94,600 additional Retail Advocates who actively support the industry [Margin of error=+/- 9,947] CRITICS A 1-point increase in the Reputation Index will lead to approximately 35,400 fewer Retail Critics who actively oppose the industry [Margin of error=+/- 7,700] 12 ROR Indicator: State of the Retail Industry General Findings Report

What impact does reputation have on driving favorable policy outcomes on specific policy and regulatory proposals? A 1-point increase in the Reputation Index corresponds to an average increase of 0.67 percentage point of policy-makers who support the industry on the average policy proposal [Margin of error=+/- 0.22 percentage-point] What impact does reputation have on leading Americans to give the industry and companies the benefit of the doubt when crises arise? A 1-point increase in the Reputation Index will lead to approximately 6.2 million additional defenders (people who will give the industry the benefit of the doubt) [Margin of error=+/- 185,500] What impact does reputation have on driving employee retention and recruitment? A 1-point increase in the Reputation Index will lead to approximately 503,000 additional retail employees who are highly likely to remain with their employer for at least a year [Margin of error=+/- 62,344] What impact does reputation have on shaping overall market/shareholder value? For every 1 point increase in Reputation Index, the average retail company s market capitalization increases by 0.4% [Margin of error=+/- 0.22%] ROR Indicator: State of the Retail Industry General Findings Report 13

Return on reputation Indicator: Methodology The ROR Indicator begins with the development of robust measurement models of the reputation in individual industries. An industry s model reflects the specific and unique expectations stakeholders have for that industry (see page 25). The measurement model provides a highly reliable index of the industry s reputation and that of its companies (see page 27). Our analytic models analyze the statistical relationship between the Reputation Index and key outcome variables which are derived either from the survey data or from other publicly available data sources. The predictions shown in the ROR Indicator are based on regression models analyzed from observed data. As with any regression model, the predicted outcomes shown are subject to the caveat of ceteris paribus (assuming all other variables except those under immediate consideration are held constant) and are subject to multiple sources of known and unknown error, including sampling error for survey data, error as a function of self-reported outcomes and all other sources of survey error that cannot be precisely measured or estimated. Furthermore, all measures of correlation (including regression analysis) do not imply causation. Details on the models for each dimension of the Return on Reputation Indicator are shown below: Consumer Behavior (Spending): Linear regression model: y (Dependent variable)=annual consumer spending (self-reported dollar spent at individual retailers); x 1 (Primary independent variable) = Reputation Index (of individual companies). Constant = -$4367.58; B (Reputation Index) = $133.05; Standard Error of B (Reputation Index) = $25.14; p =.000. Consumer Behavior (Loyalty): Linear regression model: y (Dependent variable)=loyalty (self-reported proportion of the time shopped at each store compared to other similar stores, scale from 0-100%); x 1 (Primary independent variable) = Reputation Index (of individual companies). Constant = 5.688; B (Reputation Index) = 0.481; Standard Error of B (Reputation Index) = 0.020; p =.000. Consumer Behavior (Promoters): Binary logistic regression model: y (Dependent variable) = Promoter (0= Definitely Would Not, Probably Would Not, or May or May Not ; 1= Probably Would or Definitely Would recommend store to friends or acquaintances);. x 1 (Primary independent variable) = Reputation Index (across all companies). Constant = -2.936; B (Reputation Index) =.059; Exp B ( x of 1) (Reputation Index) = 1.061; Standard Error of B (Reputation Index) =.002; p=.000. Community Activism (Retail Advocates): Binary logistic regression model: y (Dependent variable) = Advocate (0=Not involved in any of five activities in the past 12 months; 1=Involved in any of five activities in the past 12 months); x 1 (Primary independent variable) = Reputation Index (across all companies). Constant = -4.32; B (Reputation Index) =.0218; Exp B ( x of 1) (Reputation Index) = 1.022; Standard Error of B (Reputation Index) =.002; p=.000. Odds ratio applied to current number of Retail Advocates estimated based on 18.4% reported in survey out of total Community Activist population (representing 10% of total U.S. population 18 and over from most recent Census data). Community Activism (Retail Critics): Binary logistic regression model: y (Dependent variable) = Critic (0=Not involved in any of four activities in the past 12 months; 1=Involved in any of four activities in the past 12 months); x 1 (Primary independent variable) = Reputation Index (across all companies). Constant = -4.41; B (Reputation Index) =.0140; Exp B ( x of 1) (Reputation Index) = 1.014; Standard Error of B (Reputation Index) =.003; p=.000. Odds ratio applied to current number of Retail Critics estimated based on 10.8% reported in survey out of total Community Activist population (representing 10% of total U.S. population 18 and over from most recent Census data). Policy Environment: Binary logistic regression model: y (Dependent variable) = Support for average policy proposal (0=Not support industry position on an index of support across 16 different policy proposals; 1=Support industry position on an index of support across 16 different policy proposals); x 1 (Primary independent variable) = Reputation Index (across all companies); Control for party identification. Constant = -1.174; B (Reputation Index) =.015; Exp B ( x of 1) (Reputation Index) = 1.015; Standard Error of B (Reputation Index) =.005; p=.001. Litigation Environment = Binary logistic regression model: y (Dependent variable) = Defenders (0=rating of 0-5 on 10-point scale for giving company the benefit of the doubt on litigation; 1=6-10 on 10-point scale for giving company the benefit of the doubt on litigation); x 1 (Primary independent variable) = Reputation Index (of individual companies). Constant = -3.68; B (Reputation Index) =.051; Exp B ( x of 1) (Reputation Index) = 1.052; Standard Error of B (Reputation Index) =.002; p=.000. Odds ratio applied to current number of Defenders estimated based on 50.6% reported in survey out of total U.S. general public 18 and over from most recent Census data. Employee Engagement= Binary logistic regression model: y (Dependent variable) = Loyal Employees (0=rating of 0-7 on 10-point scale of likelihood of staying with company for the next 12 months; 1=8-10 on 10-point scale of likelihood of staying with company for the next 12 months); x 1 (Primary independent variable) = Reputation Index (of individual companies). Constant = -.895; B (Reputation Index) =.0178; Exp B ( x of 1) (Reputation Index) = 1.018; Standard Error of B (Reputation Index) =.002; p=.000. Odds ratio applied to current number of Loyal Employees estimated based on 65.4% reported in survey out of total retail employee population from U.S. Department of Labor, Bureau of Labor Statistics data (42,815,656). Financial Value=Adapted Market Value of Equity Model (linear regression model): y (Dependent variable) = Market capitalization of company at end of 2009; Independent variables: x assets = Total assets at end of 2009, x liab = Total liabilities at end of 2009, x earn = Abnormal earnings at end of 2009 (adjusted for cost of capital), x RI = Reputation Index (of individual companies). Constant = $2.61 8 ; B (Reputation Index) = $5.21 6 ; Standard Error of B (Reputation Index) = $2.84 6 ; p=.064. 14 ROR Indicator: State of the Retail Industry General Findings Report

Shaping the Environment: Reputation s Impact on Key Business Outcomes ROR Indicator: State of the Retail Industry General Findings Report 15

Strengthening Customer Relationships: Consumer Behavior The recession of the late 2000s hit the retail industry particularly hard. Consumer confidence hit record lows. Increasing unemployment and slower wage growth left less money in people s pockets, resulting in a sharp dropoff in personal spending. However, the economy seems to be turning a corner. Same-store receipts from April 2010 were up 0.8 percent compared with a 2.7 percent decline a year ago, according to the International Council of Shopping Centers Index of 30 retailers. March s 9-percent gain was the strongest since 1999. Despite persistent high unemployment and tight credit, consumer confidence appears to be rebounding. As many retailers cautiously raise their earnings outlooks, the fundamentals may seem to outweigh corporate reputation in the midst of this fragile and uncertain recovery. On the contrary, reputation has become more important than ever in the struggle to attract customers. Because they have less money to spend, consumers have greater and more demanding expectations from the places where they shop. APCO s Return on Reputation Indicator shows that reputation has a statistically significant impact in three areas: how much consumers are willing to spend, how loyal they will be to a store, and how likely they are to be promoters recommending the store to others. Thus, consumers will be more loyal and spend more at companies they respect and admire, although the frequency of shopping could not be predicted in a statistically significant way. What this means is that while reputation issues may not get people into the store, reputation does drive spending. Extrapolate the amount of an individual s increased spending per year over the spending of all visitors to a store and an upward tick in reputation proves to have a substantially significant increase in a company s revenue. Building reputation capital is critical in today s environment. Now, more than ever, retailers need to maximize share of wallet, price elasticity and margins as consumers wallets shrink and they become more deliberative in their spending decisions. What impact does reputation have on consumer behavior? SPENDING For every 1-point increase in Reputation Index, the average consumer will spend $133.05 more per year [Margin of error=+/- $25.14] LOYALTY A 1-point increase in Reputation Index corresponds with an average increase in brand loyalty of.48% points [Margin of error=+/- 0.2 percentage-points] PROMOTERS A 1-point increase in the Reputation Index corresponds with an average 4 percentage point increase in the number of promoters (consumers who recommend the retailer to others) [Margin of error=+/- 0.002 percentage-points] 16 ROR Indicator: State of the Retail Industry General Findings Report

Mobilizing Advocates: Community Activism Consumer behavior in and of itself is important, but it is only one of many factors which, when synthesized, formulate a complete understanding. of the impact of reputation. Community activists are another key stakeholder. Community activists, defined as people who represent the top 10 percent of the most active and informed segment of the population, wield enormous influence over the ability of retailers to grow and succeed. These activists, who are trend-setters and first adopters, are not only communicating with and influencing policy-makers and other decision-makers but also influencing and leading the broader consumer population. Community activists have always played an important role, but their influence is expanding with the rise of online communication and social media. Indeed, APCO s survey found that community activists are more than twice as likely to use the Internet to speak out on retail issues than the old-fashioned ways of writing letters to the editor, calling elected officials or attending community meetings. Please indicate if you have done any of the following within the past 12 months Retail Advocates Have done in past 12 months Write a letter to a newspaper, such as a letter to the editor,. in support of a large chain retail company Post a positive message on a blog, online forum or social networking site about a large chain retail company and its activities Contact an elected official in support of a large chain retail company and its activities Speak out at a meeting or other forum to support having a large chain retail company in your community Publicly defend a large chain retail company when a crisis or other negative event occurs Taken Any Action 18% (~4,293,180 community activists) 8% 12% 5% 5% 4% Retail Critics Have done in past 12 months Write a letter to a newspaper, such as a letter to the editor, criticizing the activities of a large chain retail company Post a critical or negative message on a blog, online forum or social networking site about a large chain retail company and its activities Contact an elected official to criticize a large chain retail company and its activities Speak out at a meeting or other forum to oppose having a large chain retail company in your community Taken Any Action 11% (~2,519,910 community activists) 5% 8% 5% 5% What impact does reputation have on driving community support or opposition? ADVOCATES A 1-point increase in the Reputation Index will lead to approximately 94,600 additional Retail Advocates who actively support the industry [Margin of error=+/- 9,947] CRITICS A 1-point increase in the Reputation Index will lead to approximately 35,400 fewer Retail Critics who actively oppose the industry [Margin of error=+/- 7,700] No Action 82% No Action 89% ROR Indicator: State of the Retail Industry General Findings Report 17

The good news for retailers is that there are more people who are vocally advocating on behalf of the industry Retail Advocates than are vocally criticizing it Retail Critics. Currently, 18 percent of community activists have advocated on behalf of the industry over the past 12 months, while only 11 percent have actively criticized the industry. Moreover, there are nearly twice as many potential advocates (who say they are likely to speak out on the industry s behalf in the future 38 percent) compared to potential critics (who say they are likely to speak out against the industry in the future 21 percent). Interestingly, Retail Advocates and Retail Critics have very similar demographic profiles. So what determines whether someone will become an ardent supporter or an active opponent in the public arena? Reputation. The reputation of retail companies is a significant predictor of whether or not someone becomes an active Advocate or Critic. The Return on Reputation Indicator shows how incremental changes in the average retailer s Reputation Index can increase the number of Advocates that are helping retailers achieve their goals or increase the number of Critics who make it harder for retailers to get their messages across, to influence the local policy environment and to grow by building new stores in local communities. Furthermore, reputation mobilizes advocates, moving people from a position of apathy to taking action. Who are these Retail Activists? Community activists come from all walks of life and all levels of the socioeconomic continuum; they are demographically quite similar to the rest of the general public. What distinguishes and defines this audience is a high level of attentiveness to news and information and active involvement in civic and political activities. APCO Insight has been conducting research to understand and profile community activists over the past 10 years. Community activists get news every day either from print or online, regularly vote in elections, express high levels of interest in public policy and have been involved in some civic or political activity (e.g. contacted a public official to express views, written letters to the editor, or volunteered for political campaigns, community or nonprofit organizations) The survey found some interesting differences between Retail Activists (both Advocates and Critics) and general community activists. The chart on the right compares the demographic profile of community activists generally and Retail Advocates and Retail Critics. Retail Activists are more likely to be men (especially Retail Critics) than the typical community activist. Both Retail Advocates and Critics are younger than the typical community activist. Both Retail Advocates and Critics are less likely to identify with one of the major parties and are more politically independent than the average community activist. Retail Critics tend to be higher income. Retail Activists both Advocates and Critics are more likely to be an ethnic minority particularly Hispanic than general community activists. 18 ROR Indicator: State of the Retail Industry General Findings Report

Community Activists Retail Activists 55% 45% Advocates 58% 42% Critics 63% 37% GENDER AGE 18-24 9% 18% 16% 25-34 15% 23% 30% 35-44 18% 20% 18% 45-54 19% 16% 14% 55-59 9% 5% 7% 60-64 8% 6% 6% 65+ 23% 12% 8% ETHNICITY White/Caucasian 76% 69% 65% Black/African-American 10% 11% 9% Hispanic/Spanish/Latino 11% 17% 22% Other 3% 3% 3% INCOME Under $20,000 10% 10% 8% $20-40,000 23% 26% 30% $40-60,000 23% 22% 17% $60-80,000 18% 16% 14% $80-$100,000 11% 10% 10% $100-150,000 11% 11% 16% $150,000+ 4% 5% 6% PARTY Republican 30% 27% 25% Democrat 39% 37% 40% Independent/Other 31% 36% 36% ROR Indicator: State of the Retail Industry General Findings Report 19

Shaping Policy Outcomes: The Policy Environment Just as corporate reputation affects and mobilizes community activists, it also plays a significant role in shaping the policy and regulatory environment. APCO s research over the past 10 years has demonstrated the impact reputation has in gaining the support of policy-makers and regulators on issues that can mean the difference between success or failure for the industry. On average, 44 percent of. policy-makers support the positions of the retail industry. When controlling for party affiliation, the Retail Reputation Index has a statistically significant impact in driving support for policy outcomes critical to the industry s success. Proportion of policy-makers who support the industry on the average policy proposal Supporters 44% Opposers 66% What impact does reputation have on driving favorable policy outcomes on specific policy and regulatory proposals? The ROR Indicator polled the position of local, state and federal policy-makers on key issues, including * : Labor Oppose the Employee Free Choice Act Oppose the Healthy Families Act Oppose local laws mandating certain levels of health care benefits to employees Oppose passage of RESPECT Act impact statements prior to receiving building permits Environmental Restrictions Oppose local laws banning. non-compostable plastic bags Oppose local laws requiring retailers. to sell reusable bags A 1-point increase in the Reputation Index corresponds to an average increase of 0.67 percentage point of policy-makers who support the industry on the average policy proposal [Margin of error=+/- 0.22 percentage-point] Online Sellers Support legislation to tighten regulations for online auctions sites Support Federal legislation granting states authority to collect sales taxes on remote (Internet) sites Taxes Oppose a national sales tax Support permanent extension of the Work Force Opportunity Tax Credit Land Use Oppose local regulation that limits the square footage of new stores Oppose local laws requiring companies to pay for local economic Marketing Oppose state laws requiring third-party advertisers to provide consumers notice on type of information collected and the methods for consumers to opt-out Civil Justice Reform Support procedural limits and cap the awards of civil lawsuits Trade Support free trade agreements Credit Card Reform Support reforms on interchange credit card swipe fees * Language summarizes actual question wording The data suggests that if the industry were to improve its reputation by 9 points among policymakers (on a scale from 0 to 100), the industry could gain majority support on most policy issues. 20 ROR Indicator: State of the Retail Industry General Findings Report

Managing Risk: The Litigation Environment Building reputation capital is like putting money in the bank. In good times, interest grows; in times of crisis, it gives the ability to draw down the deposit without draining the account. Research conducted by APCO to help companies communicate on litigation shows a direct relationship between a company s reputation and how people evaluate lawsuits. In fact, a company s reputation is often a stronger predictor of how people view a lawsuit than any arguments or merits of the case. A good reputation gives the company the benefit of the doubt, which is an invaluable asset when facing litigation or other crises. Reputation capital proves critically important in a company s ability to weather crises. APCO s Return on Reputation Indicator shows a direct relationship between retailers reputation and whether Americans will grant retailers the benefit of the doubt. The survey indicates 51 percent of the population is likely to give retailers the benefit of the doubt when the companies are facing litigation. The data suggests that a 1-point increase in the Retail Reputation Index could increase that percentage of defenders to 53 percent (which translates into approximately 6.2 million additional Americans willing to give the industry the benefit of the doubt). That s reputation capital you can take to the bank. How likely would you be to give the retail industry the benefit of the doubt? Defenders 51% (~118,062,439 Americans) Doubters 17% Scale from 0-10; 0-4=Doubters;. 5=Neutral; 6-10=Defenders Neutral 30% What impact does reputation have on leading Americans to give the industry and companies the benefit of the doubt when crises arise? A 1-point increase in the Reputation Index will lead to approximately 6.2 million additional defenders (people who will give the industry the benefit of the doubt) [Margin of error=+/- 185,500] ROR Indicator: State of the Retail Industry General Findings Report 21

Becoming an Employer of Choice: Employee Engagement and Recruitment Reputation affects not just external environments, such as public policy, but also internal constituencies. Any human resource professional can attest to the growing cost associated with recruiting and replacing employees. The SASHA Corporation, an HR consulting firm, found that replacing an $8 per hour employee can cost a company anywhere from $3,500 to $25,000 per employee. The HR consulting firm Saratoga shows in its Human Resource Financial Report that the average turnover cost equals one year s salary and benefits and is even higher for retailers. Even in an environment of high unemployment, the cost to replace employees is a significant financial burden. As the economy expands and retail sales improve, these costs will continue to rise. APCO s survey of retail employees finds that 35 percent of all employees are not very likely to remain with their employers beyond the next 12 months. There are many ways to improve employee retention, but the survey finds that reputation can play a significant role. Retail employees care a great deal about a number of factors when assessing the reputation of the companies for which they work, including how their employers give back to the community, demonstrate leadership on environmental issues and incorporate free trade practices (see page 42). APCO s Return on Reputation Indicator shows a statistically significant relationship between the reputation of a retailer and its employees likelihood of remaining with the company for at least the next 12 months. The data suggests that for every 1-point increase in the Retail Reputation Index, the number of employees who are most likely to remain with the company increases by nearly two percentage points. This could lead, on average, to approximately 503,000 additional retail employees who are most likely to stay on the job. How likely are you to stay at the retail company you currently work at for the next 12 months? Loyal Employees 65% (~28,001,439 retail employees) What impact does reputation have on driving employee retention and recruitment? A 1-point increase in the Reputation Index will lead to approximately 503,000 additional retail employees who are highly likely to remain with their employer for at least a year [Margin of error=+/- 62,344] Very Likely Somewhat Likely Neutral Somewhat Unlikely Very Unlikely 22 ROR Indicator: State of the Retail Industry General Findings Report

Enhancing Shareholder Value: Investment Decisions and Market Value As indicated earlier, corporate reputation plays a prominent role in improving the overall environment in which companies conduct business, including improving the policy landscape, reducing litigation risk, attracting and retaining high-quality employees and building stronger loyalty among consumers. It should come as no surprise then that there is a significant relationship between corporate reputation and the financial value of a company. Hundreds of articles in academic literature have evaluated the relationship between corporate reputation and financial outcomes, such as profitability and valuation. The vast majority of peer-reviewed studies conclude that there is a statistically significant positive relationship between corporate reputation and financial performance. For instance, an analysis of Fortune s Most Admired Corporations ratings and data on financial performance, including firm profitability (return on total assets), market-to-book value and firm size (total sales) has shown that firms with better corporate reputations are better able to sustain superior financial performance over time [and] good reputations help poor performing firms in their efforts to return to profitability. 1 Many studies also have demonstrated the relationship between reputation and stock market performance. One study evaluated the relationship between the Fortune Most Admired Companies rankings and security prices in the year following the publication of the rankings. Over a 13-year period, the 10 corporations at the top of the rankings showed an average increase of 20.1 percent in stock price over the year following the publication of the rankings, while the average increase in the S&P 500 was only 13.1 percent. On the other hand, the 10 firms at the bottom of the rankings showed an average decline in stock price of 1.9 percent. 2 APCO s Return on Reputation Indicator narrows in on the return on market equity that can be generated from the reputation of retailers. The data across 17 top retailers shows a statistically significant reputation premium in market capitalization. When applying a Market Value of Equity econometric model that includes APCO s Retail Reputation Index as an independent variable, we see that reputation can help predict market capitalization of retail companies. For the average retailer, the data shows that a 1-point increase in the Retail Reputation Index can lead to approximately a 0.4 percent increase in market capitalization. What impact does reputation have on shaping overall market/shareholder value? For every 1-point increase in Reputation Index, the average retail company s market capitalization increases by 0.4% [Margin of error=+/- 0.22%] 1. Roberts and Dowling (2002). Corporate Reputation and Sustained Superior Financial Performance. Strategic Management Journal, Vol. 23; 1077-1093. 2. Vergin and Qoronfleh (1998). Corporate Reputation and the Stock Market. Business Horizons, January-February 1998; 19-26. ROR Indicator: State of the Retail Industry General Findings Report 23

Retail Industry Reputation Model 24 ROR Indicator: State of the Retail Industry General Findings Report

Retail Industry Reputation Model: Defining Reputation & Understanding Stakeholder Expectations The foundation of APCO s Retail Return on Reputation Indicator is a robust model that measures the extent to which all stakeholders believe the industry (and individual retail companies) are meeting the unique and specific expectations they have for companies in the retail sector. The Retail Industry Reputation Model allows us not only to measure reputation and the return on reputation equity but also to provide a roadmap for how to most effectively protect and enhance reputation. By understanding how the industry and companies are viewed on each of the discrete drivers of reputation, and the relative impact these drivers have in shaping overall reputation, the Return on Reputation Indicator prioritizes the most important strengths to be leveraged and the most important opportunities for further enhancing reputation. Recognizing that reputation is defined by multiple stakeholders who each play an important role in shaping the outcomes that drive success or failure, the research charts a path forward for enhancing reputation by each audience. By focusing on the most important drivers for each audience, the industry can enhance reputation in order to realize a real return on reputation equity. The Retail Industry Reputation Model: METHODOLOGY The Retail Industry Reputation Model was informed by extensive research over the past six years to isolate the key drivers that define the retail industry s reputation. APCO Insight conducted extensive qualitative research (focus groups and in-depth interviews) to understand the unaided expectations audiences have for retailers to be viewed as respected and responsible companies (in their own words). Quantitative surveys were conducted to test more than 100 different attributes uncovered in the qualitative research. Using advanced statistical analyses, including both exploratory and confirmatory factor analysis procedures and Structural Equation Modeling, APCO Insight identified 24 dimensions (factors) that define perceptions of retail companies. Correlations between the 24 discrete factors show that there are four broad dimensions of reputation: Responsibility to Customers, Responsibility to Communities, Responsibility to Employees and Suppliers, and Responsibility to Investors. The analysis also isolated the 40 discrete attributes that provide the most valid and reliable metrics of these underlying factors. The Retail Industry Reputation Model provides a highly reliable and robust measurement tool to assess the reputation of the industry and individual retail companies that reflect the specific and unique expectations stakeholders have for retail companies. ROR Indicator: State of the Retail Industry General Findings Report 25

Retail Reputation Index 26 ROR Indicator: State of the Retail Industry General Findings Report

Retail Reputation Index: Measuring Retailer Reputation Total Reputation Index 56.6 0 100 Employees 54.0 0 100 Policy Leaders 56.1 0 100 Financial Leaders 57.3 0 100 Consumers 57.8 0 100 Community Activists 58.6 0 100 The retail industry, overall, recorded. a Reputation Index of 56.6 across. all stakeholders. The Reputation. Index is slightly higher than the. mid-point (50.0), which suggests that the industry is just barely meeting the expectations of most stakeholders and demonstrates that there is significant room for improvement. When compared to other industries, the retail industry s reputation is right in the middle: neither among the most reputable industries (such as computers and technology), nor among the least reputable industries (such as oil, health insurance or tobacco). The Index is computed separately for each stakeholder. By audience, the Index is the lowest among employees at 54.0 and highest among community activists at 58.6. The Index among policy leaders was 56.1, among financial leaders 57.3 and among consumers 57.8. The real value of the Index is that it provides a statistically valid measure of reputation overall and by each key stakeholder that can be tracked over time to determine the effectiveness of various industry initiatives and communication efforts. Retail Reputation Index: METHODOLOGY The Reputation Index is a highly reliable index of reputation for the industry and individual retail companies that ranges from 0 to 100. The Reputation Index takes into account how the industry (or individual company) is rated along each of the 24 reputation factors in the Retail Industry Model and the relative impact each factor plays in defining reputation. The Reputation Index is derived from the sum of the Performance Scores for each of the 24 factors in the Retail Industry Reputation Model, where individual Performance Scores are weighted by the factor s respective Impact Score (as described on page 30). The Reputation Index is computed separately for each audience and can be used to compare reputation among audiences and track reputation over time. ROR Indicator: State of the Retail Industry General Findings Report 27