Page 11 - 2019 Apple Supply Chain Co-op, Inc. Annual Report_No Financials

Macro View

Commodity costs were generally flat through 2019, with steady/favorable energy and crude oil costs, and a strong U.S.
Dollar that enables us to import commodities at a relatively lower cost and makes U.S. produced goods higher cost to
export destinations. The Consumer Price Index for Food and Beverage was up 1.9%, while the Producer Price Index for
Finished Consumer Foods was up 1.8%

A significantly more protectionist U.S. trade policy upset markets but had little overall impact to our costs. We absorbed
some increases for Chinese produced products such as Crayons, Printer ribbons, and Breaded Shrimp, as well as EU
produced Pork Ribs, moved other products away from China (Straws), and got indirect benefit to our protein costs as U.S.
exports of Soybean Meal to China dried up, keeping feed costs down and supporting protein feeding and growth. The
second significant event was the significant spread of African Swine Fever into China, where half the world’s supply of
pigs are grown. By the end of 2019, it is estimated that China had lost 45-50% of its pigs, driving up Chinese demand
and costs. Fortunately, U.S. production and supply of pork has grown significantly in the last two years and our costs
were not adversely affected. We do see this being an issue that will affect pork and protein costs though, likely through
2022.

Food

The Beef category was the primary driver of lower cost in 2019. After a year of production of precut Top Sirloin Steaks,
we were able to negotiate more favorable processing costs, re-align our suppliers, and take advantage of softer markets
to drive considerable year over year improvements in steak costs. Poultry, Seafood, and Pork category costs were all
down – as production and supply were solid and the US$ provided buying support. All these results factor in quality
improvements made to Applebee’s burgers, chicken chunks, and back ribs. Our most significant win was the benefit of
changing from pre-cooked mac & cheese to providing raw pasta and cheese sauce. This was worth over $4,500 per
restaurant on an annualized basis.

The Dairy category led our unfavorable impact in 2019. Most dairy components, except for butter, were up in 2019,
including fluid milk, block cheese, and butterfat.

Indirect Spend
An additional 560 restaurants converted to the Conservewell dipper well program in 2019. In addition to saving an
estimated 219,000,000 (that is 219 MILLION) gallons of water, those restaurants will save approximately $3.7 million per
year in water costs, including the cost of conversion.

We also coordinated the installation of over 1,700 multi-valve Juice dispensers to support the move to concentrate
orange and apple juices. The costs associated with that equipment (equipment, installation, and basic service) are
amortized into juice costs for 2 years – and still result in considerable juice savings versus prior.

Relationships

We continue to put resources into Restaurant Profitability, with the goal of delivering lower cost options to our Members
without negatively impacting their guests. We delivered results on over 50 projects in 2019, contributing over $59 million
in annualized value to the Applebee’s system, including $31MM in Food/Paper and Services benefit. Of that amount,
over $10,000 was contributed to your 2019 Market Basket, or 2.3% of our total 2.6% year over year benefit. These
excellent results require effective working relationships between CSCS, Culinary, Quality Assurance, Operations Services,
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Marketing, Consumer Insights, our supplier community, and you.

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