Can supermarkets make money in the meals business?
"Yes" is the resounding answer from industry experts who talked to SN about profitability in the meals arena. So the question then is, how can they do it, or better yet, how ARE they doing it?
The experts answered that, too. They named supermarket chains they said are currently running profitable programs, and listed some of the common characteristics that mark these successful operators.
The ones turning a profit, they said include Ukrop's Super Markets, Richmond, Va.; Wegmans Food Markets, Rochester, N.Y.; Price Chopper Supermarkets, Schenectady, N.Y.; D&W Food Centers, Grand Rapids, Mich.; Marsh Supermarkets, Indianapolis; H.E. Butt Grocery Co., San Antonio; Dominick's Supermarkets, Northlake, Ill.; Ball's Price Chopper, Kansas City, Mo.; and Roche Bros. Supermarkets, Wellesley Hills, Mass.
And they said those operators have these characteristics in common:
They have made a long-term commitment to top quality and freshness.
They've created meals programs that fit well with the chain's identity in the marketplace.
They've made it convenient for the customer to buy meals from them.
They source some products from outside or from their own central commissaries so they don't get bogged down with production costs.
They've allowed enough time for the program to take hold.
And they've made a sufficient statement with the fare, whether it be with advertising or with other marketing and merchandising efforts. "There ARE people making money," said Jim Riesenburger, a partner in Design Associates -- Riesenburger, Roberts & Leenhouts, Rochester, N.Y.
It's Riesenburger's opinion that the mountains of research arising around the fresh-meals phenomenon may be blocking a clear view of how to do it.
"We have a very difficult situation in the industry today because of a number of studies that have surfaced. Specifically, I'm referring to the latest Coca-Cola study. The picture that is painted to a large extent is that you cannot make money in prepared foods or home-meal replacement in the supermarket industry. I believe the study didn't go far enough," he said.
"There are people [supermarket operators] who understand, and theirs is a philosophy that makes profitability in this business possible. It commits them to their program. They're budgeting for labor and shrink and sampling and they're leaving it in place," he added.
However, the pundits also noted that many supermarket operators are doing little to call consumers' attention to their programs.
"One of the most horrendous assumptions in the industry is supermarkets can count on their regular grocery shoppers to build a meals business, when it is an entirely different market," said Stephan Kouzomis, president of Entrepreneurial Consulting, Louisville, Ky. Michael Acuna, former category manager for service delis at Vons Cos., Arcadia, Calif., seconded that. "You have to capture that [meals] customer. That's a different customer.
"At Pavilion [a Vons format], we did some radio advertising and tastings and that helped, but you have to keep it up. You can't stop it. When we went into Vons with the program, we did almost nothing advertising-wise. It was that old story: we did something special, but didn't tell anyone about it," Acuna recalled.
Acuna also underscored what the industry gurus have been saying: that a supermarket can't just copy a program it sees somewhere else and expect it necessarily to bear profitable results.
Acuna said that when he was there, Vons was aiming to emulate Trader Joe's with its meals program but didn't have the right customer base. "Trader Joe's has been doing this for years in southern California and people already know that if they go into Trader Joe's they'll find something good to eat at a reasonable price."
One former food-service executive at an East Coast supermarket chain suggested tailoring meals programs to fit the retailer's existing identity in the marketplace. In that regard, he stressed the importance of building on existing strengths, instead of trying to create a whole new business that doesn't necessarily meet the needs of current customers.
"The successful operators have approached meal solutions within their own culture to fill actual, not perceived, customer needs," said the former chain executive, who chose to remain anonymous. "For example, Ukrop's and Wegmans have had a service-oriented culture all along," making reference to the combo of in-store preparation and theater and prepacked, chilled items offered at Ukrop's.
On the other hand, he said, an everyday-low-pricing operator would do well to create a case-ready program with prepacked items sourced from outside because it fits better with customers' expectations. He commented that retailers come out of conferences saying that nobody gave them the practical answers, and he emphasized that the answers are different for each operator. The meals business need not be a whole new business culture that the supermarket needs to absorb, he said.
"If we all stayed within the boundaries of things we knew about, we'd have fewer questions," he said.
"We need to focus on core competencies and have a commitment to execution. Even if it's a case-ready program, we can make sure the product is there when it's supposed to be, that it's a top-quality product, that it's displayed right. Or if your strength is your sandwich program, just make sure it's the best one around," he added.
While he said low sales volume in the meals category is certainly a profit-killer, he also said it's a symptom of another problem or problems. It's an alarm that should alert the retailer to look for the actual problem.
"You can have a great marketing program that pulls customers in, but if you don't have top-quality, good-tasting products, they won't come back," he said.
First, he said, the retailer needs to develop a "food-and-service" mentality.
"To me, that means providing good food and service to your customers."
To do that, a supermarket can't be all things to all people, said Neil Stern, partner in McMillan/Doolittle, a Chicago-based retail consulting firm.
"That's one of the barriers to making profits. Supermarket operators are building home-meal-replacement programs that are too big, with too much variety, and it's hard to make money that way. They need to focus on fewer things that they can do well," Stern said.
Others agreed that supermarkets need to focus on a few signature products -- but they often don't seem to understand what a signature product is, said Edward Engoron, president and chief executive officer of Perspectives/The Consulting Group, a Los Angeles-based company that works with supermarkets.
"It's what you do well, better than anybody else. If your fried chicken is an important part of your sales now, make sure you make it the best fried chicken in the world and when it needs to be pulled, pull it," Engoron said.
"I see supermarkets not only doing too many items, but they're also too esoteric. I was talking to somebody the other day who had introduced a 'signature product,' one he said nobody else had. It was bread-wrapped brie. When I asked him how many he sold last week, he said nine. There was a good reason nobody else had that product," he said.
He suggested keeping things simple even within a product category.
"If you have the best meatballs and spaghetti around, you don't need to have fettuccine and penne with spicy sauce," Engoron stressed.
Whatever the great-tasting -- and "great-tasting" is the key word -- product is, it can be the volume builder and thus the profit-maker itself, said consultant Marcia Schurer, president of Culinary Connections, Boulder, Colo.
"I believe that if you don't have volume, it's because you don't have anything good. Good restaurants make it with word-of-mouth advertising. I don't remember ever seeing a piece of advertising about California Pizza Kitchen, and yet I go there and I tell my friends to go there because my first experience there was a good one," Schurer said.
But Schurer also said an appropriate product mix, for many reasons, is essential to turning a decent profit.
"It takes a strategic plan of action. What products, at what price, at what profit, do you need to get where you want with the program? You have to get your average margin. Soups normally have a higher margin and proteins lower. So what happens if you're selling all the ones that have the lower margin?" Schurer said.
"I've seen whole coffin cases filled with gelatin molds. It has a long shelf life and you don't have to think about it, but how many are you selling? And for what profit payoff?
"A lot of times it goes back to a quality issue," Schurer said. What's even worse than filling up a case with gelatin is taking up space with a prepared item that's past its prime. A product that has lost its freshness will not only stop a repeat sale, but it might also lose a customer entirely; and it has taken up valuable real estate that could have been rapidly turning another quality product," she said.
Schurer, along with others, also decried the quickness with which supermarkets often abandon a new prepared-food product or program before it becomes profitable.
"Every product takes time to build its market share," she said. The problem is that the short life of prepared foods makes it more costly to wait for success. So if a product doesn't move fast, and turn a profit, the temptation is to "cut back, cut back, cut back," Schurer said. She pointed out that for most food-service businesses, it takes a couple of years to make the profits that they're looking for.
When people refer to Ukrop's or Wegmans and others making a long-term commitment, they mean a commitment to providing quality and freshness at whatever investment it requires, the experts agreed.
Another consultant said many operators are looking for instant gratification, therefore undermining their potential to build profits.
"The naysayers are looking for silver bullets. Getting into the meals business is not like adding another section to the dairy case," said Howard Solganik, president of Solganik & Associates, a Dayton, Ohio, consulting firm that works with supermarkets. "Some either want to stick their toe in the water and expect instant success or they're trying to fool the customer with food that isn't really that good."
Solganik said getting the quality and freshness down pat is a given with operators who are making money. "They focus on fewer items and deeper penetration of sales. You don't make a profit on the first item sold," he said, noting that the first sales go toward covering costs. "It's the last items sold that produce the profit. So it's necessary to turn everybody into a sales person. You have the labor there anyway, no matter how much you sell."
One of the worst threats to profits is the supermarket operator's "obsession with shrink," which causes him to not put enough product out to sell, Solganik said. His advice: put the product out, but actively sell it.
The whole issue of profitability involves creating systems that ensure enough product is available fresh, when the customer wants it, without being undone by shrink, said Brian Salus, president of Salus & Associates, a Midlothian, Va., consulting firm.
"It's important that the rotisserie chicken comes off the spit just before the customer buys it, not four hours before," Salus said. The chicken that's past its prime is "a silent killer" because a customer will buy it once and never come back, he said.
Ukrop's has its production systems worked out, and it has built customer trust over the years, said Salus, who was a food-service executive for the chain before he started his own consulting business.
"Ukrop's is profitable. They generate a lot of volume with a combination of display cooking and central kitchen support," Salus said.
He pointed out, however, that even though it has customers' trust, Ukrop's still gives customers a taste of new products as they're introduced.
"When we introduced pizza at Ukrop's, we gave it a lowball price to get people to try it. They bought it at that price and found out they liked it," he said. Then, the retail price was gradually raised.
Unlike many other chains, Ukrop's also makes a bold statement with its prepared foods, Salus said, with signage, substantial displays of chilled meal components, bundled meals with a special price, and a hot pizza operation.
That the food is top quality and tastes good are prerequisites. "You can't sell inferior products. But once you have good products, you need to sell them. The products themselves, as well as the way Ukrop's merchandises and markets its meals, add up to 'superb sales volume,' " Salus said.
Once volume is up, profits grow faster because of economies of scale, he pointed out.
The people who are profitable have been there for the long haul; they knew it would take time to turn a profit, Salus said. "Ask me if Ukrop's made money the first two or three years, and I can't tell you 'yes,' " he added.
He pointed to Roche Bros. as another chain that is making money on its prepared foods; but he pointed out that it, too, has gone through a learning process. The concept has been honed down to a combination, as at Ukrop's, of display cooking in-store and a lot of chilled, prepacked items sourced from outside.
Riesenburger underscored the use of products brought in from the outside to trim some of the "extraneous expenses" that would be incurred in from-scratch production, and also in order to have quality food available at all times.
"The people making money understand the industry. They're dealing with quality, niche manufacturers for products from outside or from their central facility. And they understand the markup can't be the same as it is for other products, such as those made from scratch," Riesenburger said.
"There has to be a philosophy there that's fully understood between the manufacturer and the retailer," he said, a philosophy shared by all levels at retail, from the buyer up to the top level of management.
Engoron at Perspectives also said supermarkets would serve themselves well by communicating and working better with their suppliers.
"Strategic alliances, partnerships are important for success. That's how the U.K. companies have done it, but there isn't a lot of loyalty here. People switch for a quarter of a cent a pound," he said.
Riesenburger stressed that items need to be allowed a full year's cycle for sales analysis to be meaningful.
"In too many instances, the buyer buys an item, puts it in the case, and when it doesn't succeed in a short time, it's called a failure," he said. "There are people who understand it's necessary to leave a product in place for a least a year. But for the most part, we systematically dismantle our own business and the profitability of the business before it has had time to succeed," Riesenburger added.
That time frame is needed, too, to win the customer's trust, said Engoron. "Supermarkets have earned the distrust of consumers because in the past they haven't done a very good job. When a customer comes in and finds rotisserie chickens all decked out at 8 in the morning and comes back and sees the same chickens at 5 or 6 o'clock at night, he's very wary of buying supermarket prepared food," Engoron said.
Some meals concepts are ill-conceived, he said, but even when they aren't, supermarket operators are abandoning them before the customer gets hooked.
"They have to realize they're attempting to change consumer behavior and that takes time. The consumers have been buying their meals elsewhere," he said.
He added that providing what he calls "come-back" flavor is a big help in changing consumer behavior. He plainly stated the biggest barrier he sees to profit-making with supermarket meals programs is "bad food."
Riesenburger summed up what he sees profit winners in the industry doing. "Their food is top quality. They have a restaurant mentality and understanding that the product has to be fresh and on display at the right time of day.
"They know the food also needs to be conveniently located and merchandised like a restaurant menu. A consumer who's looking for a meal doesn't necessarily know how a supermarket is constructed," and will not go from aisle to aisle to assemble a meal.
When asked what the most common and obvious barrier to making a profit is, most of the experts agreed that hot programs can be a big menace to profits if they're not well-managed. That's ironic, given the fact that some supermarket chains have added or expanded their hot programs recently.
There are not many foods that hold up well on a hot table, so the "fresh" message doesn't get sent, the experts said. "Fried chicken and fried potatoes. End of story," said Michael Acuna. "Think about it. The food's being heated from the top and the bottom. How long can it last?
"That's why we cut our hot cases at Vons from 8 and 12 feet to 4 feet."
And Salus said, "It blows me away when I see breaded vegetables on hot tables. They have a life of just a few minutes. They're best right out of the fryer."
Others said, however, that there's a place for a hot table in some locations. If there's a huge lunch business, for instance. But even then, they proposed having it in operation only a few hours a day.
