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SHIFTING ALLEGIANCES

U.S. consumers aren't ready to reveal their elusive buying habits just yet. The only sure conclusion one can draw is that they continue to diversify their spending among a multiplying number of alternatives.SN's second annual review of the 50 top food and nonfood groups shows that American shoppers still use supermarkets for most of their purchases. Some categories, such as frozen dinners and milk,

U.S. consumers aren't ready to reveal their elusive buying habits just yet. The only sure conclusion one can draw is that they continue to diversify their spending among a multiplying number of alternatives.

SN's second annual review of the 50 top food and nonfood groups shows that American shoppers still use supermarkets for most of their purchases. Some categories, such as frozen dinners and milk, remain firmly in the grip of traditional retail food outlets. Others, including most nonfoods, generate a lot of income, yet they are steadily being siphoned off by competing formats like club stores, supercenters and drug stores, among others.

Barring some private labels, no one category is 100% exclusive. The data in the yearbook report, provided by Information Resources Inc., Chicago, show more than ever how universally available many products have become. These days consumers can purchase cans of tuna on sale in drug stores and find gallons of fresh milk in dollar stores. The novelty of finding such items in nontraditional formats has long since worn off, and shoppers are more interested in exercising their own brand of "voodoo economics" that balances price, convenience and value to varying degrees, depending on the person and their needs. They have definitively shown they don't care where they make their purchases.

GUARDING THE PERIMETER

Most fresh foods rely on strict temperature control, and this observation explains why most of the top-selling foods in supermarkets profiled in the 2005 IRI report are refrigerated. After all, supermarkets have long been acquainted with the requirements of cold cases and refrigerated displays. The channel's experience and expertise have allowed it to remain in front -- sometimes by tremendous margins -- of the competing formats profiled in the 2005 IRI report. Where drug stores and mass merchandisers might be making quicker inroads in dry grocery, supermarkets still enjoy the significant advantage in fresh items.

But for how long? Technology and design improvements are allowing competing channels to add refrigerated displays, even if it's a small reach-in for milk. Drug and mass are determined to develop their fresh-food categories, and figures for 2005 do show erosion in supermarkets to some extent. For example, in the overall milk category, food/drug/mass sales totaled $11.4 billion. The vast majority of sales, $10.9 billion, went to supermarkets. However, the drug channel captured $365 million -- up nearly 31% from the year before. Fluid dairy is one of several categories that apparently has become a convenience purchase that consumers make in a growing number of channels. Refrigerated orange juice is another. Supermarket sales slid 3.2% in the $2.6 billion OJ category, which is responsible for most of the sales in IRI's refrigerated juice group. Here again, sales increased in the drug channel, up 10% to $39 million -- a small, steady increase from prior years.

This slow but sure encroachment on territory once firmly held by supermarkets continues in almost every category covered by IRI's fresh market section.

Channel blurring is only one factor at work, however. Health and wellness are also synonymous with most fresh foods, and that trend continued to have a strong impact on the categories covered here. Several big winners, in terms of overall sales and top sales gains, turned up in the dairy case. A top category for overall sales, natural unprocessed cheese experienced another year of healthy growth. One of the big gainers, yogurt is still the darling of the dairy case, and continued its steady ascent, fueled in part by new products, growing recognition of its health benefits and convenient packaging. Milk sales were up due to higher pricing -- total unit volume fell. Yet healthier skim and low-fat milk varieties experienced much milder volume declines than whole milk. Milk substitutes, such as soy milk, continued to grow.

"People are consciously trying to make some changes," said Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill. "Regardless of the amount of fat, cheese is still perceived as healthy because of the calcium. It's used in so many different cuisines right now."

On the other hand, sales slumped for not-so-healthy categories, including sugary refrigerated desserts like pudding and gelatin.

"I see the reasons behind the sales trends as health-driven," said Jay Jacobowitz, president of Retail Insights, a Brattleboro, Vt.-based consulting service for natural-products retailers.

Though low-carb dieting propelled sales in protein-rich categories last year, the impact of the diet's strict mandates has significantly waned. If anything, its legacy seems to be that consumers are more aware of diet and health in general.

"Whether they worked or not, low-carb diets raised public awareness of nutrition and food content," Wisner said.

Jacobowitz noted that specially formulated low-carb foods, such as low-carb breads, are in decline, yet demand is strong for foods that are naturally low in carbs such as dairy products, meats and poultry.

"These more natural, high-protein foods are also better tasting, fresher and more healthful," he said. "Luncheon meats, although highly processed, are a more accessible protein, and are low-carb, so I believe that is why those sales are up."

The newly revised dietary guidelines also may be influencing fresh-foods choices. Declines in the cereal category seem to be lightening for the first time in a while -- perhaps because brands are highlighting "Whole Grain."

"Diets are one way people get educated," Wisner said. "People are smarter about eating after going through these fads."

-- LYNNE MILLER

SLIGHTLY OFF-CENTER

Center Store remains the nucleus of the supermarket, and is home to many of the channel's biggest categories by sales volume. However, the IRI numbers show sales in many key product groups are going to competing venues, again raising the argument that Center Store is slowly but surely being marginalized.

Rarely is a single trend at work in many of these categories. Take frozen juice, which had sales plummet 14% to $471.5 million as consumers opted for nutrient-specific refrigerated versions and sought to shorten prep times in the kitchen. Frozen dinners, up 2.6% in supermarket sales for the tracking period, are enjoying revived sales due to new, healthier options that actually taste good, while retaining their microwave convenience. Snack nuts, up more than 10% in supermarket sales, have received a lot of buzz as a healthful munchie, and are nature's almost perfect in-hand, on-the-go food.

If one trend is pulling out in front, it's convenience. It rules everything, said Marcia Mogelonsky, senior research analyst for Mintel International Group, Chicago. "Who's going to thaw juice if they're getting a premade peanut butter and jelly sandwich?" she said, referring to Smucker's frozen, thaw-and-eat Uncrustables sandwiches.

Convenience has helped spawn a number of packaging styles, which helps expand a category's user base, said Mona Doyle, president of the Consumer Network, Philadelphia. "The proliferation is not just in flavors and types. You can get so many things in different forms," she said.

That yen for convenience also affects shopping patterns. The desire to save time and money has hurt key food and nonfood categories in supermarkets as shoppers head for other channels where they can stock up cheaply. Declines have been biggest in ubiquitous categories such as cereal (down 1.1%); laundry detergent (down 2.7%); and diapers (down 7.2%), where it's hardest for supermarkets to differentiate. Indeed, manufacturers supply the same products in the same sizes and packages to any outlet that asks.

Supermarkets aren't likely to reverse that trend until they get more price competitive on big brands that enjoy strong shopper loyalty, said Frank Grossi, a category management expert and chief executive officer of the Partnering Group, Cincinnati. On the other hand, he said he thinks supermarkets are doing better than other channels at introducing new products, which are critical to Center Store growth.

For example, having given low-carb dieting a shot, many Americans have moved on to a quest for general health and wellness. Hence the continued growth, albeit slowing, of the $3 billion bottled-water category, which grew sales nearly 9% in the past year. Companies have floated new flavored waters as well as lines with value-added nutrients. Even wine, with its reported health advantages, has benefited from this movement, particularly as more supermarkets are licensed to offer it. Meanwhile, the $556 million weight-loss drink market declined sharply as shoppers turn to other new diet food products.

"Anything to do with diet is down because of the Atkins fallout," Mogelonsky said. "I think people are still poking around, trying to find what to do next."

One lifestyle aspect that may not be reflected in this report, likely due to the timing of the reporting period, is the new interest in subcategories like pasta, breads and cereals that feature whole grains, part of the federal government's Dietary Guidelines for Americans.

Notably, three of the top five declining categories are from the nonfood side of grocery. Diapers, dish detergent and foil wraps are among the products that have become so common in competing formats, often for less money: diapers (club stores); dish detergent (mass merchandisers); and foils/wraps (dollar stores).

A review of the Center Store categories shows that it's no longer a one-size-fits-all world, and product makers are responding to consumers' demand for products that address their specific needs. New laundry products designed for every washing situation imaginable have helped brighten sales in an overall declining category, for example. It's one of the top nonfood categories in supermarkets, earning sales of $2.4 billion for the reporting period. Yet sales are down 2.7%, and the one-time cornerstone of the nonfood section shows early signs of being yet another category in danger of slipping to competitors.

-- LUCIA MOSES

TIME TO RETHINK NONFOOD

Too much red ink on the nonfood sales ledger signals the need for serious evaluation and reinvention for supermarkets.

IRI figures indicate that supermarkets have taken the biggest hit in nonfood sales -- falling 3.13% from $18.4 billion in calendar year 2002 to $17.8 billion for the year ending May 15, 2005. However, the drug store and mass channels are not totally to blame, since they are struggling to sustain category growth as well.

While nonfood sales are up in the drug channel, they are growing at a much slower pace than in past years. Food, drug and mass channels combined show an overall decline of 4.9% in nonfood sales, from $51.9 billion in 2002 to $49.4 billion for the period ending in 2005. Unit sales among all three channels are flat or declining over the four-year period.

A primary cause for the fallout is fragmentation of the marketplace, said Michael Shinall, president and chief executive officer of Meridian Consulting Group, Westport, Conn. Shinall, who completed a soon-to-be-released study for the General Merchandise Distributors Council Educational Foundation, said the research concludes that consumers are increasingly dividing shopping trips into multiple alternative outlets. In 1996, consumers shopped 1.4 outlets a week. Last year, trips to multiple stores were up to 3.3 outlets per week.

"Supermarkets are hurt by the fact there are all these other outlets where I can go and buy the same [nonfood] stuff, and it's not like the pricing is dramatically different either," Shinall said. "There are battery centers at Home Depot and Albertsons. It's the ubiquity of presence of all these other places where I can go [to buy] nonfood that has hurt."

Wisner, the marketing consultant, said there is a tendency to blame Wal-Mart for the leakage of sales.

"In the case of general merchandise, you're looking at home center stores and the growth that they've experienced in recent years, and the amount of square footage that has been added to a lot of the categories that used to be the province of what we thought of as food/drug/mass," he noted. "There are a lot more channels. Dollar stores have taken a lot out of the market, and we've seen how those numbers have grown."

Two of the nonfood category decliners in supermarkets this year are light bulbs, down 6.3%, and photo supplies, down 19.2%. Light bulbs is one of those categories that saw sales go to the home centers, where selection is bigger and more sophisticated. Photo supplies have been impacted by the shift to digital technology, which supermarkets have been slow to adopt.

"We missed the digital lab piece of the business when that came out, and the drug stores were all over it," said Lanny Hoffmeyer, corporate director, wholesale general merchandise, Supervalu, Eden Prairie, Minn.

Sales also fell in large-volume nonfood categories such as internal analgesics, vitamins, toothpaste and sanitary napkins/tampons. Cold/allergy/sinus tablets remained flat, held down by the publicity and sales restrictions of over-the-counter drugs containing ingredients used to make the illegal and addictive drug methamphetamine.

There remain bright spots. This year's largest nonfood gainers were gastrointestinal tablets, mouthwash, miscellaneous health remedies, adult incontinence and nasal products. These categories enjoyed attractive new product introductions and continued to feed on consumers' desires to self-medicate and take care of themselves.

When it comes to health and beauty care, especially beauty, supermarkets have generally abdicated many of those categories, Shinall said. While supermarkets have done a good job on integrating the wellness-pharmacy component, Shinall said beauty is a different animal.

"By lumping together HBA we might be doing it a disservice, because there is health, and beauty, and the consumer thinks about those differently," he said. "Retailers have to think about it differently [too]."

What's needed on the part of supermarkets is reinvention, commitment and capital expenditure in order to make a statement and entice customers with nonfood, Shinall said. He pointed to the 100-store test of a dedicated beauty aisle and on-site consultant between Minneapolis-based Target and Boots, the British HBA manufacturer. CVS is also partnering with Boots and is incorporating its Life format prototype elements in stores with wider aisles, and upscale fixtures and lighting.

Shanall said supermarkets need to move beyond the world of metal gondolas in presenting nonfood categories, and food retailers need to decide whether they really want to be in some nonfood categories.

"[Supermarkets] can't be in all businesses and do everything well," Shinall said.

-- CHRISTINA VEIDERS

How to Read the IRI Numbers

In analyzing food and nonfood category trends within the supermarket channel, SN presents dollar sales data compiled by Information Resources Inc., Chicago, for the 52 weeks ending May 15, 2005, and percentage change from the previous 52 weeks. That data are used to compare performance of supermarkets to drug stores and combined food, drug and mass channels. Dollar sales and sales shift in supermarkets for all 296 categories tracked by IRI are published on Pages 30 to 38. The data are broken down for further analysis into 50 key categories representing large sales volume, top gaining and declining categories in supermarkets. The 50 categories are ranked by highest to lowest dollar volume on Page 26 and ranked by sales shift -- highest to lowest percentage change on Page 28.

In-depth analyses of Nonfood, Fresh Market and Center Store categories start on Pages 39, 51 and 73, respectively. Each of the 50 category profiles includes dollar volume of subsegments if the categories are broken down into subsegments. Supermarket dollar volume is compared to drug and combined food, drug and mass channels for the reporting period. Historical trend data are presented with dollar volume and percentage change for the calendar years 2002, 2003 and 2004 for supermarkets, drug stores and food, drug and mass channels combined. While unit sales is not reported here, it was taken into consideration by SN editors in choosing the 50 categories. Unit sales can be based on the item purchased. So in wine, a unit equals a case, but in paper towels, it could be one roll, four rolls, 12 rolls, etc. So, theoretically, if shoppers are increasingly buying paper towels in bulk, unit sales could go down.

The Wal-Mart Factor

Information Resources Inc. does not include Wal-Mart Stores sales or unit movement in reporting category numbers for the mass market channel. In 2001 Wal-Mart stopped selling its sales data to market research firms to keep the information out of its retail competitors' hands. IRI does include sales for Kmart and Target, among others. Wal-Mart is the No. 1 food retailer in the country, according to SN's Top 75 North American Food Retailers. Wal-Mart generated total sales of $285.2 billion for the fiscal year ending Jan. 31, 2005. The Wal-Mart Stores operating segment, which includes supercenters, Neighborhood Markets and discount stores, reported $191.8 billion in sales for the fiscal year. Of that amount, the segment did 28%, or about $54 billion, in consumables. Sam's Club generated $37.1 billion in sales, of which 31%, or about $11 billion, was in food. For the fiscal year, Wal-Mart sold about $65 billion in consumables, representing about 28% of its sales in the United States.

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