Shoppers make adjustments to cope with rising prices, IRI data show
It sounds like a math problem for a college entrance exam: If Shopper X has Y amount of dollars to spend on groceries, how will she choose to distribute it among Retailers A, B and C when the cost of food and gas have increased Z percent?
Throw in all the various permutations about the proximity of the retailers and their variability in pricing and selection, and it becomes an even more complex calculation.
Increasingly, according to data provided to SN by Chicago-based Information Resources Inc., shoppers have decided that the best way to distribute their grocery spending is to make large, pantry-filling purchases at supercenters — even though they may be farther away — and use nearby supermarkets and drug stores for fill-in purchases.
“Shoppers are engaged in a fine balancing act of trying to conserve gas and save money,” said Sheila McCusker, editor of IRI's “Times & Trends” report. “As supercenters offer low-cost, one-stop shopping, consumers are making the trip when pantry-stocking.”
The shift appears to have been a detriment to supermarkets, where customers have cut back their spending, and a boon to drug stores, which appear to be picking up some fill-in business. McCusker noted that while the total number of shopping trips to drug stores is down, the size of the trips is up.
Shoppers are also making calculations about the value of convenience within the store, opting for basic cooking ingredients to prepare meals from scratch and eschewing prepared foods — even as reports indicate a decline in restaurant spending.
While IRI data show big gains in dollar sales at supermarkets for many items, in many cases those gains are a refection of inflation, while unit sales have actually declined. In fresh categories like milk and natural cheese, for example, dollar sales for the 12-month period that ended June 15 were up 13.9% and 11.7%, respectively, while unit sales were down by 3.9% for milk and 2.1% for cheese. Interestingly, both categories saw gains in both unit and dollar sales in the drug channel during the 12-month span.
McCusker said she expects consumer shopping behavior to remain on its current course for at least another year.
“We do not expect to see improvement in economic conditions until at least the second quarter of 2009,” she told SN. “So for the next 12 months, we can expect consumers to continue to shift behavior in response to evolving economic conditions.
“With CPG prices expected to rise further in the third quarter, and elevated home heating costs ready to hit consumers as winter approaches, we will see yet another round of belt-tightening, and further changes in shopping behavior,” she said.
Even over the longer term, she does not expect shopper behavior to return to “pre-downturn” levels because she does not expect the economy to rebound to the way it was before the current recession-like cycle began almost a year ago.
“[The economy] will be fundamentally transformed,” she said. “Further, given the extended period of this downturn, new habits may form that could have staying power.”
According to IRI's “Channel Migration 2008 Report,” released this month, the shopping behavior patterns consumers have recently adopted are troubling for supermarket operators.
The report showed a 2% decline in average purchase occasions per household at supermarkets during the 12-month span that ended June 15, compared with a 5.5% increase in shopper visits to supercenters in that time period. Drug stores saw a 3.3% decline in number of visits, while dollar stores had a 4% increase and convenience stores a 2.4% increase.
Supermarkets' share of the CPG market slid by 0.2 points in that time, to 55.2%, vs. a 1.4-point gain at supercenters, to 15.1% share of market. Supermarkets' dollar share declined in the Center Store, fresh and frozen departments, by .04 points, 1.3 points and 1.6 points, respectively, while supercenter share gained in all three.
“There are no hard-and-fast rules about channel migration,” McCusker said. “It is occurring very much on a category-by-category basis. The grocery channel, for instance, is gaining among some food and beverage categories that have had high price increases, such as eggs and bottled juices, as well as in personal care categories such as toothpaste, and health care categories, including weight-control products.”
The report showed that consumers across a wide range of demographic strata have increased their purchases at supercenters, while most of those demographic groups have cut back on their shopping at traditional supermarkets. Even among consumers whom IRI defines as “living comfortably” and “doing well” increased their spending at supercenters during the 12-month period: Their dollar share grew by 2 points and 1.3 points, respectively.
At supermarkets, meanwhile, those consumers defined as “living comfortable” lost 0.8 point of dollar share at supermarkets, while those “doing well” were unchanged in terms of dollar share. Among those defined as “getting by,” supermarket dollar share fell by 0.1 point at supermarkets and grew by 1 point at supercenters.
“Supercenters have gained across all income segments, including middle- and upper-income consumers,” McCusker said.
Large gains among middle-income consumers are not surprising, she added, “given the tremendous financial burden that these consumers are under.”
About half of all consumers earning less than $55,000 per year are having difficulty affording groceries, she said.
Increasingly, supermarkets around the country seem to be taking steps to bolster their low-price positioning, including recent moves by Publix Super Markets, Lakeland, Fla., and Hannaford Bros., Scarborough, Maine, to lower shelf prices across a range of items in the stores.
“Grocers who successfully position their stores as providing affordable solutions to consumers will likely fare the best, particularly in middle- and lower-income markets,” McCusker said. “Pricing is one element to this positioning, but having an affordable product mix — which includes having the right brands, package sizes and assortment of affordable meal options, for instance — is also critical.”
— MARK HAMSTRA
Nonfood: Core Categories Lose Share
Supermarkets continued to lose share in core nonfood categories to other channels, and the economic downturn seems to have accelerated the trend, according to SN's annual review of IRI data.
Several areas not covered by IRI show strength, with the huge $29 billion pharmacy department and the centerpiece greeting card section holding steady. Although magazines declined due to shoppers watching their discretionary spending, it still is a $1.1 billion to $1.85 billion category, depending on the data source.
Meanwhile, gift cards are on an upward trend in supermarkets, and fuel — no surprise here — increased by about a third to $19.2 billion, according to the new “Outlook for the U.S. Fuels Business and Hypermarts in Retail — 2008” report from EAI Inc., Westminster, Colo. This May 2007 to May 2008 number mirrored almost precisely the rise in the cost of gas for that period.
What will be left when the dust clears is uncertain. New, smaller stores will dictate refinements in the core nonfood categories; pharmacy and greeting cards will continue in almost any store configuration, as will magazines and gift cards. Gas has proven to be a potent marketing tool and will remain strong for stores that can accommodate a fuel center, although factors far beyond the control of retailers will influence dollar sales trends.
“What you are going to find is a move back to a heavy focus on food, a continued focus on the perimeter and a greater scrutiny on what to do with nonfood,” said Paul Weitzel, managing partner, Willard Bishop, Barrington, Ill., which monitors nonfood in its Grocery SuperStudy. Traditional nonfood categories like those in health and beauty care, lighting and batteries “are going to be fine,” he said.
Smaller peripheral categories generating volume that does not justify their 4-foot sets will be reduced to one or two convenience shelves, he said. Examples cited include automotive, closet accessories and sewing accessories.
“Over the next five years, you are going to see more right-sizing of departments, and in the new stores you will see a smaller footprint as retailers are more willing to test new formats,” Weitzel said. In a 25,000-square-foot store, there will be a heavy focus on the perimeter, with core Center Store items in edited sets, and the elimination of some smaller categories, including those in nonfood.
But pharmacy, magazines and greeting cards will continue to be regarded as essential in all stores, he added.
Several categories gained sales in supermarkets, IRI's data revealed, although almost across the board, the percentage gains were greater in the drug and food/drug/mass merchandiser (not including Wal-Mart) breakouts.
These included vitamins, up 6%; cold/allergy/sinus tablets, up 5.3%; suntan products, up 5.2%; mouthwash, up 2.7%; and skin care, up 1.6%. The firelog/firestarter/firewood category rose 1.9%, but was remarkable in that 90% of its sales are in supermarkets.
Many big categories showed continued sales erosion in supermarkets — for example, internal analgesics, down 0.1%; toothpaste, down 0.5%; shampoo, down 2.1%; gastrointestinal, down 1.1%; batteries, down 1.1%; blades, down 1.9%; and light bulbs, down 3.9%. They were either down less or increased in the other channels.
What happens next in nonfood will be up to the retailers, but undoubtedly many will give more attention to their merchandising, promotion and selection.
— DAN ALAIMO
Fresh Foods: Opportunities Amid Inflation
For many of the perishables categories covered in this year's IRI report, food price inflation remained a stubborn problem during the 52 weeks ending June 15. Sales of milk rose almost 14%, natural cheese rose almost 12%, even the “cream and creamers” category saw a surprising jump of almost 8%. In all three cases, however, unit sales of these items were either flat or down during the same period.
With eggs, the figures were even more dramatic. Retail prices in U.S. cities spiked to a record average of $2.20 per dozen for large, grade A eggs in March, according to the U.S. Bureau of Labor Statistics. Despite unit sales declines of 3%, dollar sales of eggs were still up 28.7%.
These numbers paint a portrait of a squeezed shopper who is feeling his or her household budget pressured from multiple directions. The prices of necessities including food and gasoline have been rising rapidly, even as wages and home values stagnate.
Unfortunately, suppliers and retailers are caught in a similar vise. Input costs have been skyrocketing for farmers. Diesel and fertilizer prices have all risen in tandem with the price of oil, and feed costs have been forced upward due to the ethanol boom, which has raised the price of corn and displaced acreage once devoted to soybeans.
As those costs get passed along at the wholesale level, retailers are left with no choice but to sacrifice volume or margins. In a February presentation at the U.S. Department of Agriculture's Agriculture Outlook Forum, Bill Lapp, principal of commodities analyst group Advanced Economic Solutions, said that 75% of purchasing executives surveyed by AES had begun reflecting higher costs in consumer prices, and believed more increases would be forthcoming. Ninety percent said 2007 was the most challenging year they had faced, and they expected 2008 to be at least as difficult or worse.
Of course, there are a few silver linings for supermarket retailers. Shoppers may be in the process of slashing discretionary purchases to cope with the rising prices of necessities, but they will always need to buy food. And, as difficult as it may be, striking a balance between volume and margins is much easier for conventional supermarkets than for other sectors seeking that same share of stomach, such as the restaurant industry.
Recent Image Audit surveys conducted by DSR Marketing, Northbrook, Ill., indicated that even affluent shoppers in Memphis, Tenn., and Chicago were preparing more meals at home due to economic pressures. The surveys identified a negative 23% trend at restaurants in those cities, while supermarket prepared-food departments were down only 3%.
In the Fresh Market portion of this year's IRI report, there are also a few indications that shoppers are still searching for convenient ways to prepare meals at home. Categories including refrigerated pasta and refrigerated side dishes, and subcategories such as refrigerated baked beans, marinades and sauces continued to build on solid dollar sales and unit sales. Shoppers also seem to be returning to the packaged salad category, which had been mired in a slump since late 2006, when an E. coli outbreak was linked to fresh spinach.
In short, the next couple of years will likely be a challenging time for supermarket perimeter departments, but opportunities remain for retailers that are ready to offer their shoppers reasonable prices and easy ideas for saving money by making meals at home.
And, on another positive note, the price of crude oil has been declining recently.
Whether this is an indication that recent, dramatic run-ups in the commodity markets have been driven by non-commercial speculation, or whether it is merely a short-term reprieve, the resulting decline in fuel prices will help ease a lot of the pressures affecting farmers, suppliers, retailers and consumers in the near term.
— MATTHEW ENIS
Center Store: Back to Basics
The soaring cost of commodities is wreaking havoc on consumers' food budgets.
Whereas in the past shoppers could ride out an economic storm by dining in more often on convenient options like ready-made meals, today's situation requires a whole new level of consumer discipline. “It's really quite different this time around,” said McCusker of IRI.
Think starting a meal from scratch rather than popping a frozen dinner in the microwave.
The trend has revealed itself in Center Store, where volume of ingredients and meal components like flour, mayonnaise and stuffing mixes is growing at the expense of refrigerated meals and other prepared foods merchandised around the store's perimeter, said McCusker.
But the center aisles are by no means insulated.
Skyrocketing wheat, soy and corn prices have pushed even the most basic staples beyond some consumers' reach, McCusker said.
“Pasta prices are through the roof compared to last year and the price of bread is also very high,” she noted.
Significant cost increases in the baby formula and shelf-stable juice categories are also forcing shoppers to make tough choices.
The results of a recent IRI consumer poll revealed that nearly half of consumers who earn $55,000 or less each year said they can't afford their groceries.
“That's a big statement since it represents 60% of the population,” noted McCusker.
Just as alarming are the types of products they're having to go without.
“We asked consumers to tell us what tradeoff they're making vs. six months ago, and again almost half of those in the under-$55,000 category told us they're buying fewer healthy products since they're more expensive,” McCusker said. About half of consumers who earn less than $35,000 a year are scaling back on items like fresh produce.
But the picture is not all bleak. Unit sales improvements are evident in categories that have enjoyed price stability. They include ready-to-drink coffee and tea, granola bars, energy drinks and isotonic beverages.
“Many people can't justify shelling out $5 for a half gallon of ice cream, but they can afford to spend 99 cents on a sports drink,” said McCusker.
Package sizes are also figuring into the decision-making process.
“Consumers might not be able to buy that large package size, especially toward the end of the month,” McCusker said. Since they often come at a premium, consumers are also scaling back on portion-control packaging.
Meanwhile, higher gas prices have fueled a shift in where shoppers spend.
Members of the drug channel experienced significant unit sales increases in several Center Store categories where supermarket unit sales fell short. They include ice cream, toilet tissue, cold cereal, salty snacks and frozen dinners.
“Consumers are saying, ‘I'll make the trip to supercenters for my pantry stocking, but I can't afford the gas to go back frequently so I'll make my fill-in trip locally,’” said McCusker. “Drug stores are benefiting from that.”
— JULIE GALLAGHER
How the Numbers Are Presented
The data on the following pages were compiled from category sales figures at supermarkets provided by Information Resources Inc., Chicago, for the 52-week period that ended June 15, 2008.
The data compare the dollar sales performance of the top-selling supermarket categories to those categories' performance in drug stores and combined food, drug and mass channels.
The data indicate an increase in dollar sales of about 2.45% over year-ago levels for the categories tracked, to about $276 billion.
Drug stores, meanwhile, posted sales of $40.5 billion in the categories tracked, up about 5.2%. Combined sales for food, drug and mass for all categories tracked totaled about $343 billion.
It's important to note that IRI does not include Wal-Mart category sales in figures for combined food/drug and mass channels. However, it does track Wal-Mart performance through its IRI MarketInsight.
Dollar sales and sales shifts in supermarkets for all 297 categories tracked by IRI are published on Pages 20-24. The data are broken down for further analysis into 50 key categories representing large sales volume and top gaining categories in supermarkets. The 50 categories, broken down by department, are ranked by highest to lowest dollar volume on Page 18. Top sales gainers are also listed.
In-depth analyses of Nonfood, Fresh Market and Center Store categories start on Pages 33, 43 and 55, respectively. Each of the 50 category profiles includes dollar volume of subsegments, if the categories are broken down as such.
Supermarket dollar volume is compared to drug and combined food, drug and mass channels for the 12-month reporting period. Historical trend data are presented with dollar volume and percentage changes for the calendar years 2005, 2006 and 2007 for supermarkets, drug stores, and food, drug and mass channels combined.