Although the economic news is terrible, supermarkets still find opportunities in nonfood categories.
In general merchandise and health and beauty care, private-label products are seeing the same kind of sales spurt as in the grocery aisles as customers seek to save money. That these products usually have a bigger margin than their branded counterparts is helpful to the retailers. Some may even ponder the value of rolling out a store-brand line like Tesco's Discount Brands to shoppers particularly stressed by the economic bad news.
Inside the pharmacy, generic drugs have the same kind of advantages as private-label over-the-counter products. Price promotions that have become expected of just about all in the pharmacy business help to drive traffic, although some retailers are concerned about the loss in profitability.
The convenient care clinic business is reaching a critical juncture. Retailers will need to decide whether to get in the business, and who to partner with, or risk letting that service go to other channels, much like photo finishing.
While all the hype in the home entertainment world is focused on high-definition systems and software, low-priced DVDs are seeing, and will continue to see, strong sales inside the supermarket. Home movie nights for the family, at about the same cost as a theater ticket, combining the DVD and food items, is an offer only supermarkets can make.
It's difficult to know what will happen next with fuel prices, but the category is always promotable. Like many other things in this economy, retailers can't afford to ignore it.
These initiatives are covered in depth in the following pages.
INITIATIVE 1:
Discount Private Label
Introducing a private-label line in response to the growing economic crisis as the United Kingdom's Tesco did in September appears to be a logical move to help grocery shoppers — especially those prone to trading down — save money.
But industry watchers offer a caveat on this tactic even though Tesco's 350-item Discount Brands range, which includes household and health and beauty products, also was implemented to offset discounters' low prices and avoid price wars with others.
So far, the strategy appears to be working. In a third-quarter press statement, Tesco Chief Executive Terry Leahy said, “The U.K. has again done well — with 300,000 more customers a week and improving volume growth in our core food categories, driven by the early success of our new ‘discounter’ products and related changes — and with nonfood sales holding steady.”
Brian Sharoff, president of the Private Label Manufacturers Association, New York, noted that Tesco's strategy of introducing a new tier of discount brands didn't work in the United States during the early '80s when retailers rolled out low-priced generics to help shoppers survive a severe recession.
“While customers wanted to pay the lowest price, they didn't want to pay the lowest price for defective product. Yes, price is extremely important for consumers in a downturn economy, but not if they are going to buy unsatisfactory products,” he said.
John Rand, director of retail insight, Management Ventures, Cambridge, Mass., said the impact of trading down and low prices on private label is not a simple equation. Like the generics of the '80s, the products can be too cheap.
“If I am a consumer living from paycheck to paycheck, one of the reasons I may gravitate to brands is that I can't afford to risk a bad purchase. If you want to sell me private label, you have to neutralize the fear of whether or not these products will perform reasonably well,” he explained.
So far, U.S. dollar sales of private label is on the uptick over branded products. For the 52 weeks ending Nov. 1, 2008, nonfood dollar sales at supermarkets, excluding supercenters, were up as follows: nonfood grocery, 3.1%; general merchandise, 1.3%; and health and beauty aids, 6.1%. Meanwhile, branded nonfood products were down 1.8%, 4.8% and 1.1%, respectively, according to the Nielsen Co., Schaumburg, Ill.
— Christina Veiders
INITIATIVE 2:
Generics Programs Becoming Necessities
Promotional generics programs are now widely regarded as a necessary part of supermarket pharmacy, although some see them as a necessary evil.
With many consumers facing economic crises, the discount and free generics will become even more necessary in the months to come, and retailers will seek to enhance the programs with either more drug offerings, or tie-ins that involve the whole store, industry observers said.
“In the last two years, there has been a dramatic expansion of discounting generic drugs,” said Bob Dufour, a former pharmacy executive with Wal-Mart Stores, now a consultant with Ernst & Young, New York. “We have seen this expansion in the number of drugs, as well as the number of pharmacy chains participating.”
“The promotional program is one that, from a competitive necessity standpoint, most retailers are going to have to get involved in if they are serious about trying to keep their pharmacy volume,” said Neil Stern, partner, McMillan Doolittle, Chicago.
A pharmacy executive with a Southeastern chain said: “Generic promotions — $4 for a 30-day supply and $10 for 90 days — will continue to play a role in supermarket pharmacy to help them compete with chain drug stores and mass merchants, and to keep customers in their stores.”
However, industry research has shown that the cost of filling prescriptions exceeds these prices. “If these sales become too large a portion of a pharmacy's overall mix, the pharmacy may not be able to sustain itself. For the consumer, these low-priced generic prescriptions are a tremendous benefit. For pharmacy, it makes it difficult to convince the consumer that professional practice and judgment behind the product is worth more than $4,” the executive said.
“The rapid growth of generics over the past few years, coupled with the almost total acceptance of $4 generic programs, are likely to be a mixed blessing for supermarket pharmacy,” said consultant Bruce Kneeland, president, Pharmacy Connections, Valley Forge, Pa.
“I hope more programs centered on proper nutrition and supported by the professional support of pharmacist will accelerate,” he said.
— Dan Alaimo
INITIATIVE 3:
Clinic Window Open for Now
The start and stop growth of convenient care clinics in supermarkets needs a booster shot this year, or else retailers risk ceding this valuable service to other channels, sources told SN.
“The window for adding clinics is open now, but it only takes a few locations to saturate a market,” said a pharmacy executive with a Southeastern chain.
Hard times and the widespread lack of health insurance have created the need; now it's up to retailers and health care providers to fill it.
“If the economy continues to drag along and more families lose insurance coverage, these clinics may offer a reasonably priced alternative to the emergency room or local private physician practice,” the executive said.
With the demise of many independent entrepreneurial clinic operators, hospitals and other local/regional health systems are the best partners for supermarkets to provide this service, said Tom Charland, chief executive officer, Merchant Medicine, Shoreview, Minn., which consults on clinics and puts out a newsletter.
Charland reported on a study from Rand Corp., Santa Monica, Calif., and California Healthcare Foundation, Oakland, that predicted the number of retail clinics reaching 6,000 by 2011. Charland wrote that this is “all but impossible.” Almost all of the current growth in clinics is coming from drug chains CVS/pharmacy, Woonsocket, R.I., and Walgreens, Deerfield, Ill., and their wholly owned subsidiaries.
“There is no question that hospital systems will be entering the market. And much of that will come through partnerships with local grocery chains and Wal-Mart,” he added.
But while the recession has created demand for retail clinics, it has also constrained the capital needed for growth and to sustain the long climb to profitability. This will affect all players, including the drug chains and the hospitals, he told SN.
The clinic opportunity is comparable to pharmacy 20 or 30 years ago, said Neil Stern, partner, McMillan Doolittle, Chicago. “It can be a very powerful addition to a store in its ability to drive traffic and complementary sales. But like pharmacy, there is a slow payback because you have to build your customer base,” he said.
— Dan Alaimo
INITIATIVE 4:
Value-Priced DVDs in Strong Position
Budget or bargain-priced DVDs between $5 and $10 have always done well in supermarkets, but will do even better as the sour economy continues.
While the movie studios and electronics industry are promoting high-end home entertainment products like high-definition, big-screen televisions, and Blu-ray Disc software and players, many families will be looking for the affordability of value-priced DVD programming and snacks bought at the supermarket.
“With the economy as rough as it is, people are looking to cut back where they can,” said Bob Gettner, video buyer, B&R Stores, Lincoln, Neb. “If they can find a better deal than spending $15 or $20 on the brand new titles, I certainly can see why they'd want to do that.” B&R has increased its participation in such value-priced DVD programs.
Products at around $10 offer high margins, high volume and low shrink, noted Greg Rediske, president, Video Management Co., Tacoma, Wash., which provides video programs to supermarkets. “That is the bulk of our business, especially the $9.99 retail,” which might be $8.99 or $10.99, depending on the market.
“There is excellent product available out there if you look. Certainly, our greatest opportunities are there,” he said.
“Given the current economic conditions, bargain DVDs are a great value product to offer consumers,” said Bill Bryant, vice president, sales, Ingram Entertainment, La Vergne, Tenn.
“Supermarkets have been extremely successful with bargain-priced DVDs during the past several years. They are a great value for the money and this type of product generates impulse and incremental sales,” he said. Merchandising strategies include dump fixtures, in-line sections and spinner racks, Bryant said.
“With the economy the way it is, we expect consumers to seek value-priced items, including value-priced DVDs,” said Sean Bersell, vice president, public affairs, Entertainment Merchants Association, Encino, Calif. The association has noted that supermarkets are expected to see an increase in customers as they cut back on dining out.
“Supermarkets are well-positioned, therefore, to market value-priced DVDs — whether for purchase or rental — to cash-strapped customers who are already in their stores,” he said.
The key to marketing budget DVDs is to have a good selection of desirable titles, and position them attractively where it will lead to an impulse purchase, Bersell noted.
With single movie theater tickets going for around $10 in many places, supermarkets could promote a family movie night for $10 or under, said Neil Stern, partner, McMillan Doolittle, Chicago. This could include a 2-liter soft drink, popcorn and the movie. “You could do some pretty compelling things for people on a budget,” he said.
He described this as a “movie theater bundle. You could sell candy, you could sell popcorn, you could sell franks, you could sell pizza. There are a lot of things in the grocery store arsenal to make it a home movie night for the consumer, and the supermarket can do it better than anybody,” Stern said.
— Dan Alaimo
INITIATIVE 5:
Savings on Essential Fuel Still Needed
With gasoline prices dropping more than 57% since hitting a record high of $4.11 a gallon in mid-July, consumers may not feel the urgency to save on gasoline through supermarkets' fuel-marketing programs. However, given the expectations that the economy will only get worse before it gets better, retailers can expect their shoppers will look for savings everywhere they can, including savings on fuel, in 2009.
With fuel-incentive programs, consumers are still saving dollars whether gas costs $4 a gallon or $1.71, said Scott Wetzel, vice president of marketing for Excentus, a supplier of fuel-based marketing services in Irving, Texas.
However, Kelly Hlavinka, a partner with Colloquy, Cincinnati, pointed out that such discount-based strategies on commodities like fuel are easy to replicate from one retailer to another. She asks how long does a retailer retain an advantage with such a program.
Colloquy, provider of loyalty marketing publishing, research and educational services, has examined redemption rates on discounts vs. experience incentives such as tickets to sporting events or movies, and found an 11% boost in retention of those that redeem for experience incentives as opposed to discounts. “The stickiness [in loyalty] is much less pronounced to the people that gravitate toward discounts or rebates,” she said.
“Perhaps in these difficult times the fuel rebates fit into the mix and consumers will continue to appreciate that as a source of value,” said Hlavinka.
Tye Anthony, executive vice president of Bi-Lo, Mauldin, S.C., rolled out Excentus' fuelperks! in Charleston, S.C., in October. “The fuelperks! program is a valuable addition to our ongoing efforts to help consumers save money,” he said in a prepared statement.
“Our customers can continue to rely on Bi-Lo for everyday grocery savings with their new My Bi-Lo Bonuscard, and now there's the added bonus of saving on gas as well.”
Wetzel said fuel rewards have gone from the experimental stage to becoming a part of the retailers' overall marketing mix to drive traffic.
Despite the drop in gas prices, none of the Excentus supermarkets are scaling back their fuel discounts, said Wetzel. In fact, most companies that have been in the pilot stage plan to roll out incentives to other markets, he said.
— Christina Veiders