Food retailers said they will be ratcheting up their promotional investments in the fourth quarter as well as supporting other events to make up for last year's lackluster second-half performance, according to an online survey conducted by SN.
A strong majority, or 72% of respondents, planned to increase their promotional spending over last year's fourth quarter.
SN conducted the informal survey earlier this month on www.supermarktnews.com to assess what direction retailers are headed when it comes to this year's plans for holiday promotions and spending. The survey provides only a snapshot of retailer plans and expectations for the holiday period. The survey should not serve as a measure for all supermarket retailers.
Besides the big three holidays -- Thanksgiving, Christmas and New Year's -- the SN survey took note of other events such as back-to-school, Labor Day, Halloween, ethnic holidays and tailgate parties. It asked retailers about what specific promotions work best during the major holidays, their plans to run new promotions, their year-end sales expectations and what support they expected from their suppliers.
Wall Street analysts told SN several factors will be at play on fourth-quarter sales for some food retailers. One will be the bounce-back effect for those retailers impacted by last year's Southern California labor strike.
"You are going to cycle the strike," said John Heinbockel, an analyst with Goldman Sachs, New York, "and for a lot of companies the fourth quarter is going to look a lot better." However, he warned it may be difficult to read just how much of that bounce-back will actually help or hinder a company. "On a reported basis, it will look very good for a number of companies. But the underlying core comps and the underlying consumer behavior might still be fairly soft."
With a natural bounce back in sales expected as a result of last year's labor strike, analysts said there would be no reason for those retailers to be aggressive with promotions.
"If your sales are actually improving, and you are cycling the strike and looking at profit numbers, I don't know why you would [invest in promotions]. The payback on that is never very good. Hopefully, they will take pricing up in the opposite direction, and choose not to invest at all. I don't think you'll see it ratcheted up to another level," said Heinbockel.
"Some of the CEOs in the industry are under pressure to justify keeping their jobs, so if there is some natural improvement they will latch onto that pretty darn quick," noted Gary Giblen, C L King Associates, New York.
Mark Wiltamuth, analyst, Morgan Stanley, New York, said Wall Street will detect the blip and not "give the companies too much credit for lapping the strike and counting that as an improvement. People are going to be looking at what is going on in the rest of the business outside of California [strike] lapping."
On the consumer side, retailers might be affected by less disposable income available than last year without the boost from last year's economic stimulus package coupled with rising costs of various goods and services. Based on weak June sales and consumption figures, Heinbockel said he expects consumer spending will be soft going into the fourth quarter. He sees no sales-trend improvement between now and the beginning of next year. "We are recycling fiscal stimulus from a year ago," he noted.
High gasoline prices also will affect consumer spending, said Margaret Cannella, analyst, JPMorgan, New York. "It takes away from consumers' disposable income. We see gasoline prices staying at the levels where they are for the next 12 months."
The high cost of meat could curb consumer spending in the rest of the store and change the promotional offer, said Andrew Wolf, analyst, BB&T Capital Markets, Richmond, Va. For example, consumers may have to buy more to get their free turkey, a popular Thanksgiving promotional item.
As for the traditional Christmas ham, Wolf said consumers will not forgo buying hams because of a higher cost. "That's a traditional center of the plate item for most Americans during the holiday season. That's sort of a non-negotiable item. If it's higher priced, it's not going to cause a huge constraint to most people's budget, but it may constrain a little bit what they buy in the rest of the store."
Despite the pressures on consumer spending, a majority of retailers said they expected to make healthy gains in fourth-quarter sales. Nearly two thirds, 65%, said they will exceed last year's sales. Of those retailers, 28% believe they will increase sales more than 5%. Meanwhile, 24% of the retailers expected their sales to remain the same, and only 11% said they expected sales to decline.
Ron Pearson, chairman, Hy-Vee, West Des Moines, Iowa, told SN the economy was very strong in all seven states that Hy-Vee operates. He projected fourth-quarter sales to be up 5% to 6% over last year.
"We are expecting a real strong fourth quarter, following three strong quarters. The economy shows all signs of picking up. We see buying up on purchases. We see freed-up consumer spending on food-service items, which is a sign the economy is up. People are going back to work, working more hours and overtime, and spending more money," Pearson said.
He admitted rising gasoline prices will have some effect on spending, but he didn't see it necessarily coming out of the food sector. "It may be more out of fixed spending such as hard goods and autos. We are not expecting a spending reduction by consumers." Pearson said Hy-Vee's promotional efforts and spending will remain the same as last year.
Jeff Lowrance, a spokesman for Food Lion, Salisbury, N.C., said there appears to be some comeback in manufacturing jobs in areas where Food Lion operates that were hard hit by job losses in recent years. "We are cautiously optimistic," he said. "We feel like we are starting to see some signs of economic improvement."
Lowrance said Food Lion would run holiday promotions but had no specific details. One promotion that has worked well for Food Lion is a gift certificate used instead of the get-one-free offers. During Easter and summer cookout seasons, the retailer offered shoppers a gift certificate based upon their weekly shopping during the promotional period. Shoppers who qualified through what they purchased in the promotion received a free gift certificate to go toward any purchase in the store. "We promoted it as being able to buy all necessary items for that particular event," said Lowrance.
Many, or 61% of the retailers SN surveyed, said they will stick to the tried and true promotions traditionally run during the holiday periods. Price promotions topped the list for the majority, or 68%. However, 39% of respondents said they would run new promotions such as spotlighting cheese, cake and pies; running block ads; boosting customer service; highlighting competitive price points; promoting low-carb items; and cookbook and new product promotions.
When asked what type of promotions worked best during the fourth quarter, besides price promotions, retailers gave the most votes to themed seasonal merchandise areas (57%), special displays (38%) and buy-one, get-one-free offers (30%).
Commenting on food retailers' eagerness to increase fourth-quarter promotions, Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., said, "It's safe to say that increasing promotions is a good strategy as long as the promotions are productive, and the promotional spending results in a real sustainable shift in the way consumers buy and come back to you for a different reason."
The art of pricing is becoming much more central to the successful retailer, Bishop said. "Is the promotional activity and the pricing embedded in it going to accomplish something other than just shifting business around for no particular net gain? It puts a real premium on being targeted. It puts a premium on spending money where you have the highest likelihood of producing good results."
While those surveyed said they will put the majority of their promotional budgets behind the three big holidays, retailers also noted they were not ignoring opportunities offered by other events such as back-to-school, Labor Day, which falls a week later this year, and Halloween.
The National Retail Federation's 2004 survey on back-to-school consumer intentions and actions indicated that spending by families with school-aged children will be up 7.2% over the $26 billion spent on back-to-school products last year. About 60% of the food retailers surveyed said they were supporting both back-to-school and Halloween.
While it is too early to assess the success of back-to-school, often considered an early indicator of the fall and holiday sales period, Wal-Mart Stores, Bentonville, Ark., last week reported being on track with its August sales, and said sales tax holidays in various states helped its back-to-school sales. The discounter also cautioned against comparing this season to last year, when consumers had money to spend from child tax credits in President Bush's tax cuts.
Other events getting food retailers' support included tailgate parties, promoted by 45% of the food retailers, Labor Day, supported by 40%, and ethnic holidays, promoted by 30% of retailers.
Besides a desire to top last year's sales goals, about a third of retailers said competition from alternative formats (32%) and competition from other food retailers (30%) were driving their promotional efforts.
With an overcapacity of different retailers vying for consumer spending on food, Bishop said it often feels like a game of musical chairs. "You just know some of the chairs won't be there the next time the music stops. Everybody is working very hard to be in a position to have a place to sit."
About a quarter of the respondents said a desire to meet the projected budget (28%) and the spending mood of the consumer (26%) will influence their promotional spending decisions this year.
As far as getting the promotional support they need from their suppliers, 60% of retailers said they expected more promotional support this year. Reasons given were: "the need to drive business," "the economy is better," "we are asking for more," "aggressive promoting of new items and exceeding previous year's tonnage," "to boost sales and achieve the target" and "more customers."
Forty percent of retailers expected less support this year. One food retailer said, "In my opinion, vendors may give more support to the larger retail outlets (Wal-Mart, Costco, etc.), who can increase the vendors' profits immensely."
Source: SN online Web survey August 2004. Total retailer respondents: 46. Multiple responses accepted.
Do you plan to increase or decrease your promotional spending in the fourth quarter compared with year-ago spending?
Source: SN online Web survey August 2004. Total retailer respondents: 46. Multiple responses accepted.
In addition to Thanksgiving, Christmas and New Year's Eve, what other holidays or events during the fourth quarter will you heavily promote and tie into?
Source: SN online Web survey August 2004. Total retailer respondents: 46. Multiple responses accepted.
What are your sales expectations during the fourth quarter, compared with last year's fourth quarter?