SN's Center Store survey shows that as price inflation threatens to squeeze already-thin margins, retailers are leading with their private brands
Food retailers, like the financially compromised shoppers they serve, hope to minimize the blow of rising costs with their corporate brands, said supermarket respondents to SN's eighth annual survey of Center Store performance.
Amidst increased competition and as commodity inflation threatens to erode profits, an assortment of supermarkets are banking on the restorative effects of private brands, with strategies running the gamut from measured to risky.
Half of grocers, for instance, report having swapped out national brands for private labels during the past year in at least one of the categories in which they compete.
“Not sure if this is the best move, but yes, we have experienced this and our customers are noticing,” said one retailer who's adopted the strategy.
A grocery wholesaler observed that retailers have little choice: “It's inevitable. Over-spaced and over-SKUed, private label is still retail's last-ditch effort to squeeze a few bucks out of a remarkably small profit pool.”
(Click here for charts and other statistics culled from SN's survey of Center Store performance.)
Moving forward, 42.3% of grocers polled expect to replace national brands on the shelf with private labels in at least one category. The same number — 42.3% — will let their national-brand/private-label mix be, and 15.4% said they might replace national brands with own brands.
At a time when Wal-Mart has restored 8,500 products previously rationalized under its abandoned Project Impact plan, others are experimenting with the concept. Not by downsizing big-brand products, but by reducing the number of national-brand facings and displays.
“I'm reworking my private label and expanding those sections with the first 4 feet of aisle dedicated to displays of big movers,” said one retailer.
Several retailer respondents expressed confidence that shoppers will revert back to their dine-at-home habits as spiking gas prices keep them closer to home.
But supermarkets are by no means sitting back and waiting for the traffic to roll in. Many are anticipating how their biggest competitors will attempt to woo these shoppers.
Among those posing the greatest threat to Center Store sales are Wal-Mart, according to 45.3% of retailers (down from 50% last year), dollar stores (17%) and club formats (15.1%).
More than one respondent mentioned that dollar stores have replaced Wal-Mart as the greatest force to be reckoned with, due to their low prices and improved selections. Several mentioned Dollar General in particular, which recently pursued beer and wine licenses for its stores.
“Wal-Mart has been a threat for more than two decades, but the last year saw much more activity in the dollar stores when it came to Center Store items,” said one retailer participant. “Dollar stores have added cereal, canned goods, dairy and other items traditionally purchased in the grocery store.”
More than one-third of retailers (36%) said that own brands are their best chance to fight competition for Center Store sales. “As a conventional store, what else do you really have?” noted one.
Three in 10 retailers said price is the best way to get a leg up on the competition and 26% chose value-added offerings such as traditional loyalty programs.
One respondent is focusing on the latter to build shopper loyalty without reducing price.
“Supermarkets have sacrificed profit margins in order to be competitive. The profit margin was already low enough and must be gained through value-added programs and services.”
Nutrition shelf tags and signage are one way that retailers hope to stand out, with 61.7% planning to differentiate their anchor department this way this year.
Nearly four in 10 (38%) retailers surveyed will participate in the Nutrition Keys front-of-pack labeling initiative in particular.
Backed by the Food Marketing Institute and the Grocery Manufacturers Association, Nutrition Keys uses front-of-pack icons to highlight four nutrients to limit (calories, saturated fat, sodium and sugars) and eight nutrients to encourage (potassium, fiber, vitamin A, vitamin C, vitamin D, calcium, iron and protein). Nearly one-third of manufacturers plan to adopt Nutrition Keys for their products, while 48% of retailers and 50.8% of suppliers are still considering it.
“This will depend on the competition and customer acceptance,” said one participant.
Some are taking a wait-and-see approach since past programs like Smart Choices were highly criticized by nutritionists and the Food and Drug Administration. A separate front-of-pack label, currently under development by the FDA, may be another consideration. The particulars of the label will be informed by an Institute of Medicine report due for release this fall that will examine the advantages and disadvantages of various front-of-pack labels.
Though Nutrition Keys aren't due to appear on store brands until next month, shoppers are paying more attention to corporate brands, according to the 75% of retailers who agree that private labels make up a larger portion of consumers' shopping baskets compared with this time last year. One in five (21.2%) said they make up the same amount and 3.8%, a smaller share.
One retailer attributed the lift to increased promotional activity with their corporate brands. Another said the trend is getting it closer to its goal of reaching 30% private-label penetration.
The vast majority of supermarkets (89.6%) are working to enhance their store-brand offerings, with the most popular investments involving product innovations (35.4%), natural/organic (29.2%), specialty (29.2%), healthy reformulations (22.9%) and ethnic foods (20.8%).
Though like-minded national brands have vowed to use innovation to enrich the value of items whose costs are driven by higher commodity prices, most private-brand marketers report not being phased. Nearly seven in 10 (69.2%) said they're not concerned with the competition that more innovative national-brand items may bring, 26.9% are somewhat concerned and 3.8%, very concerned.
Many are, however, feeling the strain of higher prices handed down from suppliers. During the past 6 months, 95.9% of retailers said that prices have increased slightly (49%) or significantly (46.9%), while close to 5% said they've stayed the same.
The majority are bracing for more increases with 60.8% anticipating significant hikes through the remainder of the year, 35.3% expect a slight increase, 2% anticipate it will stay the same and 2% foresee a slight decrease.
Shoppers are coping with cost pressures by shopping multiple stores, according to 65.4% of retailers, stocking up on sale items (63.5%), purchasing private labels (53.8%), using coupons (50%), buying in bulk (7.7%) and taking advantage of locked-in pricing (5.8%).
Supermarkets are doing all in their power to lure consumers, including enhancing their ethnic marketing reach. In the next 12 months, 72% will increase their ethnic product assortment, 12% will partake in community events, 10% will add bilingual communication, 10% will launch ethnic private-label products and 4% will open a new or additional location under an ethnic format. Just under two in 10 (18%) don't plan to enhance their ethnic marketing reach.
As smartphones become more widely used, supermarket chains are increasingly experimenting with mobile marketing vehicles, according to those polled.
Retailers are catering to mobile users with location-based services such as Foursquare and Facebook places (36.4%), websites formatted for mobile devices (29.5%), text message offers (29.5%) and store-specific mobile apps (25%). Strategies also include quick response codes (9.1%), Groupon (6.8%) and near field communications (2.3%).
Last week, Big Y, Springfield, Mass., became the first supermarket chain to load Groupon deals digitally to shoppers' loyalty cards (see story on page 6). After a shopper purchases the Groupon offer and enters their Big Y Express Saving Club membership number, the deal is electronically loaded to the shopper's loyalty card.
Consumers are also engaging in social media whether at home or while they're out and about, making it an ideal vehicle for marketers to promote their products.
Facebook is the most popular medium, used by 52.1% of retailers, while others are dabbling in corporate blogs (4.2%) and Twitter (4.2%). More than one in five (22.9%) aren't using social media.