How recession-proof is health and wellness? Conventional retailers will soon find out
THE SITUATION CERTAINLY LOOKS BLEAK: Food costs are up, gas is creeping closer to $4 a gallon, health care spending is growing at nearly three times the rate of inflation and the housing market is stagnant. As a result, consumer confidence is the lowest it's been in years — more than three-quarters of the population believe the economy is currently in recession, numerous reports show.
And the hits just keep on coming.
Historically, supermarkets have fared quite well during tough economic times. Consumers cut back on nice-to-haves like restaurant meals and pricey home furnishings, focusing instead on the cost-effective staples they find at their neighborhood food store.
“Clearly, with income growth stalling, consumers are finding it necessary to spend more of their nominal dollars on food, and particularly food at home,” wrote Bank of America Securities analyst Scott Mushkin in a recent note to investors.
With premium-priced health and wellness products taking up more and more shelf space, however, things may be more complicated this time around. Simple economics dictate that consumers will trade down from these items — some of which can cost twice as much as their conventional versions — and seek cheaper alternatives. On the other hand, if organic, all-natural and related items have proved one thing, it's that sales don't always hinge on price.
Health, sustainability and a desire for authenticity and connection are just as important.
It'll be a challenge for health and wellness to maintain its hot streak during a recession, sources say. Getting the most out of the situation requires that retailers stay upbeat, know their shoppers and market smartly.
“We're looking at the glass as half full instead of half empty,” said Wes Jackson, head of the specialty division at United Supermarkets, Lubbock, Texas.
Supermarkets can bank on the loyalty of consumers like Esme Bauxar, whose reasons for buying healthy and sustainable goods go beyond price tags. A regular shopper at Haggen and other stores near her home in Marysville, Wash., Bauxar started purchasing organic produce a couple years ago, following the advice of a friend in the office. In addition to organic, she likes to buy local goods, because she feels good about supporting area farmers. She also enjoys wild-caught salmon and refuses to buy farm-raised varieties.
Bauxar, a legal secretary who commutes by bus one hour south to Seattle, isn't flush with money. But she saves where she can, and she stays away from the processed foods and snacks that crowd many of the shopping carts she sees.
“I will buy organic, and it doesn't really bother me how much it costs,” said Bauxar.
Loyalty like this has made the health and wellness market what it is today, and many say it will become the dividing line during an economic downturn — when price strains threaten to pull many shoppers away from healthful, natural and organic products.
Core consumers like Bauxar make up a growing portion of the whole health movement, though they're still a minority. According to a study last month by the Natural Marketing Institute, the percentage of shoppers devoted to organic increased from 16% to 18% between 2006 and 2007. The overall number of households that buy organic products has also gone up.
Since natural and organic stores like Whole Foods Market are a destination retailer for these core consumers, many in the conventional retail business see the increase as a mixed blessing that benefits natural stores better.
“Historically, our sales have been highly resilient during economic downturns,” said John Mackey, chief executive officer of Whole Foods, Austin, Texas, during a recent conference call. “We attribute our strong sales to many factors, including our loyal customers and their dedication to a natural and organic lifestyle, our high percentage of perishable product sales and our extensive selection of high-quality prepared foods that attracts customers trading down from restaurants.”
That doesn't mean mainstream retailers can't claim a percentage of these devoted consumers as their own, especially as chains increase the quantity and quality of their whole health inventory. Where supermarkets truly stand to benefit, however, is in catering to shoppers who fall somewhere in the middle of the health and wellness spectrum. Many of these individuals are dedicated to natural and organic products, but only in certain categories. And they don't want to give up the everyday shopping experience.
“We think the numbers are really with us right now,” said United Supermarkets' Jackson, referring specifically to the company's seven Market Street banners, which offer traditional groceries as well as gourmet, natural and organic selections. “There are a lot of folks who want a good selection of natural, organic and better-for-you, but still need Charmin or Bounty towels because they haven't transitioned to Seventh Generation yet.”
According to Jay Jacobowitz, president of Retail Insights, there are several groups within this midlevel segment who truly believe in the healthful products they buy, and won't give them up, even as their budgets tighten. New moms, whose food safety concerns have helped boost the organic baby food category beyond $120 million in yearly sales, are a prime example.
“I don't see them going back on that in a tight economic time,” said Jacobowitz. “The clean-sheet desire to give their kids a healthy start is more powerful than that. They'd rather skimp on other areas first.”
Consumers are also paying the premium for their own health. Fueled by food safety concerns in light of numerous recalls over the past two years, their confidence in the system has plummeted from 82% to 62%, according to the Food Marketing Institute. At the same time, more studies are starting to attribute quantifiable benefits to the organic system. A recent peer-reviewed analysis by the Organic Center, for example, shows organic as nutritionally superior to conventional. Another, from researchers at the University of Wisconsin, states that many organic crop systems are just as productive as conventional.
As a result, shoppers see the likes of organic and natural goods as a smart, fresh alternative. They view wellness as something to maintain during tight times.
“I think a lot of people who buy these products look at it like they're investing in their health, and so consequently they won't be investing dollars in their hospital bills or medical bills down the road,” said Michael Funk, CEO of natural and organic distributor United Natural Foods, Dayville, Conn. “That kind of shopper isn't going to worry if the box costs them three or four dollars.”
Along with the dedicated customers they already have, supermarkets will have the opportunity to capitalize on consumers trickling down from the restaurant business. That industry's sales and store expansions have already slowed, according to research firm Technomic. There's also an opportunity, retailers and analysts say, to capture shoppers who will trade down from Whole Foods and other specialty stores, where overall prices may be too high for them.
“This is an opportunity for the mass stores to really show that they're a good place for natural and organic, and that they have a good selection,” said Matt Saline, CEO of whole health marketing firm Mambo Sprouts. “I think that if they get [customers] now, it's going to be harder for Whole Foods to get them back.”
The challenge for supermarkets selling health and wellness right now is to reach shoppers like Wendy Kappel Cuba. A resident of New York's Westchester County, Cuba and her family have felt the effects of the downturning economy and are trying to adjust.
“We've eliminated unnecessary car trips and walk when possible, or ride bikes in good weather,” she said. “We have definitely cut back on our home meals by consuming more pasta and frozen pizza, which occurs perhaps once or twice a week now.”
Cuba explained that she doesn't buy organic because of the cost, and because she's skeptical of the verification process behind it. She does shop regularly at Trader Joe's and local gourmet stores, however, typically buying green tea, fat-free yogurt from Stonyfield Farm, as well as assorted fruits and vegetables. She has cut back on meat and seafood, but is reluctant to trade down on any other categories she shops.
“If we had no other choice, I suppose we would turn to cheaper alternatives, but I sincerely hope we don't need to go in that direction,” said Cuba.
Price-sensitive consumers — who make up part of the midlevel and periphery whole health segments frequenting supermarkets — are the most likely to trade down on items during a recession. And they are a sizable group. According to a recent report from TNS Retail Forward, only 17% of shoppers said they don't plan to change their spending habits in light of high food costs. Forty-seven percent said they are spending less money overall.
“The most common strategy employed currently is forgoing grocery items that seem too expensive,” stated the report. “As a result, higher-priced items such as prime cuts of meat, gourmet foods and organics will likely suffer.”
Indeed, numerous studies have pointed to the rising influence of price in determining purchases, as well as shoppers' tendency to trade down on food choices and channels during a recession. According to a survey by global consulting firm AlixPartners, price has become the No. 1 determinant of where consumers shop and what they buy. In that same vein, a study conducted by Citigroup Global Markets found that 24% of shoppers say they'll switch to a cheaper store to do their grocery shopping if food prices keep rising.
“This year, it's a whole new ball game,” said Fred Crawford, managing director with AlixPartners. “This year, consumers are saying it's all about price, price and price.”
Results like this have boosted the confidence of value chains like Dollar General, Goodlettsville, Tenn., which operates more than 8,000 stores in 35 states and sells 30% of its products for $1 or less.
“I think people are going to be looking for an inexpensive alternative to the channels that they've historically shopped in,” said Dollar General CEO Richard Dreiling in a recent interview with the The Tennessean.
Others think results like this are a bit exaggerated, and that supermarkets don't need to hit the panic button yet. Parke Wilde, a food economist and professor at Tufts University, said that most consumers are going to cut back in other areas before they alter their at-home food habits. And anyway, he explained, many people are already used to making sacrifices to buy whole health products.
“In a recession, people are going to be more price-sensitive,” said Wilde. “But because the food budget is a modest part of the total budget, and because the interest in healthy and ethical foods remains high, I wouldn't expect a widespread decline.”
Which categories are best positioned to weather the current storm? Sources say health and wellness offerings around the perimeter of the store enjoy the most loyalty, and thus will be the least likely to take a hit during a recession. Julie Stanton, a food marketing professor at St. John's University in Philadelphia, thinks that sales of offerings like organic milk will stay strong, while sales in product categories that are newer to the natural and organic movement might flag.
“I'd be very surprised to see any real drop-off in spending on organic dairy,” said Stanton. “I think you can thank concerns about rBGH and antibiotics and that sort of thing as much as you can thank the organic label.”
Recently, Stanton conducted a study that found the majority of organic sales come from “unengaged” and “idealist” shoppers who like the idea of organic and will shop certain categories, but can't really get over the fact that they're paying higher prices. The shoppers who will stick with it, she said, are the ones who believe in organic's promise.
With this in mind, the true challenge for supermarkets during a recession, according to Stanton, lies in showing the value of their health and wellness offerings.
“A lot of consumers can't get over that premium price hump unless you have really decided that organic means ‘healthier,’” said Stanton.
Marketing the value of whole health products is easier said than done, however. It's a test for all retailers, and especially for mainstream supermarkets, which often sell healthful products right next to conventional ones. Health and wellness is still a small — though fast-growing — portion of total sales, and many believe that promoting these items disparages the quality of others.
“It's a dilemma for [conventional supermarkets], and I'm not sure that, unless they're changing their positioning to natural and organic, they have much they can do in an economic downturn to convert people over to natural and organic who are not already using these products,” said Jacobowitz of Retail Insights.
There are others who challenge the idea that promoting organics can compromise sales in other areas.
“I don't know if I agree with that from the Safeway perspective, because if you look at their O Organics and everything they're doing, they're supporting that very heavily,” said Saline of Mambo Sprouts, who went on to say that “it's the supermarkets who are causing the consumer to make the distinction. A Safeway, on the other hand, puts the products out there, lets the consumers make informed decisions, and has seen growth in that category and some sales shift.”
What everyone can agree on is the need to capitalize on segments of the store that are healthy and that customers see as a value. Private-label lines like O Organics and Topco's Full Circle, for example, could be just the ticket in a downturning economy. A study by The Consumer Network and EPM Communications predicts that store brands will grow to become 25% of all supermarket sales and 15% of all drug store sales.
“I think there's a lot of opportunity for focusing on inexpensive meals that are really good in the supermarket, and certainly private label can tie into that very easily, because it already has the price image advantage,” said Mona Doyle, president of The Consumer Network.
Another opportunity lies with foodservice and prepared meals, which appeal to shoppers who still crave the restaurant experience. United Supermarkets' Jackson estimated that 10% of Market Street's sales come from foodservice, and he expects that to grow in the coming months.
“Those stores basically have a $100,000-a-week restaurant in the store, whether that's for consumption on or off premise,” said Jackson. “And that's really where I see a huge opportunity. We have some good, quality dishes at much less cost than a restaurant, and at our store you don't add 15% to 20% for the tip.”
Another advantage that supermarkets can build on is their diverse selections within categories. Consumers who might be priced out of an organic option during an economic crunch can often find a “natural” or other wellness variety in the same shelf space, usually for a couple of dollars less. Food Emporium in New York City, for example, stocks lunchmeat at several different price points for conventional and all-natural choices, all the way up to a $7 package of organic sliced, smoked turkey.
Drawing attention to a wide selection like this invites comparison shopping, and it shows that retailers understand that consumers are going through tight times.
“Within the fresh and healthy foods sector, there are a lot of bargains out there,” said Wilde. “Produce that's in season, for example, tends to be priced very well. It just depends on what your expectations are for having high-quality products throughout the year.”
But even the most price-sensitive customer likes a bit of theater in the shopping experience. In-store events like a mini spa treatment, samplings and cooking demonstrations can be a nice bit of pampering for shoppers weathering a tough economy, sources say. In return, Saline said, consumers might reason that it's OK to treat themselves a bit and spend the extra dollars.
“Depending on the size of the store, you can have a masseuse giving five-minute massages, or people giving makeovers,” he explained. “Do things in that area to generate interest and help educate people. I think there's a lot of opportunity for that.”
The right marketing strategies vary by store and region. And with consumers becoming increasingly sensitive to price and value, the most important objective for retailers right now is to know their shoppers, said Todd Hale, senior vice president of consumer insights with the Nielsen Co.
“As a retailer or manufacturer, you have to understand the demographics behind your brand,” he explained. “And during a time when the economy is soft and you have high gas prices and inflation, you need to understand how to minimize any risks from your low-income shoppers, and how do you maximize sales opportunities among your high-end shoppers. It has to be a store-by-store thing.”
According to Chicago-based research firm Technomic, the nation's top restaurant chains are seeing slower growth and fewer customers in this latest economic downturn.
That could spell a big opportunity for supermarkets. Wes Jackson, head of the specialty division at United Supermarkets, Lubbock, Texas, said he's counting on increased sales coming from shoppers who want to save money by eating at home.
“That's the opportunity, to capitalize on those folks that may be changing habits from the nice restaurant to eating a few more meals a week at home,” he said.
Health and wellness offerings should be a natural fit. Todd Hale, senior vice president of consumer and shopper insights with the Nielsen Co., said that 40% of consumers say they plan to eat out less to deal with rising costs, and that most of these people live in households making $50,000 to $100,000 per year.
“That may speak to an opportunity for grocers to take advantage of consumers who are primed for premium natural and organic products and will be coming more to the grocery stores,” said Hale.— JW
What's the best marketing strategy for supermarkets selling premium-priced health and wellness products during a recession? Three marketing experts weigh in:
Matt Saline, chief executive officer of health marketing company Mambo Sprouts: “Really study the market you're in, and tailor your promotions accordingly. Supermarkets like to throw a big net and get a big return, and what natural and organic has shown them is thatyou can throw smaller nets and get greater returns, percentage-wise.”
Todd Hale, senior vice president of consumer insights, the Nielsen Co.: “Try to send a message about value. Talk about how the grocery store can help its shoppers save money because of the convenient location, or how they can help them with meal solutions that can stretch from a meal one day into leftovers the next. Some of this might be a way for grocers to capture more share of at-home consumption.”
Julie Stanton, marketing professor, St. John's University, Philadelphia: “Turn up the volume on displays by using brighter colors and vibrant pictures — anything that makes a product seem more farm fresh. Grocers can employ those kinds of things without upsetting the balance they have to strike between marketing organic and conventional.”