Retailers expect inflation to boost sales for the holiday season, but it's a two-edged sword
Food retailers and wholesalers around the country are cautiously optimistic about the upcoming holiday shopping season, citing some benefits to the top line from higher prices.
Operators noted that inflationary price increases might be difficult to capitalize on, however, as consumers remain under pressure in the lackluster economy, and competition, while rational, is still fearful about losing traffic.
John DeJesus, president of Foodmaster, Chelsea, Mass., said he was worried that inflation could make for a difficult holiday season, leaving retailers a choice of either taking big losses to get sales or risk shocking their customers with higher retails than they are prepared for.
“The scariest thing about the upcoming holidays is the cost of goods,” he told SN. “Turkeys, hams, you name it, their prices are substantially higher than last year, and the customer has sticker shock. Prices have gone up across the board, especially in perishables.
“As a retailer, I know I can offer an item at a great price, but it's not a good price to the customer who knew what the price was six months ago. And you don't want to come out the worst in the market on turkeys.”
DeJesus said he expects consumers to be looking for value during the holiday season.
“The good thing about the holidays is that everyone feels good, and eating with the family is part of that, but I still think people will tighten their belts as much as possible. It's just not freewheeling like days of old. They will be frugal, looking for value, and it's certainly going to cut into our margins a little. I'm worried.”
DeJesus said the problem of maintaining margins was particularly difficult for independents, who are less able to ride out wild swings in fortune.
“Every report you see — from Kroger, Ahold, Wal-Mart or anyone else — says volume is up, but not up to the level of inflation, and the company had to pay dearly to keep that volume up by taking haircuts on gross margin,” he said. “For an independent, we have to consider, what's the tradeoff? Do I lose Thanksgiving? You ask yourself, how much money can I lose on turkeys? Do I do less volume but lose less money? At the end of the week it's all about profitability, and if you can't make a profit we're not here. That's the catch-22 we're all playing with here.”
Executives from Chandler, Ariz.-based Bashas' agreed that competition could make it difficult to pass along cost increases during the holidays, although they do have a positive outlook overall.
“The outlook for the holidays is good,” said Robert Ortiz, vice president of marketing and merchandising. “Business is slightly up from last year, and we believe that trend will hold for the holidays.”
Asked to name the biggest challenges Bashas' faces, Ortiz said, “We're seeing cost increases, but the market is so competitive here, it doesn't allow us to move much on retail.”
Bryan Roberts, director of non-perishables for Bashas', agreed. “There are so many places for consumers to spend their money — supermarkets, department stores and so on, so it's very competitive.”
Added Ortiz, “We're now competing with all kinds of businesses, including appliance stores that sell products we don't sell. But we're all competing for the same dollars as consumers decide to spend their money on groceries or other products. So Black Friday becomes an important day for us, even though we aren't selling the same products as the companies advertising hot holiday specials.”
“But we expect to get our fair share-of-wallet,” Roberts added. “If someone has $100 to spend, he can spend it for food in a supermarket or at some other type of store. People on a fixed budget have to decide how to spend what they have.
“So we have to be aggressive across the board in pricing holiday products, so we will continue to promote aggressively for the holidays, just as we've done all year.”
According to Ortiz, “What that means is, our floors may be fuller, and we'll move more holiday merchandise closer to the front door. We're definitely executing our merchandising better than in prior years, and that's showing up in our sales results and the look of the stores.”
Roberts added, “We're putting more inventory into the stores, and we're making sure traditional items are well-represented.”
Although most of the holiday items are food items, the chain is “slowly getting more aggressive on general merchandise,” he said.
GM sales for the holidays slowed down about three years ago, he explained, but they have begun to rebound.
Tom Jamieson, owner of 10 Shop ‘n Save and 10 Save-A-Lot stores in the Pittsburgh area, said he feels he is more competitively priced this year and is well-positioned to see sales growth during the fourth quarter.
“If we can keep our sales ahead of inflation by a point or two, it looks like it could be bright for us,” he told SN. “I feel that I am very competitive with the marketplace out there and can hold my own, and possibly try to achieve a 1% or 2% increase over inflation.”
He agreed that the challenge is to drive sales gains that exceed the rate of inflation.
“People are saying they are up 3% this year, but guess what? If inflation is up 4% to 5%, then you're down.”
He noted that last year at this time, Wal-Mart Stores had gone through an aggressive pricing campaign that made the environment difficult for everyone.
“Last year Wal-Mart was just coming out of their crazy pricing strategy they had that summer, and we couldn't touch those prices,” he said. “We can at least be competitive now. We couldn't compete with what Wal-Mart was doing [last year] — they were giving money away.”
He said pricing overall appears to be much more rational this year.
“Last year everyone was chasing Wal-Mart, including ourselves, and by the end of the year everyone had realized they had cut their bottom lines a lot. It was a very costly program for everyone, and for Wal-Mart also, I believe.”
Jamieson said the core holiday promotions at his Shop ‘n Save stores involve promoting use of the chain's loyalty cards to earn free turkeys and offering discounts on gift cards.
The five-week turkey program allows customers to earn a free bird for spending a certain amount using their loyalty card during the period.
“That's something we've done the last few years, and it's worked out very nicely for us,” Jamieson said.
In the other key holiday promotion at Shop ‘n Save, customers can double the value of gift cards — for such retailers as Home Depot and Macy's, for example — through the purchase of gasoline using the Perks loyalty program, he explained. That program “drives customers into the stores,” he explained, even if the promotion itself isn't highly profitable.
“Gift cards is an area that's growing fast, as an alternative to giving cash as a present,” he explained.
In addition, the Perks gas discount program, offered at local gas stations, also remains popular as the cost of fueling up remains high.
He said his 10 Save-A-Lot stores, while performing well and in good shape for the holidays, don't compete as aggressively on holiday items as his conventional Shop ‘n Save stores.
Associated Food Stores, Salt Lake City, expects holiday sales this year to be flat to slightly up due to inflation, Neal Berube, executive vice president of Associated and president of Associated Fresh Markets, told SN. (Berube is slated to become president and chief executive officer of Associated on Nov. 11.)
“With the economy the way it is, we think consumers will still be cautious,” he said.
Sales a year ago picked up considerably two days before Christmas when predictions called for a major storm, Berube recalled. “That resulted in massive sales increases, though the big storm never came,” he said.
The biggest challenge this year will be increased competition, he said. “The alternatives and choices are much greater,” he noted, with increased competition from WinCo Foods, which has entered the Salt Lake City market; additional Wal-Mart supercenters; and additional Super Targets.
Berube said he is particularly concerned about turkey prices this year, which will be “substantially higher and shocking to consumers. We were told by one supplier that he has only limited supplies and they will be going to the East Coast.
“So instead of concentrating on the bird, we will try to promote more value-oriented meals that will include turkey but will also include other items.
“And for Christmas, we'll feature alternatives like lamb or ham to give consumers as many choices as we can. One thing we've done for the past few years is to promote prime-rib roasts for Christmas, and because of the extra competition this year, we hope to do that again.”
As for what Associated will do differently this year, Berube replied, “The Albertsons stores that we acquired used to own the holidays locally, and now that their transition to Fresh Markets is complete, we plan to utilize that knowledge.
“Albertsons used to market the holidays as a real event, and that used to bring them increased holiday business. Prior to this year we were transitioning the stores, but things are more stable now and we have the ability to implement some of the things that made Albertsons' holiday programs so successful.”
He declined to be more specific.
Dennis Butler, president of Laurel Grocery Co., London, Ky., said he expected a “muted” holiday season and as a result is preparing retail customers to start holiday promotions earlier than last year.
“Based on the economy, fuel prices, concern over jobs and how tight-fisted customers have been, I would say we're looking at a muted holiday season — we don't think customers will be out spending much more than they did last year,” Butler said. “So we're asking our customers to start promoting and getting the word out early, and we're getting ready to ship holiday items a little earlier than usual so they can do that.”
Pat Fox, owner of Fox Bros. Piggly Wiggly, Hartland, Wis., said a relatively stable economy in the markets where he operates stores indicates that sales will improve this holiday season as compared to last, but said his stores would have to execute on their promise of “being quality focused, customer-centric and community supported” to realize it.
“In our particular marketplace, we expect the holiday season to be better than last year. I just think we're lucky to be in an OK marketplace that hasn't been impacted too badly by the economy,” Fox said. “I don't know if we'll see a big change in price competition in our marketplaces. At the end of the day we have to deliver service, quality and great ads to our customers.”
Joseph Zahriyeh, owner of Fresh n' Save Marketplace, New York, said he was hopeful sales improve this holiday season as compared to last, but said the change would be driven more by a stronger emphasis on selection at his stores, which are shifting to a mix of more perishables.
“Business has been down from the recession, but we're hopeful it gets better this year,” he told SN. “What will help us is the fresh offering. People come for your produce, your deli, your bakery. Everyone sells grocery these days — CVS sells it. The gas station sells it. So we have to go to a perishable mode now.”
Ortiz said Bashas' is doing more merchandising on its website, “and about six months ago we put up a Facebook page, including one in [Spanish] for our Food City stores, though it's too soon to determine what kind of results we're getting.”
According to Roberts, “The reaction to Facebook has been good, and we're starting to get good feedback.”
Ortiz said Bashas' is moving closer to electronic couponing, “and we hope that's available for the holidays.
“When it comes to the holidays, you have to really plan ahead and execute well, especially in this marketplace,” Ortiz added. “You can't afford to miss a beat.”
Jamieson said his company is using web and mobile technologies more than ever in an effort to reach consumers.
“The handwriting is on the wall for print media — between the next five and 10 years, I don't think that's going to be a viable way to get your message out.”
He said the company has been focused on obtaining customers' emails so it can send them promotions electronically.
“That's an ongoing process, and we expect to keep moving forward in an aggressive manner for the next several years, because I believe that may be the only method of advertising 10 years from now,” Jamieson said. “Younger people will use that technology more and more.”
The company is using Twitter, email blasts and other methods to reach customers, and during the holidays it will be reminding them that they can earn multiple free turkeys through the loyalty program, he said.
Associated is increasing its use of electronic media with more targeted email coupon blasts, Berube said.
The company encourages customers to sign up for special offers at its Fresh Market locations, as well as on its website, “and we've had a good response for the past year-plus, and we expect signups to increase prior to the holidays.”
Reporting by Mark Hamstra, Elliot Zwiebach and Jon Springer