FMI research illustrates how the recession has hit food retailers
The economic pressure on consumers appears to be accelerating the erosion of grocery shoppers away from traditional supermarkets and into supercenters, according to new research from Food Marketing Institute.
The 2009 Trends survey of consumers by Arlington, Va.-based FMI shows that the economy is impacting the way people shop more than it ever has before. The percent of shoppers who now choose traditional supermarkets as their primary grocery destination has fallen to 56%, down from 60% in 2008, while the total of consumers who said supercenters were their primary store rose to 27%, vs. 25% a year ago.
“Price is now the No. 1 factor in selecting the primary store,” FMI wrote in the report, noting that when shoppers are asked for just one overriding factor when selecting their primary grocery store, 37% indicate low prices have the greatest influence on their decision. “While low prices have always been important, they have not led the list of important features in many years. This increased focus on price and value is playing out in channel selection and causing further erosion of the supermarket share.”
Although the survey found that only 6% of shoppers said they changed their primary store because of price, 45% said they now shop a secondary store to find items at lower cost.
The FMI survey also found more people than ever — 69% — saying that the economy was influencing their grocery shopping, up from 48% in 2008 and 41% in 2007.
One analyst interviewed last week by SN said he believes the impact on traditional food retailers could ease, however, as supermarkets hone their value offerings in the perimeter departments and as economic conditions improve.
“The customer is voting right now with value, and everyone is moving in that direction,” said Simeon Gutman, an analyst at Canaccord Adams, New York. “If we go through what I characterize as marginal improvement, with very slow, steady growth, and unemployment stops getting worse — which won't happen for a quarter or two — then supermarkets can really extend their advantage and take back some of their customers.”
He described what the industry went through last year as a “supershock” — a convergence of reduced spending power, higher fuel prices and higher food prices. Now that food inflation has eased and consumers are beginning to place a higher priority on convenience again, he said he believes shoppers who had looked to other venues for better prices and — perhaps more significantly — had reduced their spending within the store may return to their more traditional shopping patterns.
“As customers consolidate their shopping trips, I have a hard time believing that the supermarket is not part of that consolidated trip,” Gutman said. “I think the customer is going to be tired of shopping six different venues to find the best deals. Right now I think there are a lot of people shopping in stores where they would rather not shop.”
He noted that a recent pricing survey he conducted in nine markets found that supermarkets have become more aggressive than ever on shelf prices in an apparent effort to prevent further erosion and build business among existing customers. While traditional supermarkets have generally been within a 15%-25% range of Wal-Mart's pricing on comparable items, in the most recent survey he said supermarket prices were about 7%-15% higher, noting that aggressive private-label programs reduce that gap even further.
“It doesn't appear there is a price war, but it is a very competitive market,” Gutman said.
Pleasanton, Calif.-based Safeway in particular has become much more value-priced, he said, even beating Cincinnati-based Kroger Co., long considered a price leader among traditional operators, in one Texas market on an 80-item basket.
Gutman noted that in some markets, Safeway's aggressive discounting put it within 3 percentage points, either higher or lower, of Wal-Mart's pricing.
He also pointed out that Minneapolis-based Supervalu, too, had jumped on the pricing bandwagon, with its new aggressive “big relief price cut” of up to 20% on items throughout the store at Jewel-Osco in the Chicago market.
The influence of the economy is not only playing out in store selection, but in customer behavior within the store as well. The survey showed an increase in such behaviors as buying private brands and adhering to a shopping list.
Fifty-three percent of shoppers said they use a shopping list, vs. 48% a year ago. Shoppers with higher incomes — who are less likely to switch to a less expensive store format — are more likely to create shopping lists, the study found. And while most customers still said they stray from their list to purchase impulse items, the number of people who always stick to their list while inside the store is up from a year ago, at 18%, vs. 16% in the year-ago survey.
The most common in-store economizing behavior, however, is switching to private label or a lower-priced brand, which 28% of shoppers said they do “almost every time,” compared with 24% a year ago. In addition, 25% of shoppers said they expect to increase private-label purchases this year, vs. 3% who said they expect to decrease such purchases.
Interestingly, the survey indicates shoppers have cut back on buying in bulk. Only 22% of shoppers said they are stocking up when they find a bargain, vs. 27% a year ago.
Helping to balance the channel erosion and in-store economizing behavior was a decline in restaurant spending and restaurant visits, the Trends survey found.
“Most shoppers turn to reducing their spending on eating out as the first step to save money on total food spending,” the report stated, noting 55% of shoppers said they were spending less on dining out than they did a year ago. In addition, 69% said they were eating out less often, vs. 46% who said they were eating out less often a year ago.
Higher-income shoppers in particular exhibited a greater shift away from eating out this year, after lower- and middle-income shoppers had made that shift a year ago.
Gutman of Canaccord Adams noted that although consumers have cut down on their restaurant spending in favor of foods prepared at home, supermarkets don't seem to have enjoyed a corresponding lift in perimeter-department sales. Instead, consumers seem to be trading down within the fresh departments — to lower-priced cuts of meat, for example, or eschewing some fresh offerings altogether.
The FMI Trends survey was conducted online early this year, and included more than 2,000 consumers. The results, traditionally unveiled each year at the FMI Show, were scheduled to be presented last week at FMI's FutureConnect conference in Dallas, which was postponed indefinitely because of concerns over the flu outbreak.
The survey also includes a wide range of other data, covering shopper perceptions about health, food safety, sustainability, meal preparation and other topics.
The economy was also top of mind for retailers in FMI's annual Speaks survey, which also had been scheduled for release last week at the FutureConnect conference.
When asked to indicate which of 15 industry issues caused them the most worries, retailers told FMI it was the economy, by a large margin — 8.7 on a 10-point scale, the highest-ever score for that issue, the report points out.
“For the remainder of 2009 and early 2010 retailers are not optimistic about the recession's impact on sales and profits,” the Speaks report says. “Very few foresee increases in trip frequency or basket size, and many expect customer loyalty to diminish as shoppers search for the best deals in town.
“It will be imperative for companies to find and establish their niche in this complex marketplace. Differences between those successfully navigating this environment and those who are not are widening rather dramatically.”
According to the report, “Overall, food retailers posted solid sales figures in 2008, but the real picture is much more complex than that.
“With food-at-home inflation of 5.7%, these industry sales increases were largely or completely offset by the inflationary pressures. In fact, one-fifth of retailers posted sales losses in 2008, while 54.7% reported sales gains lower than the rate of inflation. Yet 21.3% posted double-digit sales gains.”
Identical-store sales growth for the industry in 2008 fell to the lowest levels since 2001 because of the high rate of inflation, FMI Speaks indicates.
ID sales in current dollars rose 4.5% last year; however, adjusted for food-at-home inflation, IDs were actually down 1.2%, it says.
ID sales growth, which stood at zero in 2007, had been positive the two previous years, rising from negative 0.4% in 2004 to 1.1% in 2005 and 2.3% in 2006, FMI points out.
It wasn't only sales that suffered in 2008, the Speaks report notes. “Despite superior cost controls, net profits also suffered [as] many retailers could not overcome the increased cost of goods and thus lower gross margins.
“The median net profit for the industry dropped from 1.82% to 1.43%.
“However, because industry profit leaders typically managed to keep costs down and achieved better gross margins when compared with the industry as a whole, the net profit for the group was much higher — 3.43%,” the report says.
Other statistical information in the Speaks report includes the following:
Given the higher costs of goods, companies' gross margin in 2008 dropped to 28.37% from 29.30% in 2007.
Through better inventory management, retailers increased overall store-level turns to a median of 16.43 for the store in 2008, compared with 15.60 in 2007 and 13.50 in 2006.
Median weekly sales per square foot, regardless of format, rose to $8.32 in 2008, up from $8.01 in 2007 — a number “greatly impacted by store format and weekly sales volume,” FMI noted. Conventional supermarkets reported median sales of $8.69 per square foot, while superstores and combination stores tallied $8.12, the report said.
Personnel productivity was one area of clear improvement for retailers in 2008, with weekly sales per labor hour of $145.51, compared with $138.90 last year and $133.31 in 2006 when weighted by sales volume. Leaving company size out of the equation, FMI said sales per labor hour were $129.75 last year, compared with $127.50 in 2007 and $122.14 in 2006.
Relatively few companies are planning to cut advertising budgets in 2009; instead, they plan to adjust their marketing mix to obtain the best return on investment.
STORES SHOPPED FOR FOOD (In the past 30 days)
|Warehouse club stores||21||23||21||21||22|
|Specialty stores (organic, ethnic, gourmet)||7||8||9||11||13|
|SOURCE: FMI Trends|
PRIMARY FOOD STORE CHANNELS (Where shoppers spend the most on groceries)
|Warehouse club store||7||6||7||6||7|
SECONDARY STORE (Where shoppers spend the second-most on groceries)
|Warehouse club store||6||8||10|
|Note: Data unavailable before 2007.|
|SOURCE: FMI Trends|
CHANGES IN BUYING STRATEGIES
|Make fewer impulse purchases||50%|
|Purchase fewer “luxury” food items||45%|
|Eat more leftovers||45%|
|Plan purchases based on sales||42%|
|Use more coupons||42%|
|Make more dinners from scratch||29%|
|Purchase more large-size or bulk items||27%|
|Buy more canned, frozen or boxed food items||27%|
|Purchase cheaper meat/poultry and/or fish||22%|
|Purchase fewer food items overall||20%|
|Purchase less meat and fish||16%|
|SOURCE: FMI Trends survey of consumers|