Supermarkets, discounters hang tough as retailers weather a difficult season
Analysts expect this to be a dismal summer for retail sales overall, but supermarkets seem to be holding up well, according to early feedback on the back-to-school season.
A variety of factors have converged to make this season especially challenging — in addition to the lingering recession, some parts of the country have suffered a decline in summer tourist business due to unseasonably cold and rainy weather, and the back-to-school season has been delayed overall this year because of the relatively late Labor Day holiday, giving consumers an extra week to postpone their shopping.
“As it has been the case for several seasons, customers are shopping much closer to the event,” said Eduardo Castro-Wright, vice chairman of Wal-Mart Stores, Bentonville, Ark., in a discussion of back-to-school sales during the company's second-quarter earnings conference call.
According to a report issued by the National Retail Federation last week, only 14.1% of respondents said they had completed their back-to-school shopping by Aug. 11. Nearly a third, or 30.5%, said they had not yet begun to shop for back-to-school items. On average, respondents said they had completed 41.6% of their shopping by that time.
The back-to-school season is often seen as a barometer for consumer spending in the upcoming year-end holiday season, so if the slow start to back-to-school is any indication, 2010 may be going out with a whimper.
The NRF previously projected that back-to-school spending would decline 7.7% in 2009 compared with 2008, to an average of $548.72 per family with children in grades kindergarten through high school. Total spending was projected at $17.42 billion.
Citigroup issued a back-to-school report forecasting that sales would be down between 3% and 4%.
“If back-to-school sales don't materialize early, we believe that retailers could become very promotional in an attempt to drive traffic and sales,” wrote Deborah Weinswig, a Citigroup analyst, in the report.
Citigroup's proprietary back-to-school survey found that 45% of consumers plan to spend less on back-to-school this year. Many said the reason for the cutback was concern over the economy.
“Consumers will be forced to cut back on discretionary purchases this year, a negative for back-to-school spending, and focus on buying only the items they need for the upcoming school year,” Weinswig wrote in her report.
Some supermarket operators, however, said they have seen success in their back-to-school offerings with some early seasonal promotions.
Dewayne Rabon, vice president of general merchandise, HBC and family care at Winn-Dixie Stores, Jacksonville, Fla., said he believes consumers responded well to early promotions on back-to-school items.
“Value is definitely top of mind with consumers, with the state that the economy is in,” he told SN. “Consumers were out a little early, and they were shopping for value.”
He said Winn-Dixie conducted some 10-for-$10 offers on back-to-school items such as 10-pack pens, pencils and composition notebooks, and saw some good consumer response.
“We saw good takeaway on that, so it was very obvious the consumer was taking [value] into consideration in making their purchases,” Rabon said. That really did seem to be what resonated with the consumer.”
Winn-Dixie predominantly offers branded items in its back-to-school set, but does include some private-label stationery.
“Consumers still recognize Crayola and brands like that, so we did use those as draws,” Rabon explained.
One thing Winn-Dixie did a little differently this year was promote tie-ins between the food and nonfood offerings for back-to-school with more in-store promotional materials.
Although the company always combines its marketing for both food and nonfood back-to-school items, this year the promotions went a little further with simple, eye-catching signs in the store that mixed traditional school supplies with grocery offerings.
“Our program was a concerted effort from our food and nonfood side,” Rabon said. “We worked with marketing on our signage, to bring the synergies of back-to-school in terms of filling up the lunchbox as well as the pens and pencils that people are looking for. We tried to make sure that our signage called that out, and as we merchandised in-store, I think we put a little more emphasis this year on tying that food product in to the hard-goods side.”
He said the company has been “pleased” with the effort so far.
“I think the food is still kind of center plate, and by tying that in, it gives a little extra boost to our nonfoods side.”
Rabon said the company did pare back somewhat on the number of back-to-school SKUs it is offering this year.
It has also been much more targeted in its promotions this summer, running sales on specific items rather than more general, seasonal promotions.
“We would pick certain key items and advertise price points, rather than having percent-off sales on everything,” he said. “We made sure we were specific to the consumer, and then we would track those items at the end of each promotion to make sure we were getting the lift.”
Rabon said the strategy helped the company better track its inventory. Winn-Dixie was able to see which items were lagging in sales and then put some extra targeted promotions behind them to move the volume through the stores, he explained.
He said he thinks the promotional environment for the back-to-school season has been similar to last year.
“It kicks off the fall, so all retailers are going to go after that aggressively,” he said. “But I didn't see anything different about that this year.”
Overall this summer, consumers seem to be looking for deals on seasonal items, Rabon explained.
“It wasn't the everyday price points that were out there,” he said. “When we first ship our summer seasonal, there are a certain number of consumers who see what they like and they buy it, because they are impulse items, as most summer seasonal products are.
“But for the most part, consumers are waiting for us to run our ads and programs and promotions during key holiday time frames, and that is what stimulates the sales. I would say, based on where we had forecast it, we were on target with our summer.
“We were cautiously optimistic about sales, and what we found was that as we hit and targeted certain categories throughout the season, we were able to get consumers to buy.”
He said the company expects the weak economy to weigh on consumers through the rest of the year.
“We believe that the consumers will spend, but they will be looking for value. We think it's important that we pick the right items and we pick the right price points that convey value.”
Customer Counts Up at AFS
Dick King, senior vice president, Associated Food Stores, Salt Lake City, said customer counts at corporate stores have been up during the summer, “though sales have been basically flat,” he added. “Units are up in a lot of categories, but they are mostly value-end items with a lower cost of goods. In other words, customers have been buying $2 brands, not $4 units.”
The company also cut back 35% on the amount of patio furniture the stores carried during the summer, he noted.
Since March, King said Associated has seen an increase in canning supplies (jars, lids and pectins), “so it appears people are doing more at-home canning, which leads us to believe they are staying home more, which is why unit sales are up.”
The corporate stores have also seen increased sales in prepackaged meats, cheeses and deli items. “We've seen a real increase in sales in those items, which has probably taken sales away from the service deli, so units are up in the prepackaged items.”
The company is also seeing increases in coupon redemptions, King added.
Prepackaged salads — with and without dressings included — have been flat, while sales of iceberg lettuce have gone up, he said, which means the company is also selling more dressings and shredded carrots, he said.
“And charcoal sales are up in units in both branded and private-label offerings, so it's clear to us people have been eating more at home this summer, and when they stay home, that's good for our retailers,” King said.
In terms of back-to-school merchandising, Boyd Irving, director of general merchandise, health and beauty and wellness, said Associated went with more lower-priced items this year. “We didn't go with private label as aggressively as we did in the past because private label is not strong enough in this category, and we felt with the discounters offering the national brands, customers would want the national brands.
“So we stuck with Elmer's glue, Crayola crayons and Mead notebooks, and we've seen sales increase this year by 24%.”
Irving said the size of the increase surprised him.
That increase was achieved, he said, with the same amount of space as in previous years, “but we used more national brands and ran more frequent promotions — six this year, compared with three last year.”
He said the company felt more promotions would make a stronger impact on customers. “We felt that was what the competition was doing, but we had more to offer at lower prices,” Irving said. One feature had five notebooks for $1.
With more year-round schooling, Associated's retailers had to spread out their advertising over a longer period, he explained, “so instead of starting back-to-school the second week of August, we started right after July 4, and instead of two or three ads in August, we're spreading it out to take us through September.”
According to King, Associated's prices were more competitive or sometimes lower than what the discounters were featuring.
“The difference was in pennies,” Irving added.
Associated also cut back on the number of SKUs it stocked in back-to-school merchandise this year by about 8% — dropping from 822 items last year to 766 this year, he said — “so we were able to spread out on key items. For example, we eliminated the cannibalization caused by offering three different brands of crayons,” he explained.
King said Associated, like Winn-Dixie, tied food items to back-to-school merchandise sales, offering lunchbox fillers like Capri Sun juices and Frito-Lay snack packs.
The company is also featuring more health-and-wellness merchandise, such as flu-related items because of the possible spread of swine flu later in the year; acne medications; tissues; peroxide; and hand sanitizers.
Despite the big increase in back-to-school sales, Irving said he doesn't think that indicates sales will also be up at Halloween or the year-end holidays.
“Back-to-school items include merchandise people have to have, but in this economy, do they really need another house decoration for Halloween? I think you will see people pulling out stuff they bought over the last three or four years rather than buying much that's new.
“As a result, our commitment on Halloween merchandise is down substantially this year — by about 8% — because we don't want a lot of close-outs.”
King said he expects candy sales to be better this Halloween than last year, and the company's buy-in on candy is up about 2%.
“We expect Christmas general merchandise to be down 10%, while we expect total food sales for the holidays to be up 2% to 3%,” King added.
Discounters Positive on Season
Both Wal-Mart and Target Corp. in recent weeks said they were optimistic about this year's back-to-school season, given some early trends and a “more rational” promotional environment, despite the focus on value.
“Based on the industry reports on back-to-school, we believe we're gaining significant share of this sizable business,” said Castro-Wright of Wal-Mart. “Although it is a tough sales environment, we're pleased with the initial response to our back-to-school and back-to-college offerings,” adding that the company's back-to-college sales are “running in the mid-double-digits ahead of last year.”
Gregg W. Steinhafel, chairman, president and chief executive officer of Minneapolis-based Target, meanwhile, last week said its back-to-school and back-to-college results “are encouraging,” and its August sales “have shown modest improvement from recent trends.”
In a conference call with analysts discussing second-quarter results, he explained that some states shifted their seasonal sales-tax holidays from July into August, driving the volume later into the season.
“Overall, we're starting to see some slight strengthening in both the traffic and transaction trends,” Steinhafel said. “But I caution, it's very, very early, and we're going to have to see how back-to-school plays out. We think we've put together a real strong back-to-school/back-to-college program. We have been very aggressive on price. We believe we will gain market share during this time frame, and it's our expectation [we will have] some improvement in our same-store sales compared to the last quarter,” when that figure fell by 6.2%.
Kathryn A. Tesija, executive vice president of merchandising at Target, said this year's pricing environment “appears to have moderated in terms of promotions and intensity.”
“We're driving traffic and sales during this key season through our circular, direct-mail incentives and for back-to-college, a much more aggressive social and online media mix,” she said.
Tesija noted that Target cut back on SKUs this season as well.
“We're down about 5% this year, which helps us get product out of the back room and save on labor from the stores,” she explained. “It also helps us reduce markdown expense. It also helps on the sales side by being able to put more facings out for those things that are selling best.”
She added that the company expects some seasonal excitement around Halloween this year since it falls on a Saturday.
“We'll show our guests how to throw a great party for less with many party favors and accessories under $3, and with our exclusive ‘Skelanimals’ theme, we'll create a differentiated one-stop entertaining shop and a strong value message.”
Additional reporting by Elliot Zwiebach