Consumer Mindshift

The economic environment has created a new shopper — one who's cooking at home more often, aggressively looking for bargains and often forgoing the indulgence of impulse purchases.

The impact of her actions can be seen in the Related Articles, where SN examines product-sales data from Information Resources Inc., Chicago, for the last 12 months. The Related Articles include a list of 50 key categories selected for analysis, and the following premium content: dollar and unit sales for 297 categories, and in-depth examination of the 50 key categories in three SN departments: Nonfood (Convenience Loses), Fresh Market (Value Added) and Center Store (Buying on a Budget).

The data also describe a market where shelf prices of processed foods have resisted the downward pressure of input costs, even as many prices for many fresh items have receded since spiking a year ago.

“Consumers have been forced to make significant changes to everyday behaviors,” IRI said in its August Times & Trends report, which analyzes shopper behavior across different market channels. “Today's consumers are more self-reliant and more in-tune with how and where money is spent. Recent reports indicate that the recession is easing, but consumers remain firmly entrenched in savings mode.”

To appeal to the shoppers of today, CPG companies are offering retailers extended, deep promotions rather than cutting list prices, and many traditional supermarkets have responded to consumers' quest for grocery savings with sharper pricing on everyday items and enhanced private-label offerings.

The tactics appear to be stemming channel erosion to some degree, according to the Times & Trends report, although supercenters are still gaining share. While shoppers increased their spending at supercenters when the economy went into freefall late last year, the aggressive pricing stance of traditional supermarkets may be sinking in as consumers find bargains in their local stores.

For the 52-week period that ended June 28, IRI reports that supercenters and dollar stores both increased their penetration in terms of number of households that shop at those formats, compared with the preceding year. Supercenters have gained 1.8 points, to 65.9% penetration among households, while dollar stores have gained 1.4 points, to achieve 53.8% penetration among households.

Among those shoppers who are considered heavy supermarket users, supercenters picked up 2.4 percentage points, while dollar stores captured 0.6 points from this group.

In recent earnings reports, some of the larger publicly traded supermarket operators have noted that promotional activity is at an all-time high in the market.

Craig Herkert, chief executive officer of Minneapolis-based Supervalu, said last month that customer spending on promotions in its first fiscal quarter, which ended in June, was up 400 basis points — a 4% swing — compared with the level of a year ago.

“The magnitude of this unprecedented shift in consumer purchasing mix lowered both transaction size and margins, and is primarily driven by changing consumer shopping behavior,” he said. “Current conditions have made being thrifty ‘cool’ once again, and we are seeing this in our customers' cautious purchasing behavior. For many, what was an essential just a few quarters ago is now more likely a discretionary purchase, and tradedown continues at a higher year-over-year rate than originally expected. If the item is not on sale in our stores, it's far more likely to remain on the shelf.”

Steve Burd, chairman, president and CEO of Pleasanton, Calif.-based Safeway, likewise described a highly promotional environment, during a conference call last month discussing its fiscal second-quarter results.

The rise and fall of many supermarket categories reflect the changing shopping habits.

He cited the example of milk, which has become a low-price traffic builder for competitors, he said. Traditionally, he explained, when the price of milk goes down, Safeway is able to maintain its profit margins, but this time it has been unable to because of the competitive pressures.

“And there are other examples of that,” he said.

He made his remarks after announcing that the company posted identical-store sales declines for the first time in 18 quarters. Despite the top-line declines, Burd said the company had high unit volumes in both perishables and Center Store, reflecting the relatively lower prices that are attracting customers.

The IRI Times & Trends report explained that basket sizes are still growing, but have been moderated by lower prices and by increased trip frequency.

“Opportunity to grow basket size remains, but is dependent upon the ability to tie marketing strategies to key shopper needs,” IRI stated in the report. “For example, dollar store basket size has increased 5% vs. last year. A majority of that growth is coming from Center Store categories such as spaghetti sauce, rice and salad dressing, highly reflective of increased at-home meal preparation activity.”

Following are summaries of the product volume trends in nonfood, perishables and Center Store.

— Mark Hamstra

Delayed Purchases Hurt Nonfood

A fact — the recession has changed the way people shop. That's especially true for nonfood discretionary purchases. While general merchandise and health and beauty care products were often picked up as a convenience or on impulse purchase, the recession put a halt to that habit. Instead, many nonfood purchases are being given a second thought or are being delayed. If the pantries are filled, they are being depleted before another nonfood purchase is made. Forget it if pantry products like drugs are outdated. They are being used anyway.

Under this recession scenario, supermarkets that have positioned their nonfood departments as convenience stops for impulse purchases have lost sales. Other outlets — mass merchandisers, dollar stores, warehouse clubs, drug stores — perceived as destinations for nonfood benefited. The perception among consumers is that destination outlets offer the lowest prices in town with better selection. When consumers lack discretionary dollars, they'll shop destination outlets to save on nonfood products.

Jim Wisner, president, Wisner Marketing Group, Libertyville, Ill., said he has heard — “even if I need it right now, I am not going to buy it” — voiced time and again in recent focus group sessions. “The market for convenience has shrunk,” he said.

This for the most part is reflected in the year-end Information Resources Inc. sales figures reported for 15 nonfood categories SN tracked in this issue. Of the 15 categories, supermarkets scored sales increases in just five categories: soap, which is considered a destination category for supermarkets; vitamins and weight control products, which benefited from the self-care trend; batteries; and adult incontinence. Unit sales were down in both batteries and adult incontinence, even though dollars were up, which may be the result of commodity price hikes that plagued the industry during the year. Sales in all 10 other high-volume nonfood categories were down at supermarkets.

Meanwhile, drug stores fared much better in nonfood categories tracked by SN. Only three categories were down. Toothpaste sales at drug stores were flat at -0.75%. Mops and brooms and light bulbs, not destinations for drug stores, fell -5.1% and 3.8%, respectively. All other nonfood categories tracked enjoyed sales spikes at drug stores.

Wisner agreed that drug chains have been more aggressive at the front end. Take Walgreens, Deerfield, Ill., for example. The drug chain is pursuing a repositioning effort to “reinvent the customer experience,” and is doing a much better job at leveraging what it sells particularly in its core HBC categories, said Wisner.

“They're coming out with new store formats. They're rethinking and readdressing that whole part of the business. They're doing a pretty good job of driving additional traffic by becoming convenience stores that women like to shop as opposed to guys who like to go to the gas station.” According to an IRI Times and Trends report — “2008 CPG Year in Review” — drug channel share of consumer product goods sales inched up 0.2% points in each of the past two years. Drug stores' efforts to bring more breadth and depth to their health care offerings that target an aging population have met with positive results. Drug retailers' health care departments posted positive unit sales growth of 1.3%, despite an overall industry slide of 1.9%. IRI stated that “as a destination location for health care needs, drug stores are well-positioned to thrive in this economy, particularly as consumers elevate the practice of self-care to minimize medical costs.”

IRI reported that beauty and personal care sales growth was negative in 2008 due to consumers stretching their supplies and reducing purchase of products. Categories like shampoo, down 8%, and blades, down 3.8%, were affected by consumers shifting to broad and extended use of products in an effort to lengthen time between purchases.

Wisner pointed out general merchandise categories have been particularly vulnerable during the recession because of consumers' tendency to defer purchases, which is even greater for general merchandise. He pointed out that general merchandise is driven by household growth as opposed to food that is driven by population growth. A number of factors about the bad economy have wreaked havoc on household growth, forcing some people out of their homes, forcing some to move in together and to delay having children. “The number of light bulbs you need doesn't depend upon the number of people. It depends upon the number of households.”

Wisner is optimistic about nonfood sales activity in the fourth quarter when consumers begin to run out of supplies and need to replenish them. “I think the year-over-year will be a little better than everybody anticipates. Add to that the economy should be getting a little better at that time,” he said.

For nonfood to grow at supermarkets, Wisner said food retailers need to be innovative in rethinking their nonfood strategies. The food channel has nothing to lose in attempting to make more of a dramatic statement in its nonfood departments, he added.

However, the current state of mind among food retailers is to hunker down and focus on food since the economy has forced people to eat at home more. “It's not about the side stuff, but really about basic bread-and-butter groceries,” said Wisner.

— Christina Veiders

Home Cooks Turn to FRESH MARKET

During the past two years, price inflation has been a central theme in the Fresh Market section of this special annual Information Resources Inc. category guide. The soaring cost of animal feed, fuel and fertilizer helped boost wholesale and retail prices for eggs, dairy products, juice, vegetables, meat, poultry and other fresh food categories.

But since last summer's report, the air has come out of that bubble. Retail dollar sales of milk, juice and eggs all slipped in the latest 52 weeks as prices in these categories softened.

Fortunately for supermarkets, these declines have happened during a time when consumers are cooking at home more often, due to the ongoing recession. And some data presented here may indicate that shoppers are already willing to trade up within some categories when preparing dinner.

“Across every income bracket, there is an 18%-28% increase in individuals planning to alter their cooking habits at home in hopes of squeezing out extra savings,” reads a report released this month by Thom Blischok, president of consulting and innovation for Chicago-based IRi. “Sixty-two percent of those making $35,000 or less were cooking from scratch more often in 2008, while now 80% of consumers in this bracket say they intend to change their cooking habits at home this summer.”

In addition, according to the report, titled “A New Look at Old Summer Rituals,” more than three-quarters of respondents in the $35,000-$54,000 and $55,000-$99,000 income brackets said they were planning to cook at home more this summer, compared to a little more than 50% of respondents in those income brackets during the Q2-Q4 period of 2008.

Of course, even with consumers eating at home and shopping at food retailers more often, it's tough to move the needle much when it comes to multibillion dollar categories. On this list, for example, unit sales of refrigerated juice, yogurt, eggs and breakfast meats rose just a little over 1%. Butter was up just over 2%. Unit sales of natural cheese were flat, and sales of milk and refrigerated salads actually declined.

But there's plenty of good news for retailers and suppliers who read between the lines. Notably, dollar sales of the entire cheese category have continued to rise during each of the past several years because the popularity of specialty cheeses and value-added products has continued to grow. When consumers cook at home, they still appreciate the convenience offered by the pre-sliced, pre-shredded and pre-grated versions of their favorites, despite the fact that they're usually slightly more expensive.

And three of this year's hottest perishables categories with sales over $200 million were whipped toppings, refrigerated salad dressings and refrigerated pizza, which posted 4.8%, 8.5% and 14.9% unit sales growth, respectively, during the latest 52 weeks. One could argue that all three of these categories offer examples of ways that shoppers are actually upgrading their experience when cooking at home — trading up to a premium dressing for their salads, trading up to a refrigerated pizza rather than a frozen one, or buying a highly discretionary item like whipped topping to make dessert a little more fun.

“Shoppers have thrown off the panicked cost-cutting of last year and have adopted much more nuanced, sophisticated and strategic attitudes regarding their shopping behavior,” writes Blischok. “Consumers continue to test new money-saving strategies and will retain those that best balance the tradeoffs between quality and cost.”

— Matthew Enis

Strategic Shopping in CENTER STORE

The cost of most raw ingredients has moderated from last year's historic highs, but you wouldn't know it judging from some Center Store price tags.

Nearly half (46) of the top 100 CPG categories experienced above-average price increases in 2008, and especially for goods that undergo processing, those prices are expected to hold steady through most of this year, according to Information Resources Inc.

That's a lot to swallow considering that between 2007 and 2008, pasta prices increased 21.1%, paper towels 11.9%, dog food 11%, fresh bread and rolls 9.5%, cold cereal 4.7% and carbonated beverages 4.2%

But with last year's losses still fresh in their minds, manufacturers are taking a measured approach to list pricing.

Since many are attempting to recoup lost profits, retail prices remain the same, according Susan Viamari, editor of Information Resources Inc.'s Times & Trends report.

Suppliers aren't quite ready to pass on permanent price reductions, but they are providing value in more prudent ways.

“We're seeing a lot more activity in temporary price reductions that offer some price relief without painting [suppliers] into a corner,” Viamari said. “Many are a little longer or a little steeper than they have been in the past.”

Makers of products merchandised in Center Store are also experimenting with size.

Procter & Gamble recently increased the amount of product contained in its Pringles Super Stacks, after Frito-Lay began offering 20% more product free, across its lineup, according to a recently published report.

Meanwhile, Wegmans Food Markets is heading in the opposite direction, by once again reducing the size of its store-brand Light Extra Churned ice cream, in order to maintain its price. It's holding fast to the rule that when prices are raised past a certain point, consumers buy less, but when they downsize the contents, sales remain the same.

Shoppers are taking such changes in stride, with most adopting one of three distinct mindsets — none of which is demographically driven or emerging as more popular than the other two, noted Viamari.

The first group is buying in bulk to save money on a per unit basis, as well as trips to the store. Members are leaving their mark by purchasing multi-serve packs of frozen entrees, cases of sub-premium beer for at-home consumption, and extended roll toilet tissue.

Others are stocking up on items when they go on sale. Discounts and special offers receiving the most attention are those in categories that make at-home eating convenient. Instant potatoes (6.3%), frozen side dishes (31.6%) and miscellaneous snacks like trail mix, and other lunchbox fillers (14.3%) experienced significant dollar growth, which was driven by volume movement in the food channel, during the 52 weeks that ended June 14.

Likewise, foods used for at-home entertaining also fared well, with salty snacks (9.8%), crackers (3.8%) and wine (3.7%) exhibiting dollar sales gains in the food channel. A third shopper group is sticking with a consistent budget, opting for smaller basket sizes and more frequent visits.

Some members of the group are even incorporating fill-in grocery trips with excursions to drug stores, which are becoming more frequent as consumers take health care into their own hands.

“Consumers are very much in health care mode, and they're frequenting the drug channel for their needs,” noted Viamari. “Members of the channel have done a commendable job on capitalizing on the opportunity with expanded Center Store categories.”

In fact, their efforts are so effective that the channel's dollar sales growth outpaced supermarkets, and food, drug and mass merchants combined, in all but two of the 20 Center Store categories profiled in this year's IRI issue.

The most dramatic increases took place with dog food (28.7%), toilet tissue (18.7%), pasta (18.2%) and cigarettes (16.8%).

Meanwhile, consumers seem to be sticking with traditional food channels when it comes to planning dinners prepared in not-so-traditional ways.

Sales of instant potatoes and frozen side dishes fell 4.4% and 30.2%, respectively, in the drug channel.

— Julie Gallagher