Supermarket Category Trends: The Value Equation

By Mark Hamstra

Cross-channel competition, inflation and promotional strategies have all impacted product movement in the supermarket channel in the past year.

Traditional supermarkets have struggled to grow unit volume in many of the largest categories, according to data from SymphonyIRI and the Nielsen Perishables Group, as detailed on the following pages. In many categories, inflation has propelled dollar-sales gains, however.

And while some supermarket operators — notably Supervalu and Food Lion — are in the midst of revamping their price positioning to be closer to their discount rivals, the pricing environment overall at traditional supermarkets has been rational, said Andrew Wolf, a Richmond, Va.-based analyst with BB&T Capital Markets.

“I would say it’s been a lot more rational than it was in ’09, when volume fell, prices fell, and there was big deflation,” he told SN. “Now, because there has been product cost inflation, retailers had to pass it through. Their margins were already crimped because they hadn’t recovered much from ’09, so they felt compelled to pass it through.

Downloadable pdfs:
260 Supermarket Categories by Dollar Sales
260 Supermarket Categories by Unit Sales

 “You didn’t see a lot of price freezes, cheap milk and super-hot promotions,” Wolf noted. “The economics of the times dictated that. It was easier to have some super-hot pricing when there was deflation.”

While the grocery volume decline sparked by the recession resulted in more aggressive pricing and promotion by retailers, the more recent unit-volume pressures have been driven in part by high gas prices and some price inflation, Wolf explained.

The two largest food retailers — Wal-Mart Stores and Kroger Co. — also to a large degree set the pace for pricing in their markets. While Bentonville, Ark.-based Wal-Mart shifted its strategy to be more EDLP focused and has backed off its promotions, its move has not sparked a price war, Wolf pointed out.

Cincinnati-based Kroger, meanwhile, has continued its “methodical pricing strategies,” he said, although “they haven’t amped it up, which they have done in the past.”

“Overall we’ve seen a little bit of shifting in strategies, but you haven’t seen a big break from the two leaders, which is probably why overall, pricing has been more rational than not,” Wolf said.

Quincy, Mass.-based Ahold, parent of the Stop & Shop, Giant-Landover and Giant-Carlisle chains in the Northeast, also has had its pricing in line, much like Kroger has, he pointed out.

Safeway, Pleasanton, Calif., while a “laggard” in terms of lowering its overall price positioning, has since “more or less” caught up, Wolf explained.

“Now they are trying to use what I call more efficient promoting, and it seems to be working for them,” he said.

Salisbury, N.C.-based Food Lion has also been addressing its price positioning on a market-by-market basis as a part of what it calls a “rebranding” effort, and Supervalu, Minneapolis, is also seeking to improve its price positioning while simultaneously exploring the possibility of selling itself and transitioning to new leadership.

“They are planning to increase price promotions, to the degree they can given their financial constraints,” Wolf said of Supervalu.

The moves come as more food retailers indicate they are shifting away from traditional high-low pricing strategies and toward EDLP or hybrid-type strategies incorporating both promotional pricing and EDLP-type positioning on some items.

PROFILES OF 50 KEY CATEGORIES
Year of the Beverage in Center Store
Nonfood Categories Holding Steady
Fresh Food Catetories on the Rise

A recent survey by Kantar Retail, Columbus, Ohio, found that 35% of retailers said they expect to be using an EDLP strategy in the next three years, while only 13% said they expect to be a traditional high-low retailer. That’s down from 28% who said they are currently a traditional high-low operator.

In addition to more pure EDLP positioning, retailers also say they will be migrating toward more hybrid pricing models, such as using EDLP for “known value items” (KVI), and high-low pricing for other SKUs; more “diluted high-low” pricing, with more EDLP and fewer discounted items; and “match and switch” pricing, with EDLP for widely available SKUs and high prices for unique products.

“Value pricing is a winner,” said Wolf of BB&T. “It takes at least a year of pain to implement it, but you do stop bleeding market share if your pricing is close enough to a market leader.”

Inflation Impact

Although the current drought conditions across much of the Midwest are projected to begin impacting some prices by year-end, retailers in their most recent conference calls with analysts said they expect food inflation to be about 2% to 3% this year, in line with historic averages, and less than what retailers experienced overall in 2011.

Even if the pace of inflation slows this year, however, unit volume might not recover as quickly, according to David Dillon, chairman and chief executive officer, Kroger Co.

“Tonnage will be slower to recover than the rate of inflation will come down, I believe,” he told investors in a conference call discussing first-quarter results.

The reason he thinks that unit volumes will remain challenged, he said, is that “the economy, from a shopper’s point of view, is not in all that great a shape.”

“So it’s not going to cause customers to jump back on the wagon unless they’ve got more money to spend. But, we do expect it to positively affect tonnage — just at a slower rate, that’s all.”

Nonfood Category Trends: Holding Steady in 15 Categories

15 More Categories: Fresh Foods on the Rise

Kroger noted that the 3.9% rate of inflation in the first quarter reflected a rate of decrease that was faster than expected. The company said deflation in product categories “offset somewhat” inflation in all other departments, including grocery, meat and bakery.

“If you look inside the grocery category, which is half of our sales, it actually got lower every four-week period the way we measure it internally,” explained J. Michael Schlottman, senior vice president and chief financial officer at Kroger, also speaking on the first-quarter call.

Total product tonnage in the first quarter, the company said, was “essentially flat,” although slightly improved from the fourth quarter of last year.

Likewise, Safeway projected inflation to increase “less than 3%” this year.

Downloadable pdfs:
260 Supermarket Categories by Dollar Sales
260 Supermarket Categories by Unit Sales

“I think the new sweet spot for inflation is probably closer to 2% than it is to 3%,” said Steve Burd, chairman and CEO, Safeway. “And right now, we’re running below 2%. And if you look at the center of the store, the price provided by the consumer packaged goods industry, that inflation is pretty consistent with those historical numbers. It’s in that 3% to 4% range.”

The company, he said, is compensating with “large volume gains on the produce side.”

“Inflation will follow its own path — as long as that is hovering around the 2%, 2.5% range, I think that will be good,” Burd said.

Following are summaries of product-movement trends for key categories in Nonfood, Fresh Market and Center Store.

NONFOOD

The Ongoing Battle for  Dollar Share

By Robert Vosburgh

There’s no doubt that supermarkets reign supreme as the primary destination for food. Competition for those dollars isn’t as intense as it is in the nonfood area. Here, supermarkets continue their age-old struggle against channel blurring and increased rivalry with drug, mass and club stores. 2012 is no different.

The latest numbers included in this year’s report reflect the ongoing give-and-take between competing formats. The 15 categories covered focus on health and beauty care, for that is where the fighting is most intense. As more channels encroach on the nonfood side of the supermarket business, food retailers have had to take increasingly dramatic steps to remain relevant in the minds of shoppers.

“The food store isn’t necessarily the first place you think to shop [for nonfood],” said Jim Hertel, managing partner at consulting firm Willard Bishop. “They have to work harder to have a credible reason to get shoppers to buy the products.”

That HBC items comprise most of the 15 categories covered in this year’s report is telling. The demand for vitamins, weight control powders and sleeping aids reflect the lifestyle issues currently top-of-mind with most American shoppers. Increasing health care costs, obesity rates and an ongoing economic malaise are sending people into all sorts of stores looking for relief.

Indeed, industry experts say that leveraging demographics is perhaps the single most important factor in keeping supermarkets competitive in the nonfood sector. Within it are products that are helping the vast number of aging Baby Boomers stay mobile, fit and spry.

“You have some category trends that are very strong,” noted Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill. “In skin care, there’s the aging population driving volume. On the OTC side, about 51% of purchases are made by people over the age of 50.”

However, demographics alone are not enough to sustain nonfood sales. Retailers need to commit to creating a nonfood environment that is adequately merchandised and marketed as a destination. The current trend of shrinking store sizes into new food-only formats endangers such dedication.

Nonfood Category Trends: Holding Steady in 15 Categories

“Supermarkets are a convenience, not a destination,” said Hertel in comparing nonfood departments in supermarkets to other formats. “The drug channel is seen more as a destination.”

Retailers known for comprehensive nonfood efforts include H.E. Butt Grocery Co. for its pet aisle; Wegmans Food Markets for using its magazine to tie food recipes with kitchenware also available at stores; and Roundy’s for partnering with manufacturers during cold season to offer not only OTC medications, but tying in sanitary wipes and spray disinfectants.

Downloadable pdfs:
260 Supermarket Categories by Dollar Sales
260 Supermarket Categories by Unit Sales

“It’s not the channel that drives where the customer goes, it’s how well you execute that category,” said Wisner.

A wide-ranging data analysis of the supermarket by Willard Bishop found that many nonfood categories were less intensively shopped. There seems to be an almost palpable lack of investment and inspiration, Hertel said.

“The magic to it is the creativity and intellect as to how can I theme this,” he said. “You’ve got to find ways to position it more creatively than just a side stack.”

— Additional reporting by Alyssa Haak

FRESH MARKET

Higher Prices, Less Volume

By Jenna Telesca

Fresh food departments rang up more sales this year, but much of the sales gains were attributable to inflation.

“Prices are up compared to a year ago in all five fresh departments,” Kelli Beckel, senior marketing manager of the Nielsen Perishables Group, Chicago, said of the bakery, seafood, produce, deli and meat departments.

Dairy categories, too, saw sales gains for almost all of the categories represented in SN’s annual category review.

High prices are driving shoppers to purchase less unit volume, although they are still purchasing enough products to keep dollar gains positive, Beckel told SN.

This year’s high production costs and tight livestock supply continued to push up meat prices. All meat categories saw sales gains of around 4% this year, but the average volume per store, per week, was down across the board for the 52 weeks ending May 26, according to the Nielsen Perishables Group.

With a still-recovering economy, many consumers are being mindful of their spending and cooking more meals at home. Prepared foods in the deli have benefited this year from consumers who don’t want to pay restaurant prices, but also don’t want to cook. Deli sales are up 7.2% overall, and average volume sales per store, per week are up 3.4%, according to the Nielsen Perishables Group.

15 Key Categories: Fresh Foods on the Rise

“Don’t forget, too, that picking up a meal from the deli can be more affordable than purchasing a lot of separate ingredients, so there are times in the value equation where deli has an edge over cooking, especially for smaller households,” said Jenny Anderson, director of research and consulting at Chicago-based Technomic.

Downloadable pdfs:
260 Supermarket Categories by Dollar Sales
260 Supermarket Categories by Unit Sales

This year, SN continued its partnership with SymphonyIRI, Chicago, for the dairy categories — milk, cheese, yogurt, juice, luncheon meats, breakfast meats and eggs — and with Nielsen Perishables Group for in-store deli, vegetables, fruits, beef, poultry, in-store bakery, seafood and pork sales numbers.

CENTER STORE

Conservative Mindset Among Consumers

By Julie Gallagher

Three years post-recession marketers are trying to cajole Americans to stock up on groceries rather than shop on an as-needed basis — but to little avail.

Despite an increase in merchandising support across 47% of CPG categories, with an emphasis on temporary price reductions, and moderating price inflation, the majority of high-volume Center Store categories highlighted in SN saw unit sales dip in the food channel during the 52 weeks ending June 10, 2012.

The situation shows signs of improvement as shopping trips become less frequent and consumers spend just under 2% more per mission, but Americans haven’t abandoned the conservative mindset just yet.

“Consumers are relying more heavily on fill-in trips and quick trips and that’s beneficial to the drug and dollar channels and a bit more cumbersome for the supercenter and the club channel,” said Susan Viamari, editor of SymphonyIRI Group’s Times & Trends report.

Indeed, with their increased consumable offerings and more aggressive promotional activities, drug stores continue to grow baskets, drive repeat trips and earn higher-than-average sales from key consumer groups such as members of Generation Y who shop these stores for convenience, Viamari said.

Innovative products centered on home-based rituals are likewise posting impressive gains.

Dollar sales of coffee skyrocketed 17.1%, with units increasing just 2% due to the high premiums attached to single-serve pods.

Downloadable pdfs:
260 Supermarket Categories by Dollar Sales
260 Supermarket Categories by Unit Sales

Also sustaining its caffeinated jolt are energy drinks, with sales up 14.6% on top of two consecutive years of double-digit growth. Drink makers continue to innovate with positioning in natural food sections and increased merchandising support. Among the 100 top CPG categories, energy drinks received the third largest jolt in merchandising activity in food, drug and mass.

20 Key Categories: Year of the Beverage in Center Store

The convenience of premixed cocktails and coolers are also appealing to shoppers, and women in particular, with sales spiking a whopping 25.9% in supermarkets. Food, drug and mass retailers featured these ready-to-serve, low-calorie margaritas, sangria and piña coladas front and center, with merchandising support jumping 41% and display activity up 20%.

Suggested Categories	More from Supermarketnews
Top 75 Retailers & Wholesalers Top 50 Small Chains & Independents Top 25 Global Retailers 2012 Power 50 SN Photo Galleries	Bakery Meat Dairy Center Store Nonfood