CEOs See Renewed Emphasis on Value Message

ELLIOT ZWIEBACH, JON SPRINGER and MARK HAMSTRA

With little relief in sight from the pressures of inflation and a weak economy, supermarket operators are increasingly looking for innovative ways to emphasize their price positioning to attract financially stressed consumers, according to top supermarket executives around the county interviewed by SN.

“There's a new consumer out there — one who will buy products they use for their families wherever they can get the best price,” Jack Brown, chairman and chief executive officer of Stater Bros. Markets, San Bernardino, Calif., told SN. “They may buy some items at a gas station or a drug store, with no loyalty to the supermarket where they have done most of their shopping for years, because of the economic strictures they're feeling.”

All across the country, supermarket operators are redoubling their efforts to get the message out that they provide sharp pricing despite inflation, whether it's by emphasizing private label, touting bulk packs or making sure stores have enough selection for value-hungry shoppers to fulfill their needs in one trip.

“We are beginning to see changes in consumer buying habits now,” Scott Schnuck, CEO of Schnuck Markets, St. Louis, told SN. “I think most consumers have held off for as long as they could, but are now forced to cut back, trade down and shop more specials.”

John DeJesus, president and CEO of Foodmaster, Chelsea, Mass., said consumers are looking to trim their expenses any way they can.

“We're seeing bottled water as an item we call a luxury,” he told SN. “Now, people are beginning to say, ‘I can get water from the tap for free.’ People are starting to make those kinds of tradeoffs.

“The challenge is, how do you grow the business in those circumstances?” he said. “How do you get them to keep coming? I look in the mirror every day and say, ‘How can I reinvent myself?’”

Many of the executives interviewed by SN said they are not optimistic about the economic outlook for the second half of 2008, although for the most part they expressed confidence in their own abilities to cope with the ongoing pressures of inflation, declining home values and a weak job market.

JACK BROWN
chairman and CEO, STATER BROS. MARKETS, San Bernardino, Calif.

According to Brown, the Riverside-San Bernardino area most of his 165 Stater Bros. stores serve has had the highest rate of mortgage foreclosures in the country.

“We went through a period of high unemployment in this area in 1994, and we're seeing some of the same customer behavior now as we did then,” he said. “People simply don't have much money, so we've relaunched our family packs — 20-roll packages of toilet paper, 12-roll packages of paper towels and very large sizes of items like Bisquick and Hamburger Helper — and put those items back out there.

“We did that because we believe it's our job to help our customers cope with the economy by giving them the products they're used to at the lowest prices possible, even if that means they have to buy bigger sizes.”

Brown said Stater has had all the larger-sized products available in the stores for years, “but we didn't promote them quite as heavily. But now families need that kind of help.”

He said Stater started promoting the larger economy sizes about six months ago, “though we've had large numbers of mortgage foreclosures for about a year. During that time we've held our customer count, which means our program is working. And when the economy improves, those customers will hopefully stay with us and spend more.”

He said he expects the economy to improve by the end of 2009.

To manage the pressures of food-cost inflation, Brown said Stater is running more 10-for-$10 sales, “which is the kind of thing shoppers are looking for.”

It also had its first-ever 12-hour sale on a Saturday in late March, “which was very successful,” Brown said. “We had some great values on major items that customers knew the value of, and we hadn't seen that kind of reaction to a sale for many years.”

He hinted the chain may run additional 12-hour sales in the future.

Brown said Stater got “a little burst” from the stimulus checks.

He said he expects sales and earnings to be fairly comparable with results a year ago, “which would be good, particularly with this economy.”

The biggest factor affecting his outlook is the cost of fuel, he said, “because that affects us on the in-bound side and then again in the cost of distribution to the stores, and some of that you can't get back.”

During the second half, Brown said Stater will attempt to control expenses, “which are always the Achilles tendon of any business. But it's important for us to maintain good expense controls.”

JAY CAMPBELL
president and CEO, ASSOCIATED GROCERS of Baton Rouge, La.

Campbell said he expects ongoing high prices for food and fuel, “and that is going to put pressure on consumers, so that they are going to cut back on anything that is discretionary.

“People do have to eat — they will, we think, stay focused on grocery-store purchases and will look for meal alternatives there as opposed to casual dining or fast food, strictly due to cost.”

He sees the second half of 2008 as being “very, very difficult” for consumers in the area served by his cooperative's stores.

“It depends on the socio-economic demographic of your customer base, but for the most part you are seeing trading down, much more movement to a value line of products, to smaller sizes of products, and actually, larger rings at the register but fewer visits,” he explained. “They are traveling less to shop, so they are buying more of their needs fewer times.”

He said all retailers seem to be raising their retail prices in accordance with the higher product costs.

“For the most part, all of the competitors in the marketplace are having to face the reality that these increases are not temporary,” he said. “We went for so may years with little or no inflation in the cost of food, and the cost of oil, which affects packaging as well as transportation costs. Now all of a sudden raw food costs have gone up, the packaging and the processing costs have gone up, and now the transportation costs have gone up, and I think everybody who is in the wholesale or retail business is having to pass those costs on into the cost of the goods.”

He said Associated is focused on doing “whatever it takes” to help its retail members succeed, whether that means working harder to control costs or helping them to “be as aggressive as they can in their promotions,” he said.

He said he wasn't sure it was possible to measure whether the tax rebate checks had any impact.

“I'm not sure we have a good means of measuring how much of a bump we got from that,” he said. “I am sure there were some who spent those dollars on food, but in other cases it could have gone for debt reduction, clothing needs or anything else that's out there. I'd say we did not see anything really appreciable from the rebate checks that we could measure one way or the other.”

JOHN DeJESUS
president and CEO, FOODMASTER, Chelsea, Mass.

DeJesus said price increases are arriving at a faster rate than any time since he joined the family business in the 1970s.

“My main concern is cost-of-goods price increases, and also the fuel surcharges,” he said. “The last resort is raising retail [prices], but the reality is, we're going to have to.”

Prices on some items have risen so quickly, DeJesus said, it has been difficult to communicate a value offering.

“We try to be as aggressive as we can,” he said. “Our mission and challenge every day is to be the best in the marketplace. But if a customer is used to seeing a chicken breast sale price of $1.79 and your price goes up 70 cents a pound, and so the new sale price is $2.19, how do present that so that the customer thinks it's a good value? That's the crisis we have — 18 months ago this was a horrible retail [price]. Today it's a great retail [price], but I don't think the customers understand that.”

As a small independent operating nine stores, DeJesus said he fears the economy won't afford him the same attention from vendors that his larger competitors receive.

“For me, it's difficult as the little guy to keep the attention of the big manufacturers,” he said. “Will they keep sending people out to see me? And so you wonder if you can play on a level playing field with the bigger guys. Are we going to get the same deals as the big guys? I'm afraid, though, that's going to get worse.”

He expects the economy to remain stagnant for much of the second half.

“I don't see how the economy will get better at least until the election because one side won't want the other side to look good until then,” he said. “If anybody says the economy is getting better, they're blowing smoke. I don't see a way out for a while here.”

DARDEN HERITAGE,
owner of STAR MARKET, Huntsville, Ala.

Heritage said rising fuel costs have affected all facets of his company, including his workers.

“The price of fuel affects everything we do,” he said. “It affects our customers, our employees. We have quite a few good employees who drive in from quite a ways, and I'm worried they may look for jobs closer to their homes. I'd hate to lose quality employees that way, but that's a concern.

“Finally, our suppliers are passing along surcharges because they have to, and we've got to pass that along to the consumer.”

He said the economy in the Huntsville area, where his company operates three supermarkets, is still relatively strong.

Heritage said his stores are working to improve and expand product variety to serve a customer who will become more selective in where they shop as money tightens due to gas-price inflation. Star Market recently completed a major remodeling at one of its stores for just that purpose, he said. Star Market is also emphasizing its pharmacy departments as part of a full shopping trip for its customers.

“The consumer is going to get more selective about their shopping,” he said. “It's more important to have a good mix in your stores. You have to improve your selection so you don't have somebody coming here to get one item and to a competitor for something else.

“Pretty soon the customer won't do that anymore. They're going to choose one store where they know they can get it all because of the price of fuel. We have to become more of a destination than a stopover.”

He said he also expects to see consumers taking more advantage of discounts through coupons or other promotions.

“People will be shopping smarter,” he said.

However, he said well-positioned stores can benefit from the times, as consumers eat fewer meals away from home and do less traveling.

“We had a very good Memorial Day weekend, and part of it was because fewer people were traveling down to the Gulf Shore,” he said.

ERIC LINDBERG
co-CEO of GROCERY OUTLET, Berkeley, Calif.

Lindberg said he thinks the weak economy and pressure on consumers will drive more business to his chain of 132 discount supermarkets.

“Those pressures will help us, but with food inflation, rising gas prices, the drop in the housing market and the credit crunch all assaulting consumers at the same time, consumers are losing confidence,” he said.

Grocery Outlet is seeing increases in its customer counts and in consumer spending, “with a lot of first-time customers calling or asking over the Internet how they can use our stores to save money,” Lindberg said. “We're attracting more customers from the conventional supermarket sector who are now more interested in our sector.”

That's been the case since last October, he said, “after which things leveled off through March, then began escalating again with the last few increases in fuel prices.”

Grocery Outlet has traditionally relied on word-of-mouth as its sole advertising vehicle, but in January it began running monthly fliers “to broaden our appeal and to sell the benefits of who we are,” Lindberg explained.

“It's not item-and-price advertising,” he said. “Instead, it emphasizes our core food offering and the deals we have in grocery, frozen, deli and produce.”

Lindberg said Grocery Outlet anticipates “a second-half boom” for its business as customers remain under a lot of pressure. “They're eating out less, and they're spending less of their disposable income on what they want and more on what they need, so we project a really nice second half, but we're aware that the economy is not healthy.”

Grocery Outlet tries to be the last operator to raise prices due to food-cost inflation, Lindberg said.

“We're laggards — the last ones who go up — and if it's a commodity increase, we absorb it. It draws people in when we hold prices, and that's what works for us.”

Regarding the stimulus package, Lindberg said, “There was no impact that we can track, but we think we did get some lift because we saw an increase in sales during the spring.”

Although he anticipates sales increases, Lindberg does not anticipate earnings gains in the second half.

“Our pricing strategy doesn't lend itself to better profits,” he said. “It's a long-term approach, and we could see benefits to the bottom line when the economy moves back up.”

During the second half, Lindberg said the company plans to boost its capital investments at 12 locations, with new or relocated stores or significant remodeling work.

“For us, 12 stores is nearly 10% of our base, but we're spending the money to reinvest because we see long-term opportunities,” he said. “We want to upgrade the stores now so our house is in order — so customers have a positive reaction, in hopes they will stay with us in the future.

“We're big believers in painting the bridge and then, when we're done, repainting it. That's part of our long-term investment strategy.”

MARK OERUM,
partner in HOWS MARKETS, Pasadena, Calif.

Oerum said his company's biggest challenge is to maintain its momentum.

“Most of our customers are middle- to upper-income people, but they're trading down a lot, and so rather than buy Prime Spencer steaks, they're shopping very carefully and buying chuck steak and chicken,” he said.

Trading down started “about the time gas started going up above $4 a gallon, about six weeks ago,” Oerum said.

Business was very stable through the end of 2007, he noted, “but buying trends have been changing since then. In our business, meat and seafood sales combine for about 16% to 18% of our volume, but those dollars are shifting now to more basic proteins, and we've remerchandised the case to reflect what many customers are looking for.”

HOWS also changed its ads to include more value items, he said, with more emphasis on items like Jubilee paper towels, which it buys direct and uses as a private label, and more basic produce items, such as potatoes instead of asparagus, Oerum said.

To manage cost increases, “we're raising prices just like everybody else,” he said.

One positive note in his outlook is the fact Ralphs changed its double-coupon policy late last month — doubling to a maximum of $1 — while HOWS continues to double the value of coupons up to $1 (so customers can get up to $2 off), “and we allow customers to use three coupons for the same items, so we think our double-coupon program will help us,” he said.

“Ralphs is our biggest competitor, and the day they announced the change in the double-coupon policy, we began getting calls from customers about it, and we believe that will help us.”

Asked whether the stimulus package had any impact on HOWS' business, Oerum replied, “Not that I saw.”

Looking ahead to second-half sales and earnings, Oerum said, “We're hoping to hang onto what we have and maintain what we did last year, which is about where we're running right now. Increases of 5% to 6% would not be realistic. Until gas prices went above $4 a gallon, we believe we were running ahead of last year, but the last couple of weeks have been pretty flat.”

Asked what kinds of initiatives HOWS is considering for the second half, Oerum said, “We're looking at old-fashioned parking-lot sales or the kinds of road shows Costco does where we'd sell a couple of items out of trucks — we're open to anything that gets us out of the box. But it looks like we're going to have to be better merchants as we move forward.”

PAT RAYBOULD
president, B&R STORES, Lincoln, Neb.

Raybould said new competition in the form a new Wal-Mart Supercenter and a new Hy-Vee are a bigger concern for his business than inflation as he looks ahead to the second half of 2008.

“In the past year, there have been a handful of new competitors in our marketplace,” he said. “That always adds to the sales challenge.”

While competition presents a challenge for the company, which operates stores under the Russ's Market, Super Saver and Alps banners in Nebraska and Iowa, Raybould acknowledged that “inflation is a very serious matter with our customers. They are cutting corners.

“But on the other hand, some of the causal-dining restaurant business is off, and we have been getting some of that, so that kind of customer is spending more in our stores now.”

He believes the two trends are offsetting each other.

Although he said he's been passing along his cost increases on most items in the form of higher retail prices, “it's hard to keep up with the price increases as fast as the cost increases. I think with some price-sensitive items, there's been a lag.”

Consumers “are concerned about what the future may bring as far as price increases,” Raybould said.

“I think you will probably see more one-stop shops — instead of hopping in the vehicle and burning gas, people will be more selective with their trips.”

Looking ahead to his company's own initiatives in the second half of 2008, Raybould said the company has “made a number of improvements, and we are looking forward to making more improvements.”

B&R recently acquired Grand Central Apple Market in Kearney, Neb., which B&R will continue to operate under that banner for the time being.

Raybould said the company will be focused on rehiring the employees there and “making a smooth transition.”

SCOTT SCHNUCK
CEO, SCHNUCK MARKETS, St. Louis

Schnuck said the biggest challenge that his company will face in the second half of the year is the rising cost of food and fuel.

“Not only are we paying more for certain types of food, but we're also paying more to transport food from our warehouses to our stores, and this does affect consumers eventually,” he said. “You hear it said all the time, but the trickle down effect is really in full swing.”

He said the company is focused on providing competitive prices without sacrificing quality.

The company has looked to reduce costs during the last several years by asking employees throughout the organization to come up with ideas to operate more efficiently, Schnuck said.

“This savings has not only allowed us to lower the prices on 10,000 Center Store items like we did last year, but it has also allowed us to keep prices in check with the recent rise in cost on many foods,” he explained.

“We have also placed a greater emphasis on our line of private brands,” he added. “We encourage our customers to give the Schnucks brand a try. Our private-brands group has provided our checkers and other store associates with samples of the Schnucks brands so that they may communicate to our customers the great savings and great quality.”

Looking ahead to the rest of 2008, Schnuck noted that the second half of the year includes several holidays “where we traditionally see a spike in sales.”

He is hopeful that the economy will begin to recover in the second half, but “it will probably take an easing in fuel prices as well as a slow down in inflation,” he said.

Asked if the economic-stimulus checks provided a sales boost, Schnuck said that although the company did not track a correlation, “it's always a good thing for retail when shoppers have a little more money in their pockets.”

Schnuck said one of the major initiatives of the second half is the company's $4 generic drug program (for a 30-day supply — the price is $10 for a 90-day supply), which follows last year's introduction of free oral antibiotics.

“Just as with the free oral antibiotic program, there is no required purchase, no coupon and no insurance needed to make use of these special offers,” Schnuck pointed out.

STEVE SMITH
president and CEO, K-VA-T FOOD STORES, Abingdon, Va.

Smith said inflation is not only affecting shoppers, but has made doing business more expensive. He said he is worried that the economy, led by gas prices, will get worse before it gets better.

“Business is pretty good, but the commodity price increases keep coming,” he said. “To manage is them is just to deal with them as they come, and try and pass along those that you can. One of the most complicated things is being able to deal not only with the price increases, but with the increase in costs associated with fuel and other petroleum-based products — bags, wraps, foams and other things we use.”

Consumers, he said, “are very cost-conscious right now, because their pocketbooks are impacted by what's been going on with the economy — job cutbacks and layoffs.”

He said Food City is responding to the economic crunch by implementing programs to win customer loyalty through unique product offerings and gasoline discounts. It also introduced a $4 generic prescription program recently.

“The folks in our company are in a mode where we expect that things will get a little bit worse before they start to get better,” he said. “And I think we have to react to our consumers and drive home the value proposition that we offer and the difference between us and our competitors.”

One of the methods the company uses to offer value is its FuelBucks program, in which every $10 spent in corporate-brand merchandise earns $1 in gas discounts at the Food City pumps.

“We're trying to take what people are looking for — how to stretch their food dollar — and we're trying to find out how we leverage that a little further to increase purchases, and increase loyalty to our store vs. our competitors,” Smith explained.

Government stimulus checks have had little to no effect so far at Food City, he said.

“They've been spread out and hard to measure. I haven't seen any great impact. Although our sales have been pretty good the past few weeks, I don't know that's not because of promotional activity.”

RICK WRIGHT
president and CEO, WRIGHT'S FOODLINER, Eugene, Ore.

Wright, operator of seven stores under the Market of Choice banner, said his company is finding some supplies are becoming scarcer.

“We're getting less than the quantity of product we want because of shortages of corn and grain, which means food prices are increasing for us and for the consumer,” he said. “Consumers are already being hit hard by fuel and energy prices, and they're looking for alternative products and changing their buying habits and how they shop.”

Market of Choice offers a mix of conventional and natural groceries in nearly equal amounts in stores that average 32,000 square feet, “and with a large assortment of organics and naturals and products we prepare ourselves, most of our customers don't have a lot of alternative choices of where to shop,” Wright said.

“But over the last month or so, we've been having problems getting adequate supplies of the flours we use for our cakes. We're working with manufacturers to get as much as possible, and we're building inventories in our warehouse to make sure we have what we need — at the same time, we're trying to slow demand by raising prices, and that's working a little bit.”

He said that with most of the stores near universities (University of Oregon, Southern Oregon University and Lewis & Clark University), the company realized an “enormous week” during graduation season.

“And even though we raised prices and shortened the window for ordering cakes, we still did a big business because we put out a great product, and our customers know they can't get what we offer anywhere else.”

Wright said his stores have raised food prices, “but every month we see prices going up, particularly in dairy.”

Market of Choice is passing most price increases through to customers, but it is taking a hit on some gross margins.

“If we believe something is a temporary increase, we let it ride, but when prices continue to rise, everyone has to pass the increase along,” he said.

Asked if the stimulus checks had any impact on his business, he replied, “Not that we noticed. That period of sales was similar to previous periods.”

Looking ahead to the second half, he said, “Sales growth has been softening, but we will still be up between 5% and 6%, which will be our worst growth in 13 years. Until last year, we had 12 years of double-digit growth where we were never below 10%, and last year was the first year we fell below that level.”

He said profits will improve because the company opened two new stores and one relocated store last year.

Wright said he's not sure what new initiatives the company will pursue in the second half. “We just had an influx of people coming into Eugene for the Olympic track and field trials, and that's kept us too busy to project beyond that.”