Consumers Seen Under Pressure Into 2010

SN STAFF

Like the groundhog that sees its shadow and predicts six more weeks of winter, food industry executives are looking at the current economic climate and seeing six more months of bargain-hunting shoppers.

“We're hoping to see some lift by the holidays at the end of the year, as people become more used to eating or entertaining at home,” said Dick King, vice president of Associated Food Stores, Salt Lake City, in an interview with SN. “That will be a good start for a recovery, but we don't see that recovery coming until five or six months into next year.”

That's not terrible news for most supermarket operators, executives from food retailing companies around the country told SN when asked about their outlook for the second half, as consumers will continue to shun restaurant dining in favor of home cooking. To help make sure consumers continue to eat more meals at home, food retailers are seeking to keep the excitement level high with aggressive price promotions for both private-label and name-brand products.

“We've heated up our ads because people look at ads carefully,” said Mark Oerum, a partner in HOWS Markets, Pasadena, Calif. “People are looking for bargains to get a few more meals per dollar.”

The aggressive price stance means tighter margins, retailers pointed out, but higher volumes are making up for the squeeze, they said.

“It's become more of a penny-profit business,” Oerum explained.

Statistics back up that perception of consumer caution. Last week's Consumer Confidence Index, issued by the Conference Board, New York, showed a decline from May levels. Those respondents claiming business conditions were “good” numbered just 8%, down from 8.8% in May, and those stating that “jobs are hard to get” increased to 44.8%, vs. 43.9% in May. Those expecting an improvement in business conditions during the next six months numbered 21.2%, down from 22.5% in May. Those expecting conditions to worsen totaled 20.2%, up from 18% a month earlier.

As far as the slowdown in inflation, retailers seem to be handling it well, they told SN. While a year ago prices on commodities had soared, driving up supermarkets' top lines in the mid-single digits, this year sales gains appear to be “real.”

“Inflation has been about zero, but we are still seeing big increases in same-store sales,” said Tom Jamieson, owner and president, Jamieson Family Foods, a Shop 'n Save and Save-A-Lot operator based in Uniontown, Pa. “Last year we had huge inflation going on, and that was a big factor in our increase in sales. Now it is almost deflation, and if you have an increase in sales, it means you are doing really well.”

Retailers see the slow rise in fuel costs as cutting both ways — while price hikes eat away at consumers' disposable incomes, many supermarket operators who sell fuel at their stores see opportunities to drive sales and traffic with gasoline promotions.

According to the latest data from the Bureau of Labor Statistics, the food-at-home index was up just 1.5% through the 12-month period that ended in May, compared with the 5.7% increase for all of last year. Many categories have declined in the mid-single digits since last year.

Following are interviews with food retailing and wholesaling executives polled by SN about their outlooks for the second half:

Dick King

Dick King of Associated Food Stores, a cooperative with stores in several Western states, said the economy continues to influence how consumers shop.

“WE'RE EXCITED that people are staying at home more rather than going away on vacation — as a result of the economy and the fact that gas is up to $2.60-2.80 a gallon, which is 60 cents or 70 cents higher than earlier in the year but down from $4.20 a gallon at this time last year.”

He said the company is still seeing sales increases in store brands, with penetration at 20% of grocery sales, up 3%-4% over last year.

“It's hard to say if people are indulging when they shop, because we haven't broken down ice cream sales, for example, to see if we're selling more premium than house brands,” King said. “But we're definitely seeing more of a shift to filling the pantry.”

For a while, consumers were buying just what they needed to get by from week to week, he said. But since members introduced 10-for-$10 programs, “people seem to be buying 10 of an item, which indicates they're restocking the entire pantry.”

Asked about trading down from restaurants, King said, “We've read that fancy restaurants are down in volume, while mid-range restaurants are still doing good volume, but we haven't seen that affecting our business.”

However, he said he has seen an increase in the number of people shifting to club stores, dollar stores or big-lot stores.

“We've seen some increases in traffic flow at the stores, but it's not very heavy, and we're still working on improving sales by promoting products in multiples — to get people to buy for stock-up rather than fill-ins.”

King said Associated has seen some price reductions, which he called “a slowdown in inflation, though I'm not sure if it's deflation. So, we've lowered our retails in some categories, which means we have to sell more product to keep sales up when prices go down.”

He said that although there is a lot of real estate property available as a result of the downturn, “the price of money is a deterrent.” The real estate people are getting very aggressive on selling property, and the banks are willing to loan money, but the terms for short-term loans are still very tough because the banks are worried about whether interest rates will go up or not, and they are reluctant to loan money at low interest when they may be able to get higher rates in the future.”

Asked how long the downturn will last, King said, “We're hoping to see some lift by the holidays at the end of the year, as people become more used to eating or entertaining at home. That will be a good start for a recovery, but we don't see that recovery coming till five or six months into next year.”

Neil Golub, chief executive officer, Price Chopper Supermarkets, Schenectady, N.Y., said he is optimistic about his company's business for the rest of the year.

“WE ARE VERY much encouraged that things appear to be stabilized, and they are not going backwards,” he said. “We would like to see an improvement in tonnage, because this was impacted as most customers bought slightly less. We see that in customer order size.

“But customer counts are still strong, and business is still strong, and we think toward the latter half of the year we should move at least a little in the right direction.”

He said the company has seen some success with various promotions in the weak economy, and has also benefited from a strong private-label program.

“We have had good response on private label,” Golub said. “As has been said, private label has become the new dinner guest and so we are benefiting from that.”

He said the company, like may others in the industry, experienced negative “real” growth in 2008, after factoring out inflation.

“Inflation always buoys sales up,” he said. “I think everyone had some negative real growth, but inflation has allowed our business to grow in terms of dollars. This year inflation has slowed down, so we'll see how that impacts us.”

The cost of fuel “is going up in chunks” in upstate New York and New England, Golub said, although he noted that the company recently rolled out its Fuel Advantage offer in the Albany area to help mitigate those costs for customers.

“We think will that be very helpful in driving our business,” he said.

Roger Collins, CEO of Harps Foods, Springdale, Ark., said he doesn't expect the economy will recover in the short term.

“I THINK it's going to take awhile for this to turn around,” he said. “I wouldn't look for it in the next six months.”

Shoppers are looking for more emphasis on price, which is a disadvantage when battling Wal-Mart, Collins admitted.

“People are looking for specials, so customers need for you to say something about price and put things before their eyes that are special deals.

“Based on our observations of area restaurants, we think people are eating out less and that's helped us. Our strategy is to try to compete on the basis of quality and service, and our primary competitor is Wal-Mart. Their strategy of trying to provide the lowest price is a good strategy to have for this economy, so that may be hurting us a little bit, but overall our sales are up.”

Collins said keys to recovery will be freer credit lines and better lending terms. This will help retailers more than a reduction in the cost of goods and services, he said.

“We opened a new store in January and another in February, and most of the contracting was done a year ago, so we didn't really see much benefit [from lower costs]. If we were to do something now we would see that,” he said.

“One of the detriments of the economy turning around is the ability to get credit. Lenders are charging more money, and structures on loan deals are not as attractive as they used to be. Loosening up credit and extending better terms will be a key to turning the economy around.”

Mark Oerum of HOWS Markets — a group of five stores, four of which are in moderately upscale areas — said his company is experiencing the same kind of economic impact as others “across the board at all stores, with sales flat at best, though it seems things hit bottom for us in mid- to late March and have leveled off since then.”

“PEOPLE ARE watching everything,” he said. “We're seeing less sales of beef and more of poultry. We've heated up our ads because people look at ads carefully. We recently sold tilapia at $1.99 a pound, down from a regular $5.99, and we sold cases of it because people are looking for bargains to get a few more meals per dollar.”

HOWS also switched to everyday low pricing on produce, one of its signature categories, in April after testing it at one store for six months, “and that has helped,” Oerum said. “So our tonnage is up but volume is lower, but it attracts people to the stores.”

Oerum said it's hard to tell what impact a drop in restaurant patronage may be having on his business “because we see the restaurants getting more aggressive in terms of running coupons and offers like two-for-one meals, and I think they're regaining some of that business by lowering their prices, just as we have done.”

He said he believes rising gas prices are not having much impact on his business as yet. Gas prices in Southern California are running around $3 a gallon, “and I think people accept increases at that level, but if it goes up toward $4 again, we could feel a negative impact,” Oerum said.

The drop in price inflation “means a little lower margins as we try to sell more — it's become more of a penny-profit business.

“We try to reduce prices where we can, and we put a sign with a big yellow arrow with the price in red to call attention to those items with reduced prices, and that's been effective. But I believe people are shopping at more than one store these days, though that could change if gas goes up to $4. But ad shoppers are probably going to three or four stores in their neighborhood and buying four or five of the best deals at each one, more so than before.”

HOWS carries a handful of items — including water and vitamins — under its own name, “and the water is a great seller,” Oerum said. Its primary private-label lines are Springfield and Western Family, from its wholesaler, Unified Grocers, Los Angeles, along with Unified's new organic line, Natural Directions, “which is doing very well,” he said.

Oerum also said he's seen some declines in the costs of construction and maintenance and repair.

He said he's hoping to see an improvement in the economy by early next year, “but I think we'll see higher unemployment through the rest of this year, with more people losing their homes as layoffs increase.”

Tom Jamieson of Jamieson Family Foods, which operates 10 Shop 'n Save Stores and 10 Save-A-Lots, said he expects a long, slow economic recovery that may not start until next year.

“WE ARE IN THIS for the long haul, and we haven't bottomed out yet,” he said. “In my own opinion, I think we have at least 18 months to go.

“I think maybe by the end of the year, things will bottom out and then things will start to straighten out a little bit, in terms of the economy. It will be shaky to the end of the year, followed by a slow recovery, and I guess that's good for supermarkets.”

He said he's definitely noticed a slowdown in mid-priced and upscale restaurants in his trading area, and he believes that is translating to better supermarket sales. Although he said he hasn't noticed much lift in prepared-food sales at his stores, he believes shoppers are doing more “scratch” cooking from home.

Shoppers are also very focused on price, he pointed out.

“They are definitely sale-driven,” Jamieson said. “We are seeing huge uplifts with two-day sales and other things we have done in the past few months. It spurs their interest.”

He also pointed out that his Save-A-Lot stores have seen bigger increases in sales and customer counts than his Shop 'n Save outlets.

“Save-A-Lot seems to be driving some business,” he said. “We have two locations located right behind an Aldi, and we are seeing nice increases in sales and in customer count in both of those stores.”

He also pointed out that construction costs have gone down in the last year. His company has two new stores under construction, one of each banner.

“I think all the construction people are looking for work,” Jamieson said. “We are seeing the bid prices way down from what they were a year or two ago. If you have some money saved, it would probably be a good time for independent retailers to upgrade or build new stores.”

The only problem, he pointed out, is that the cost of getting a loan is up about 2%.

Dennis Butler, chief operating officer of Laurel Grocery, Loudon, Ky., said the recession has been a “mixed bag” for independent retailers it services. He said the economy has deteriorated in recent months, and he doesn't foresee a dramatic recovery in the short term.

“FOR THE MOST part, the recession has deepened over the past two or three months to the point where consumer spending is very tight, even in grocery. I do see it as possibly loosening some as we get further into summer but I don't put a whole lot of stock in the idea we're going to get real well any time soon.”

Competition has heated up as the economy has soured, Butler noted. It has forced retailers to sharpen prices and look at their own expenses.

“We are seeing some benefit from the ‘eating out less’ trend, but at the same time there is trading down from branded product to private label and even to packer-label products in the grocery store,” he said.

“When you look at Wal-Mart's reports, it shows there has been some [shopper] movement there,” Butler said. “I don't know that it's necessarily coming out of our stores. Our stores are just like anyone else's — a mixed bag. Some are reporting stronger sales and others that are struggling to maintain vs. last year. Overall, I think the independent retailer is doing a reasonably good job managing through this crisis through promotional activity, and by taking care of business with regard to costs and the expense lines.”

Butler said the recession has given some retailers the opportunity to discuss rent relief with their landlords, and detects a trend toward retailers using the soft economy as a chance to seek ways to better control expenses.

“We've seen some loosening in regard to renegotiating leases,” he said. “There's some room to talk there now. There is also room to push for higher productivity with employees. We see our independent retailers striving for more productive processes. We have retailers looking at new systems, showing us how to save electricity, because beyond the economy, there is another set of challenges. So as things get well, we'll have challenges out there on the expense line.

“There are a lot of companies out there looking for business now. In the equipment business or in the construction fields, they are looking for business and willing to sharpen their pencils for that.”

Rich Niemann Jr., CEO, Niemann Foods, Quincy, Ill., said he thinks consumer behavior that is changing as a result of the economy will have more staying power than the economy itself.

“I REALLY THINK the recession is going to be hanging around for the rest of the year. Even if there are some leading economic indicators that start to show some improvement, I just think that it's going to stick with people.

“This particular recession is changing some behaviors,” he said. “We first saw some real behavioral changes when gas went from $2 to $4 and trips went down. And although gas has come back from $4 to $2, that trip behavior hasn't changed as much. I think that's because people learned how to live differently and they were saving some money by not making so many shopping trips. Some of that is not being exposed to the temptation.

“People are learning how to cook again, and learning to conserve, and learning to buy what they need instead of buying what they want. How many years did we see where people only bought what they wanted as a rule?”

Job losses are a particular concern in the Midwest, Niemann said.

“The Midwest didn't get hit as much with the housing problems that other areas of the country did, but the continued loss of jobs is really starting to take hold,” he noted. “The feeder companies of the auto industry are dotted around here, and those job losses are starting to show up now.”

The food industry is resilient, but times are tough when discretionary spending is down, Niemann said.

“We're in a pretty good business to be in tough times. That doesn't make it easy, but only part of our business is discretionary. And making a discretionary sale is tough. Overall, it's somewhat neutral to a little negative.”

Building materials have come down in price, and contractors are hungry for work, providing an advantage to operators with a strong cash position or the ability to borrow, Niemann said.

“Things are a tremendous bargain,” he said. “Anything from buying fleet cars to doing different kids of repairs. Most contractors are hungry. Concrete didn't get cheap, but a lot of other materials are cheaper. Doing a project — a renovation, a new store or a repair — can be done because contractors are hungry, and are working hard for every job.”

In commercial real estate, there are some opportunities as well, he said.

“We went into this recession thinking there would be an advantage to anyone with cash or the ability to borrow,” Niemann said. “We feel like we were fairly prepared and so we're able to take advantage of those opportunities.”

He is concerned about changes under way in Washington, including the aftereffects of the federal stimulus bill and proposed changes that could make energy more expensive.

“The things that the government is doing are frightening me to death,” he said. “We're spending money we don't have, and I think it's going to have to have an inflationary effect, maybe hyper-inflation, and if that's the case the way to control that is higher interest rates, which hurts everyone and we go into another recession trying to correct this one.”

Steve Junqueiro, president and COO of Save Mart Supermarkets, Modesto, Calif., said he expects to see the same shopping patterns of the first half continue through the rest of the year.

“THE SENSITIVITY of the economy has changed the psyche of consumers more than anything since the Depression,” he told SN.

“The panic is over, but people have moved to new ways of decision-making and managing through the economic crisis. So I anticipate we'll see some of the same trends we've seen, including the shift in categories purchased toward more private label and a real search for value. And it's incumbent on us to provide value to support their needs more than ever.

“Toward that end, Save Mart has been aggressively working to provide value with our own brands. Seldom do we get the opportunity where the consumer tells us so clearly what she wants, so we're emphasizing the value offered by our brands; we're passing on values from suppliers; and we're concentrating on our value image at store level and in the media.”

The drop in restaurant business “indicates how people are thinking and the decision-making process of how to spend the money best for the long term,” he said. “People will continue to be very cautious with their discretionary spending for the long term.”

Junqueiro said gas prices always impact consumer behavior. “People get used to gas prices within certain levels, and if it gets too much higher than that, it has to have an impact because that accounts for such a big chunk of their disposable income. Prices have eased a bit for a while, but now we're seeing the price moving up again to more than $3 a gallon, and each time it edges up, it affects us all.”

Regarding the impact of inflation on shelf prices, Junqueiro said, “We've really made a concerted effort over the last year to work with our suppliers as much as possible to develop real partnerships to ensure that we provide value. That effort has been effective, and if we can pass along a value, we do.”

Private label has moved up to 20% of sales at Save Mart, “with especially strong growth over the last 18 months, and it is continuing to grow. Our goal is to grow by 2.5% a year, and we believe we are going to exceed that goal this year.”

Junqueiro said he has seen costs coming down, particularly in the area of acquisition costs for goods and services.

Asked when he thinks the downturn will end, he said, “It will take a long time to come out of this. We expect to start seeing some improvement toward the end of this year, and we're looking for a very eventful fourth quarter, where we're able to provide great value through the holidays.

“As for the economy, things seem to be flattening out and we're seeing some rays of sunshine that indicate that, by the first quarter of 2010, we will start seeing some positive movement — but it will take awhile.”

Reporting by ELLIOT ZWIEBACH, JON SPRINGER and MARK HAMSTRA