Retailers See Holiday Strength in At-Home Dining

SN STAFF

Consumers might be feeling pinched this holiday season when it comes to gift-giving, but supermarket retailers are expecting business to be buoyant as at-home dining becomes more attractive and rising gas prices keep shoppers close to home.

“There will be a positive trend toward eating at home, especially when it comes to the holidays,” said Bob Kirch, vice president and chief operating officer, Laurel Grocery, London, Ky. “We anticipate there will be less travel, and I think that means more traditional eating than in prior years.”

Food retailers told SN they anticipate competitive pricing for groceries this season, however, as some consumers, especially those with lower incomes, pay more attention to their budgets amid uncertain economic conditions and rising fuel prices.

“I think people are going to be a little more cautious this season,” said Steve Smith, chief executive officer, K-VA-T Food Stores, Abingdon, Va. “Gas prices really take a chunk out of people's disposable incomes.”

Retailers said they expect rising gas prices to cause consumers to cut back on the number of shopping trips they make and to buy more on each trip.

“Consumers this season will be even more conservative than they were last year because of the economic climate,” said Mike Proulx, president and COO, Bashas', Chandler, Ariz. “Gas prices in Arizona, as elsewhere, are climbing again, and we're seeing basket sizes going up a little, and in general, trips to the store are coming down.”

Several surveys issued in recent weeks project a slowdown in consumer spending at general-merchandise retailers in the months ahead compared with last year, in what is traditionally the busiest time of year for such operators.

TNS Retail Forward, a Columbus, Ohio-based consulting firm, said it expects general-merchandise and catalog retailers to post fourth-quarter sales gains of 3.3% in 2007, down from 4.6% a year ago and 7.4% in 2005. It would be the slowest rate of growth since 2002.

“The credit crunch will lead to a consumer crunch by the holidays,” said Frank Badillo, senior economist at TNS Retail Forward, in a recent report. “This will extend the weakness in retail sales beyond home improvement stores to other retail channels.”

He added that “the risks are biased in favor of still weaker growth, particularly as the housing market deteriorates further.”

Low-income households will be the hardest hit and most likely to cut back on their spending, he said. Although some higher-income households could start to rein in spending as well, “upmarket spending should remain relatively more buoyant,” he added.

The National Retail Federation, Washington, also said it expects the 2007 holiday season to be the slowest for retailers since 2002, with anticipated growth of 4%. The 10-year average rate of growth has been 4.8%, according to NRF's annual research.

“Retailers are in for a somewhat challenging holiday season as consumers are faced with numerous economic obstacles,” said Rosalind Wells, NRF's chief economist. “With the weak housing market and current credit crunch, consumers will be forced to be more prudent with their holiday spending.”

She agreed with Badillo of TNS Retail Forward that a slowdown in consumer spending would be reflected most prominently among low- and middle-income consumers. This would most likely have its biggest impact on discount stores and some department stores, she said, while luxury retailers will be somewhat immune to the downturn.

Industry observers said supermarkets are well positioned to withstand the economic pressures that are impacting other classes of retail, however.

“If anything, this could be a very positive holiday season for supermarket retailers, for a couple of reasons,” said Jon Hauptman, partner at consulting firm Willard Bishop, Barrington, Ill. One is that, due to the economy, consumers are eating outside of the home less often, and can be expected to focus more of their food spending on their grocery store. Additionally, supermarkets are doing a better job than ever at bringing in holiday merchandise to sell and establishing themselves as a destination for holiday goods and gift items, many of which they have sourced directly from all around the world. Consequently, I wouldn't expect supermarkets to be as challenged during the holiday season as other forms of retail, which are going to be much more vulnerable to the current economic conditions.”

While the NRF cautioned that department stores could be vulnerable to “trading down” by hard-hit consumers who opt for less expensive gifts this year, supermarkets shouldn't experience much of that phenomenon, Hauptman said.

“I think one of the last places shoppers will cut back is in what they are going to put on the family's holiday table,” he said. “They may cut back on eating in restaurants, and they may cut back on the types of gifts they give during the holidays. However, I would expect shoppers to continue to create memorable holiday meals for their families.”

He said consumers will still be looking for the best deals when they are buying the ingredients for their holiday meals, however.

“Supermarkets that can position themselves as offering strong values will be advantaged during the holidays, and those values could be defined as sale prices, attractive store-brand options, and high-quality perishables at reasonable and competitive prices,” he said.

Less Dining Out

Supermarket retailers' expectations of a strong holiday season are backed up by some research that indicates declines in consumer spending at restaurants.

A report issued last week by RBC Capital Markets, New York, projected that consumers would continue to spend fewer of their food dollars at restaurants through the remainder of the fourth quarter.

According to RBC Capital's research, same-store sales growth at publicly traded restaurant operators slowed to 1.4% in October, from an average gain of 2.5% through the rest of 2007. The company projected that the slowdown could continue in November and beyond, based on its own consumer survey indicating a marked shift away from dining out.

More than half — 59% — of consumers said they planned to eat out less during the next three months, with the most pessimistic consumer groups being young adults and those with household incomes under $50,000.

However, the survey also found that consumers were spending less on prepared meals from supermarkets — an offering some retailers said they expected to do well this season. According to the RBC survey, 51% of shoppers surveyed said they were buying prepared foods from supermarkets less often than they were six months ago, while 26% said their purchase levels remained about the same and 21% said they were buying more prepared foods from grocery retailers than they were six months ago.

Of those who are buying more prepared foods at supermarkets, 39% said they were doing so because of “convenience,” and another 38% said they were doing so because they were eating out less often. Eighteen percent of those who are buying more prepared foods at supermarkets said they were doing so because the quality and selection had improved.

RETAILERS POSITIONED WELL

Retailers polled by SN during the last two weeks said they were positioned well for the holiday season.

Dick King, vice president, trade relations, Associated Food Stores, Salt Lake City, said his company anticipates sales increases of 6% to 8% this holiday season because it has refined some of the programs it's run in the past.

For example, the company is putting more emphasis at its corporate retail stores on floral merchandising — “not just cut flowers and bouquets, but also centerpiece arrangements,” he said. “And since expanding and revamping the produce sections in our stores, including extending produce into the lobby area, we expect those sales to pick up.”

The stores also expect to do more sales than last year in holiday meals, with full turkey dinners priced at $59-$79, King said. “We've done a better job in that area each year, and we're advertising it more.”

One of the successful programs Associated repeated this year at its retail stores was hosting open houses at different banners during the first two weekends of November. “When we get the stores ready for the holidays, with all the holiday decor and merchandising, we invite people to come in and look around and sample some items, and we bring in local choirs from schools or churches to sing Christmas carols.

“It gives customers a chance to see what we have available, so even if they don't buy anything during the open house, they may remember something they saw and come back later,” King said. “It's hard to measure what the open houses add to sales, but we estimate about 2%.”

Another holiday-related event Associated held this year for the first time was “Support the Troops,” a fund-raiser in which Macey's, one of its corporate chains, joined with local soldiers' families and loved ones to assemble bags of groceries that were purchased by customers and will be donated to the troops and their families.

“That helps with our community involvement — it lets our people know we care about the troops — and it also increases sales,” King said.

He said he hasn't seen any consumer resistance to spending because of gas prices in his region.

He said this year Associated's corporate stores will be more price-competitive, “because we have to keep up with the major chains.” However, consumers are still willing to pay for quality, he pointed out. Toward that end, Associated's retail stores have added premium fruit pies this year that sell for $9.99 and $10.99. To draw attention to the item, Associated's merchandisers came up with the name “cow pies” for the item, “and they sold well during the open houses,” King said.

Mark Oerum, partner in HOWS Markets, a five-store operator based in Pasadena, Calif., said he expects holiday sales to be slightly above what they were a year ago.

He said he's seen some indication that consumers are trading down in the cuts of meat they have been buying during the last couple of months.

“I get the feeling from consumers that some basic cuts are looking more attractive. For example, we're seeing a pickup in proteins like chicken, ground beef and chuck steak. So we're changing our ad strategy and putting more of those items in our weekly ads. Instead of featuring Spencer steaks two times a month, now we have it once a month and go with more basics the rest of the time.”

HOWS sells only Prime and Choice meats, which it will continue to do, he said, and it still plans to feature prime rib for the holidays, along with fresh turkeys.

In fact, it will feature prime rib in its holiday ads. But rather than using cable TV for the holiday season, it plans to use billboards around its stores, “which are less expensive,” he said. HOWS plans to run about 25 billboards, with the majority around its newest store in North Hollywood, Calif., and a lesser number around each of its other stores, Oerum said.

Each billboard will feature the same single item: prime rib. “We'll make our statement with that item,” he said.

LOOKING FOR BARGAINS

Proulx of Bashas' said that with housing being a major industry in Arizona, “the slowdown in housing has folks in that market watching their wallets and purses, and I predict they will be slower to open those wallets and purses during the holidays. I think more people will be looking for bargains and ways to stretch their dollars, especially when it comes to food for the holiday table. So we anticipate a softer holiday season this year.”

Bashas' is becoming more aggressive in its price-and-value statement to accommodate hard-pressed shoppers, he said.

“In our market, we're very sensitive to price, with all the competition so aggressive in the pricing arena,” he said. “Pricing seems more heated this year, with holiday promotions starting earlier than usual. Things usually start to heat up the week before Thanksgiving, but this year they started heating up at the beginning of November.”

Bashas' is already in the thick of its turkey program, he said, “and we'll stay right there with the market.”

Despite the economic slowdown, Proulx said he expects prepared holiday meals and party trays to be a big part of sales. “It may slow down a bit [from prior years], but I don't foresee a huge drop. The fact consumers are busier than ever, with two family members working, makes prepared dinners an important part of our business, and we think a lot of consumers will choose that option. Business won't spike, but it should be a steady business.”

Phil Gentile, senior vice president, purchasing, for K.V. Mart, a chain of 22 independents serving low- to middle-income Hispanic shoppers in Southern California, said he expects consumer spending to pick up because of rising fuel prices.

“What we find in our area is that sales go up when gas prices rise, because people drive less, they eat out less and eat at home more,” he said. “And Hispanic shoppers tend to spend more of their income on food anyway.”

Because consumer spending will be up, Gentile said he expects holiday sales this year will outpace last year's sales.

Although increasing fuel prices are forcing prices upward on more grocery items, “we haven't seen any huge impact on buying yet, primarily because of our reluctance to raise prices, because while the chains have raised prices, the major independents we compete with have not.”

Gentile said he expects pricing to be particularly competitive in the areas where his stores operate, “because while the chains are starting to move prices up to reflect inflation, independents like us are fighting for more business from lower-income Hispanics, and a lot of us are starting to get more aggressive.”

For K.V. Mart, that meant putting out holiday displays earlier than usual — before Halloween, Gentile said — because of competitive pressures. “That gave us a jump, and our business was up. Most independents are usually a little behind the chains, so we decided to get out there with them this year rather than wait for the other independents.”

K.V. Mart does not anti-cipate any changes in its holiday promotions, Gentile said. For the third year, it will feature a “Sit with Santa” program — where children get their photo taken with Santa Claus for free — at its stores on the weekend before Christmas,

“Having that program the week before Christmas, when things are traditionally slow, is usually reflected in a pickup in business in the days right before the holiday,” he said.

Because K.V. Mart's target audience is Hispanics, the bulk of holiday items is more traditionally Hispanic than American, Gentile said, including maseca flour, mole, hominy, sliced jalapenos and tamale ingredients.

Kirch of Laurel Grocery, which distributes to 500 independently owned stores in eight states, said he thinks “people will be more conscious of how they spend their money so they get the most for what they have.”

“It's definitely going to be price-competitive,” he said. “I think what will determine where the customer buys their holiday meal is how competitive the pricing is on the main items. And I think once they determine the pricing on the main items, they will come and buy the majority of the items they need in one place. They will become a primary shopper. There's no doubt about it, retailers will be under some pressure to keep pricing tight in this environment.”

Kirch said Laurel has a group of 40 stores in an EDLP marketing initiative in which they designate 4,000 EDLP items and run an ad for those items not on EDLP. That's up from 15 stores in the program a year ago.

“That makes them very competitive with the low-price leaders in their markets,” he said. “That is working well for us.

“We're looking forward to a strong year. We feel this is a good opportunity for grocery stores to get back on their games if they have competitive pricing on the right items.”

Smith, of K-VA-T Food Stores, said the biggest factor in his area of the mid-South is the rising cost of gasoline.

“We are in a very modest-income area — a lot of our stores are in small towns and rural areas, and we think consumers are going to be watching their dollars, trying to stretch their dollars,” he said.

The “silver lining” to the high gas prices, however, is that “people might be shopping one store more, and they won't be driving to three or four stores to buy their goods,” he said. “Possibly we will even get a little bit of business from the restaurants, although that's a tough thing to do during the holidays, because people are so busy, and they tend to eat out a little bit more.”

K-VA-T is planning to launch a four-week promotion this Friday tying its 70 fuel centers to consumer spending on store brands. The promotion, which will be advertised on radio and TV, gives consumers $1 off at the fuel pumps for every $10 they spend on corporate brands during the weeks before Christmas.

“We think corporate brands are going to be a big part of the holiday season, and we think if we tie fuel to that, it's going to have a dual effect,” Smith said.
Reporting by Elliot Zwiebach, Christina Veiders, Jon Springer and Mark Hamstra