Retailers Worry About Protracted Recession

MARK HAMSTRA

Supermarket operators are bracing for a prolonged economic slowdown that will put pressure on their profitability, according to a survey of food retailers conducted last month by SN.

Recovery from the economic recession won't come until at least next year, respondents said. About 84% of those surveyed said they expect the recession to extend to at least 2010, and about a third of those — 23.7% of total respondents — are even more pessimistic and said they expect that economic recovery “is years away.”

Most of them also said they expect that the weak economy will have a negative impact on their net income, as consumers continue their trading down behaviors and shop in alternative venues.

In fact, 43.3% of respondents said they expect the economy “will hurt profitability significantly in 2009,” and another 40.2% said they expect that the economy will have a “slight negative impact” on profitability. Another 7.2% said the economy would have no impact on their bottom lines, and 9.3% said their profits would actually improve in a weak economy this year.

“I think there's a definite fear factor that's driving dramatic shifts in consumer behavior,” said Frank Badillo, senior economist and global program manager, TNS Retail Forward, Columbus, Ohio. “Shoppers have not seen this kind of economic turmoil in their lifetimes in many cases, and it is prompting some dramatic changes.”

Retailers appear to be recognizing this and taking steps to stem the erosion of sales and profits, and observers told SN there are many ways to do so, including expanding private-label offerings, more carefully communicating value messages and making better use of loyalty cards.

Jon Hauptman, partner in consulting firm Willard Bishop, Barrington, Ill., said promotional retailers in particular have to be aware that consumers have become much more discerning when it comes to their offers.

“In this economy, they are not swayed by smoke and mirrors,” he said. “It's not enough just to have a lot of sale tags — consumers are scrutinizing the values available on promotional tags much more closely than they have in the past. And a retailer that is offering modest or inconsequential discounts will find that their tags will be overlooked by shoppers, because they are just not meaningful to them.

“Promotionally oriented supermarkets need to be sure that every single one of their promotional offers is relevant and compelling,” he said. “The quality of promotion is going to matter a lot more than quantity of promotion in 2009. A fewer number of promotions on the right items will go a lot further.”

Feeling the Pinch

Although supermarkets have not been as acutely affected by the economic slowdown as other retail channels, they are certainly feeling the pinch. Inflation is helping the channel keep sales growth positive, but just barely — December sales adjusted for inflation were down about 5%, according to U.S. Department of Commerce figures, Badillo of Retail Forward pointed out.

“What will be interesting will be to see how much demand falls off, even as inflation recedes,” he said. “Food and drug retailers could see some flat if not negative growth, and that could put them in a much more difficult situation here in '09.”

He described the December fall-off in adjusted sales as “probably one of the worst months since the 1990s, and maybe since the early 1980s, in terms of performance.”

Shilpa Rosenberry, senior consultant, WSL Strategic Retail, New York, said she thinks the severity and duration of the current economic slowdown has created long-lasting changes in the way consumers approach shopping.

“I think the big message that we are seeing in the shopper mindset and behavior is that this isn't just a momentary shopping crisis, where once the economy rebounds, things will go back to the way they were,” she told SN. “I think the attitudes and behaviors shoppers have adopted over the last few years have become really entrenched.

“In particular, the idea of the ‘smarter shopper’ is here to stay,” she said. “She is evaluating what's worth it and what's not worth it, she is trading down in categories, trading down brands, avoiding some stores for fear of overspending, and those kinds of behaviors are not going away.”

According to WSL's recent “How America Shops in Crisis” report, groceries are the No. 1 area where shoppers trade down to less expensive brands, with 42% of consumers saying they were trading down in the grocery store.

Rosenberry described the behavior of shoppers today as being more “in control.” Consumers are evaluating store circulars more closely, clipping coupons more often and stocking up on products that are on sale.

“We are seeing a return of behaviors some thought were long gone,” she said. “Those are 1950s behaviors that we are seeing again now.”

Some of these behaviors that have come back into favor, according to WSL's study:

In addition, the WSL research found that shoppers are increasingly cutting back on certain kinds of foods in the store. For example, 55% of shoppers said they were cutting back on packaged convenience foods in 2008, compared with 36% who said they were doing so in 2007. In addition, 42% of shoppers said they were cutting back on purchases of non-alcoholic beverages in 2008, an increase of 17% over the 25% who said they were cutting back on those purchases in the preceding year.

As the success of some discounters like dollar stores and warehouse clubs have indicated, some shoppers also have shifted out of the supermarket channel. WSL found that 26% of consumers said they had moved out of supermarkets into lower-priced channels for some shopping, and 11% said they had traded into supermarkets from other channels, primarily specialty operators like Whole Foods, Rosenberry said.

Badillo of Retail Forward said although shoppers may return to previous patterns once the economy improves, there are some indications that behaviors have been modified for the longer term. Consumers themselves are saying as much, he pointed out.

In examining the Conference Board's analysis of consumer confidence, for example, the sharp decline in consumers' assessment of their “present situation” is typical for a recession, but the most recent consumer confidence analysis also shows a sharp decline in the “expectations” portion of the index.

“That has caused a pretty dramatic shift in behavior,” Badillo said. “In past recessions, people were really down in the short term, but in the long term, they believed they were going to be OK. This time people are not so sure. People are starting to change their behavior for the long term as well, because they are starting to see that this is going to last a long time.”

He said once consumers' expectations begin to turn positive, some of their economizing behaviors will return to more normal patterns, but others could be more enduring.

“I don't think these behavior shifts will be permanent for all households,” he said. “I think typically you see shopper behavior begin to return to more normal behavior as the economy begins to rebound. Some of these behaviors will be long-lasting, but not all.”

Last fall — before the worst of 2008's economic news hit — Retail Forward analyzed the various consumer behaviors triggered by the economic slowdown, and found that consumers said some economizing behaviors were more likely to persist than others.

The types of behaviors that consumers themselves said were least likely to persist were so-called “limiting behaviors,” in which shoppers put off buying certain items, and instead purchase only the essentials.

The behaviors that shoppers said were more likely to persist were “deal-seeking” behaviors, like taking advantage of sales, using more coupons, comparing prices more carefully and shopping at discount stores.

The third type of behavior, trading down to less expensive versions of products and switching to cheaper brands or store brands, was not as likely to persist as other deal-seeking behaviors.

Opportunities for Supermarkets

Hauptman of Willard Bishop said supermarkets need to focus on retaining customers by delivering a strong, comprehensive value message.

“We're going to continue to see shoppers trading down, not only to alternative value-oriented formats, but also to private label, and increasingly to second-tier, or value-oriented lines, that have an even lower price,” he said.

He said he believes that retailers will be able to sustain sales of their private labels in the long term after trial of those lines increases in a weak economy.

“My expectation is that the experience of many shoppers will be that these items are an agreeable alternative, in certain categories, and even as the economy improves, the memory of shopping in these challenging times will make finding value and shopping for value an even higher priority than it was just a year or so ago when the Dow [Jones stock index] was at an all-time high.”

He said he believes many consumers will discover an affinity for value-based shopping.

“Shoppers will find that's a very positive behavior that they will want to continue even after the economy improves,” he said.

That echoes remarks made by Lee Scott, the outgoing chief executive at Wal-Mart Stores, Bentonville, Ark., at the National Retail Federation's Big Show in New York last month. Scott said he believes that consumers have embraced thrift as an important part of their shopping behavior.

“Everyone has given up something, and they are talking about how good they felt about doing that,” Scott said. “I am not sure there is going to be an immediate desire to return to consumption and debt. There are a lot of young people who have learned what it's like living on the edge when the bad times come.

“They may return to that eventually, but right now I think their appetite is more towards living a little bit differently.”

Hauptman said traditional supermarket operators should be acting swiftly to prevent shoppers from leaving the channel in the first place.

“As supermarkets lose shoppers, I think they will find it difficult, but not impossible, to bring them back,” he said. “This is really why it is critically important for supermarkets to focus strongly on highlighting all of the great values they have available to slow the leakage of shoppers to alternative formats, because it is much more difficult to bring them back once they are gone.

“I don't think alternative formats will keep all of the spending that they are gaining today once the economy improves, but I do think it is highly likely they will retain some of the spending, which comes directly out of supermarket operators' pockets,” he added.

The main focus of supermarket operators should be on making sure they have sharp prices on the key items that are most important to the shoppers in their market, he said.

In addition, supermarkets should expand their selection and highlight the availability of both national-brand equivalent private-label and second-tier private-label products to give those shoppers who are looking to trade down an alternative.

Communicating value through effective displays and in-store activities is also important, he explained.

“Supermarkets need to effectively merchandise the great values that they have on items throughout the store, on endcaps and on other displays, and highlight the savings that are available by purchasing off of endcaps or special displays,” he said. “They need to educate shoppers about all of the ways that they can save within the store — all of the ways that they can ‘work the system’ and save money in that store, and really not need to go to an alternative format to find savings and great values.”

Rosenberry of WSL agreed that supermarkets have a big opportunity to showcase their store brands and stand to gain some long-term loyalty by doing so.

“Once shoppers realize they are getting the same quality and variety, they might not be as likely to jump back to the national brand later,” she said. “I think that retailers that are putting more strength around their store brands, for example Safeway, have been doing the smart thing — getting the shoppers in and trialing those products.”

In addition, she said supermarkets could be doing more with their loyalty-card programs. She cited British retailer Tesco as an example of a supermarket operator that makes innovative use of its loyalty cards, although that company's U.S.-based chain, Fresh & Easy, does not offer a loyalty program.

“They have been very good at letting consumers use those points for everything from groceries to vacations,” Rosenberry said. “Shoppers are getting increasingly frustrated with airline miles and credit-card points, with restrictions on when they can use them and so forth, and I think that's an opportunity for supermarkets.”

Price Messaging

According to SN's survey, most respondents this year said they intend to engage in more price-focused advertising in 2009. More than a third — 37.1% — said they planned to engage in significantly more price-focused advertising, and 42.3% said they planned to increase their price-focused ads somewhat.

That compares with expectations from the SN survey of a year ago, in which only 6.8% said they planned to increase their price-focused advertising significantly during 2008.

Although supermarkets have been under pressure from consumers to lower their prices, retailers said they expect most of their relief to come this year in the form of promotional dollars from manufacturers, as opposed to lower list prices. Only 6.2% of retailers said they expect vendors to lower prices as inflation subsides, while 64.9% said they see vendors offering more promotional dollars instead of lowering prices.

Most retailers are projecting food-cost inflation will rise between 2% and 5% in 2009, although about a quarter — 27.8% — project that inflation will be up less than 2%. About 10% said they expect inflation to be more than 5%.

Overall, retailers are expecting smaller baskets in 2009. Sixty-eight percent of retailers said they expect smaller baskets, although more than half of those said they expect customer counts to increase in 2009. Only 15.5% said they expect increases in both customer counts and basket sizes, and 16.5% said they expect larger basket sizes but decreases in customer counts.

Private-label sales penetration was up more than 2% for more than half of all retailers in 2008, and 61.9% of respondents said they expect that level again in 2009.

One of the economizing behaviors that supermarkets appear to be reaping the benefits from is the trend toward less dining out in restaurants.

Of the retailers polled by SN, 73.2% said they believe their customers “have cut back significantly” on dining out. That compared with the SN survey from a year ago in which only 38.6% of retailers said their customers had cut back significantly on dining out.

How much did your private-label penetration change in 2008 as a percent of total sales dollars?

How do you expect private-label penetration to change in 2009, in terms of dollar sales?

The charts and tables on these pages were created based on a survey of retailers conducted by SN from Jan. 15-29. The surveys were conducted via email to subscribers to SN's daily electronic newsletter. The data include results from 97 retailer respondents.