Value Judgment

MATTHEW ENIS

It's been a difficult year, and at this point it looks like the economy could get much worse before it gets better. However, supermarkets are in the business of selling a basic necessity, and thus will remain in an enviable position compared with most other types of retail during a recession.

That's not to say that supermarkets can rest easy. Competition will become ever more intense as shoppers cut their budgets and seek out the best values.

Prepared foods remain a key area of opportunity. Some recent studies have indicated that supermarket prepared-food sales are flattening, but restaurants have had an abysmal year by comparison, with a majority of operators reporting ongoing declines in customer traffic and sales during the past several months, according to the National Restaurant Association's Restaurant Performance Index. Shoppers may be cooking more at home, but convenience still ranks high, and many prepared-food departments offer restaurant quality and the ease of takeout at a much lower cost.

Also, shoppers are looking for new meal ideas. By bundling center-of-the-plate proteins or prepared-food items with side dishes and other ingredients needed to make inexpensive family meals, many retailers are now simultaneously addressing their customers' demand for value while satisfying that search for meal ideas.

Locally grown and raised foods also appear poised for continued growth. As more retailers have begun emphasizing their local offerings, some independents and co-ops have begun distinguishing themselves further by actually growing some of their own crops or developing tiered categories for their local items.

Regardless, as the economic outlook darkens, it's important for supermarkets to anticipate the challenges that their shoppers will face, and to proactively develop solutions that will help them make it through a difficult time.

INITIATIVE 1:
Continue Focusing on Prepared Foods

Even as the economy darkens, this could be meal/prepared-food departments' time to shine, with just a little more attention. Ramped-up merchandising and marketing, and a focus on value, could be key, sources said.

“I think the outlook for ready-to-heat and ready-to-eat meals in 2009 can be very strong for supermarkets, if they position themselves as a value alternative to eating out as opposed to a more expensive alternative to preparing it yourself,” said Neil Stern, senior partner, McMillan Doolittle, Chicago.

Terry Roberts, founder and president of Merchandising By Design/The Design Associates, Carrollton, Texas, agreed. “The decrease in restaurant business is a boon to supermarket prepared foods.”

Roberts said she has seen retailers expanding their prepared programs just in the last few months. “The Costco near me in Dallas has put in at least two to three times the refrigerated food it had last year. Lunds/Byerly's, too, has expanded its programs.”

Stauffers of Kissel Hill, Lititz, Pa., has tripled space for prepared foods in a 78,000-square-foot store it just opened. That's not just wishful thinking. Its prepared-food departments had already chalked up a 15% year-to-date gain in same-store sales before the new store's unveiling last month.

Like others who are successful, SKH has paid close attention to the mix it offers. “People are still time-starved, and supermarkets have a variety [of prepared foods] that are cost-effective,” said Mike Huegel, deli-bakery buyer at Stauffers. “With this economy, many of our departments are flat, but we find prepared foods to be on the upswing.”

Roberts, like Huegel, emphasizes the strategy of sticking to what's sought-after, and what turns a decent profit.

“Customers are certainly looking for high quality, but not fancy frou-frou. No ducks, no quail. They want high-quality basics,” she said. “Rotisserie chicken still makes up 50% of supermarket foodservice sales. Such basic and anything that complements them — mashed potatoes, mac and cheese — will do well.”

Another consultant also suggested concentrating on comfort foods.

“I believe in times of challenge, of change, we all seek comfort. And so, comfort foods very well might rise above a consumer's reluctance to purchase prepared meals in favor of foods that have a settling and soothing effect and bring back memories of a calmer time. Mac and cheese, meatloaf (beef or turkey), pot roast, roasted chicken, mashed potatoes and more make a lot of sense in tough times,” said Ira Blumenthal, president of Co-Opportunities, Atlanta.

To succeed, especially in 2009, retailers should be mindful of shrink and deploy labor judiciously, Blumenthal and Roberts pointed out.

“I look at Wegmans as a good example,” Roberts said. “They may have just 15 to 18 platters of amazing food in their chilled case, and a few salads.”

Researchers said retailers often don't give the category its due.

“This [prepared foods in the supermarket] is still a growth area, but retailers need to do some marketing,” said David Lockwood, senior research analyst, at Mintel International, Chicago, a consumer research firm.

“Retailers need to promote what they have. It doesn't have to be extensive. Could be in-store signs, menus or putting things close together in a way that makes sense. A sushi bar next to the oranges and the deli in another aisle doesn't do it.”
— Roseanne Harper

INITIATIVE 2:
Promote Local Food

The popularity of locally grown and raised food will continue to build next year, experts told SN. Many retailers are starting to differentiate themselves from competitors by either expanding their selection of locally grown items, or redoubling their efforts to highlight and promote their selection.

In fact, according to market research firm Packaged Facts, local foods will be a $7 billion-a-year business by 2011, and 73% of consumers think such items important.

There's super local, very local and local products at Alberta Cooperative Grocery in Portland, Ore., a store that touted local products before there was even a buzzword for it. The co-op started highlighting local products when it opened in 2001, but this year it developed new signage to designate the different tiers of local it offers, which are designated as products from within 30 miles, from within 300 miles and from the Pacific Northwest region, said marketing manager Jocelyn Furbush.

Specifying the distance food has traveled is likely to be very appealing to consumers, said Jim Hertel, managing partner, Willard Bishop consulting, Barrington, Ill.

“Without the distance specification, ‘local’ is a pretty vague term,” he said. Further defining the local benefit will be essential, said Hertel, because the closer the proximity, the more the freshness and the taste of produce are implied.

Alberta is also connecting customers to farmers and producers, said Furbush. It does this through the food as well as by highlighting farmers, featuring their photographs and telling their stories, both in the store and in its newsletter.

The co-op carries local deli and bakery items, sausages, shelf-stable foods like pickles, and more. But the program really comes alive through samplings, with at least one held per week. “We definitely see an increase in sales when people can taste and smell the food, and talk to the people who make or grow it,” said Furbush.

As a next step, the co-op will soon begin hosting field trips to the farms to educate consumers and help them appreciate how food is grown.

“Taking shoppers into the field demonstrates real pride in sourcing,” said Hertel, “and can help them better appreciate top-quality fruits and vegetables.”

Local food doesn't get any fresher than the produce sold at Bi-Rite grocery store in San Francisco. Last spring, the store began growing its own produce in a one-third of an acre garden in Sonoma County, north of the city.

By the end of the summer, the farm had produced more than 3,500 pounds of tomatoes, 500 pounds of eggplants, 400 pounds of peppers and 200 pounds of basil. Winter crops, including kale, escarole, beets and chard, are now for sale in the store.

“We started the garden because I wanted to get a better understanding of farming and growing, so I could understand our suppliers, and because I wanted our staff to learn,” said the store's owner, Sam Mogannam. “I also wanted to provide something that continues to separate us from all other grocers, and to share our stories and firsthand experience with our customers.”

Before he started his garden, Mogannam was already selling produce from his parents' Placerville farm near Sacramento, slaughtering his own pigs and growing limited crops in a rooftop garden.

And nothing is wasted. Last summer, he used some of his cosmetically less-than-perfect produce to make dishes such as gazpacho, as well as a garbanzo and heirloom tomato salad, to sell in the store.

Coming up, Mogannam would like to create some shelf-stable products from his garden's fare. In order to grow sufficient vegetables, he's considering buying a four-acre garden, where he'll grow tomatoes, potatoes, garlic and greens.
— Amanda Baltazar

INITIATIVE 3:
Offer Value by Bundling Meals

During the past several months, retailers have responded to the economic challenges many of their shoppers are facing by highlighting ways to prepare economical meals at home, and those programs are expected to continue in 2009.

Food Lion, Salisbury, N.C., was one of several chains that launched cross-merchandising and meal bundling programs such as its “Meals for Less” this fall. Each week, Food Lion displays a group of perishable and packaged ingredients that can be used together to prepare a dinner for four for under $10.

“Our goal is to provide customers with low-cost, quick and easy meal solutions,” Gene Faller, vice president of Dry Category, said in a statement.

Similarly, Publix Super Markets, Lakeland, Fla., has long highlighted the savings that customers can realize by preparing meals at home rather than going out to eat.

In a recent circular, Publix included a section titled: “Fifty bucks says you'll love this meal.” The ad lists the various ingredients needed to make Shrimp Scampi Linguini accompanied by a salad and bread, and points out that the cost of those ingredients at Publix adds up to $17.95. To order the same meal for four adults at a restaurant, Publix estimates, the total cost would be $68 — a $50 difference.

“We have had the value comparison [since] the inception of Publix's Apron's [recipe, demo and meal assembly program]. Also, we want to get families back to the dinner table, especially since all families are experiencing this economic pinch,” said Dwaine Stevens, a spokesman for Publix.

In addition, Publix includes 4-foot refrigerated cases at the front of most of its stores with a featured protein on sale for the week, along with the corresponding produce and other items needed to make an affordable family meal. In its fresh meat cases, Publix includes a variety of prepared entrees, including Italian Meatballs, Jerk Pork and Curry Chicken, seasoned and ready to heat. Along with a vegetable or starch, these meals can typically feed a family of four for under $10, Stevens said.

Meal promotions are also becoming more popular in deli and prepared-food departments. At Bruno's Supermarkets in Birmingham, Ala., shoppers can choose a main entree priced at $5.99 and higher from the stores' hot bars. For $3 more, they can select two side dishes and receive a free bag of rolls.

“Customers have always responded well to the meal deals,” said Jenny Brooks, a spokeswoman for Bruno's.

In its weekly circular, Bruno's offers meal suggestions and recipes, based on items that are on sale for the week, such as a recipe for fish and green beans. Bruno's has also continued with its “Power of 10” promotion, which highlights 10 everyday items, such as milk and ground chuck, at “rock bottom prices” every week, according to Ray England, senior vice president of marketing and perishable merchandising at Bruno's.

“For both banners, we have focused in stores on appealing to customers' desires for home-cooked, yet simple, solutions,” England said.
— Christine Blank

INITIATIVE 4:
Generate Loyalty With Aggressive, Short-Term Sales

When times are tough, consumers tend to budget more carefully. There's evidence that this trend has been on the rise in supermarkets during the past few years. The average number of shopping trips across all outlets decreased 2.9% in 2008 and 1.9% in 2007, according to Information Resources Inc., Chicago, but spending per trip was up 3.3% and 2.7% in those years, respectively. Basically, shoppers are making fewer trips, but increasing basket size.

Tanney Staffenson, an advisor for Lamb's Thriftway, Portland, Ore., said the five-unit independent has not experienced any noticeable decrease in traffic, but said other evidence shows customers are planning trips more carefully — shopping with lists again, redeeming more coupons and stocking up on featured items. He said he expects the trend to intensify after the end of the year.

“Right now, everyone is still shopping for the holidays,” he noted.

Retailers will need to plan even smarter in 2009, featuring special promotions that can get customers through the door to spend their weekly food dollars in a supermarket, rather than a club store or supercenter.

One-day “superhot” sales have helped do the trick at Hen House Markets, a banner of Kansas City, Kan.-based Balls Food Stores, according to comments made by produce manager Quinton Neely at this year's Produce Marketing Association Fresh Summit.

The 12-hour sales feature deep discounts on a small selection of items throughout the store, including perishables. Recently, Neely's department featured grapes at 69 cents — marked down from an everyday price of $1.99 — and sold 93 cases of product.
— Matthew Enis

INITIATIVE 5:
Prepare for More Price Swings in Commodities

If there is any sort of hopeful development in the financial markets right now, it's that the recent turmoil has deflated the bubble in crop commodities that was created partly by non-commercial speculators. Obviously, this has not been a positive development for America's agribusiness industry, but it's a positive development for almost everyone else involved with the buying and selling of food: suppliers, retailers and consumers alike.

Wheat, corn and soybean futures rose to record highs earlier this year, with corn passing $8 per bushel in July; soybeans trading around $16.40 that same month; and wheat reaching almost $13.50 in February. So far this month, corn prices have broken below a key support level of $3 for the first time in two years; wheat prices are at their lowest levels in a year and a half; and prices for soybeans have declined to less than half their levels from July.

Prices for animal feed and flour should continue to drop in the near term, and producers of meat, poultry, eggs and dairy products — as well as bakery products and anything that contains soy ingredients or corn syrup — are relieved.

However, current commodities prices are still very high compared with historical averages. And evidence of the blows dealt by this recent, extended period of sharply higher input costs is still surfacing. Notably, poultry producers have been forced to cut production targets several times this year, and Pilgrim's Pride, the nation's top chicken producer, was forced to file for Chapter 11 bankruptcy court protection earlier this month.

Production cuts, expectations that commodities prices will remain relatively high next year, and the possibility that the cost of fuel and fertilizer could rise again were among factors that led the U.S. Department of Agriculture to forecast food price inflation of 3.5% to 4% next year, despite weakness in other areas of the economy.

That forecast suggests a reprieve from the price spikes of the past two years, but to be on the safe side, supermarkets should anticipate further volatility ahead.
— Matthew Enis