EASY DOES IT 2006

CHRISTINE BLANK

To build sales in nonfood departments, supermarkets need to appeal to the customer's need for one-stop shopping while increasing health-related offerings.

Grocery operators have been transforming their pharmacy, health and beauty care, and other nonfood departments in recent years by adding in-store health clinics, expanding natural HBC offerings, and offering more convenient options such as gift cards and DVD rentals via kiosks.

While supermarkets have been very progressive, the marketing of these products and services has not yet reached its full potential.

For example, with in-store health clinics, most supermarkets lease the space to the clinics, but they often miss the opportunity to cross-market the clinics with foods, supplements and OTC products, sources said.

“It [grocery] is the only channel that, within four walls, you can deliver a holistic approach, including food, pharmacy and HBC,” said supermarket consultant Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill.

Following are five opportunities relating to general merchandise and HBC categories that supermarkets can use to build greater sales success in 2007:

INITIATIVE 1:

Merchandise Gift Cards by Category

Sales of gift cards to restaurants, movie theaters and retail chains have been booming in supermarkets, and the trend is expected to continue.

The gift card market has quickly grown into a $35.3 billion industry annually, reported research firm Packaged Facts, a division of MarketResearch.com, New York.

Even in a smaller segment of the gift card market, one in five consumers said they planned to purchase branded gift cards — those with a credit card logo that can be used at any retail location — this holiday season, reported the Network Branded Prepaid Card Association, Sherborn, Mass.

“Gift cards have been accepted by the mainstream, as evidenced by their growth and popularity in virtually every imaginable retail outlet,” according to Don Montouri, publisher of Packaged Facts.

Grocery shoppers, particularly, have embraced gift cards because they visit the stores frequently and like the convenience of picking up a “last-minute gift,” said Teri Llach, group vice president of marketing for Blackhawk Network, the gift card subsidiary of Safeway, Pleasanton, Calif.

“Shoppers seem to love gift cards. National statistics show that 83% would rather receive a gift card to their favorite retailer than any other gift,” Mary Ellen Burris, senior vice president of consumer affairs for Wegmans Food Markets, Rochester, N.Y., wrote on the retailer's website.

Wegmans sells a selection of about 35 gift cards — in addition to its own — and plans to continue to grow gift card offerings.

Safeway and Giant Eagle, Pittsburgh, are also effectively taking advantage of this trend.

Safeway, via its Blackhawk Network, partnered with McDonald's in November to carry its Arch Cards, which had previously only been available at McDonald's, in 1,500 of its stores.

McDonald's executives like the idea of extending their gift card reach to supermarket shoppers. “More than 50% of U.S. consumers have purchased or received a gift card in the past year. We are meeting our customers' changing lifestyles and needs,” said Gina Pfeifer, vice president of business integration for McDonald's USA.

Safeway, which has been selling a variety of gift cards for about four years, successfully merchandises them on end caps and segments cards by category, such as dining.

Giant Eagle, which is a Blackhawk customer, has taken its gift card program to the next level by tying it with its fuelperks! reward program. Giant Eagle shoppers typically earn 10 cents per gallon on gas for every $50 spent in Giant Eagle stores. However, during the holiday season, customers can earn 20 cents per gallon on every $50 spent on gift cards.

Gift cards have become so popular among Giant Eagle customers, according to spokesman Dan Donovan, that many shoppers are changing their shopping habits at other retailers. In many cases, they are “making a trip to our supermarkets the first step in visits to these other retailers,” Donovan said. Giant Eagle aggressively promotes this concept.

Wegmans merchandises gift cards from Bed, Bath & Beyond, Regal Theatres, Baby Gap and several other retailers on tall kiosks that are usually near its general merchandise aisles. The cards are separated into categories, including Dining, Home, Books, Music and Movies, Fashion, and Electronics and Toys.
— C.B.

INITIATIVE 2:

Create Destination Departments for Natural HBC

While natural health and beauty care offerings are on the rise in supermarkets, retailers and consultants say the category could be better merchandised to boost sales.

Natural personal care sales reached $5.6 billion in the U.S. in 2006, more than 10% of the total HBC market, according to Nutrition Business Journal's Natural Personal Care Report 2006.

“People are becoming aware that anything you put on your skin or in your body is absorbed into the bloodstream, so it's important that we offer clean [products],” said Debbie Leland, natural and specialty food buyer for the nine-store Kowalski's Markets, Woodbury, Minn.

Leland said that shoppers are coming into stores much more educated on natural personal care than in the past.

At the same time, most chains do not yet devote the space and attention needed to make the category profitable, Leland and others said.

“You can't just bring in a few SKUs and cram them in the corner. You need a commitment to growing the category,” Leland said.

“I don't see many willing to commit to the space and expertise,” said Cynthia Tice, manager of natural and specialty foods for Foodtown, Avenel, N.J. Tice has owned a natural food store and worked as a consultant for supermarkets.

For sales success, Tice suggested creating a destination department for natural personal care. The Foodtown stores that have been most successful with natural HBC are the ones that have a segregated, staffed section within the main HBC department. Natural HBC also sells well in Foodtown's freestanding natural food stores.

“That was where we have been particularly successful because we have created a destination location. Breadth of assortment and expertise is key,” Tice said.

Kowalski's has also carried a large selection of natural personal care items for several years. At the same time, Leland said, the retailer constantly expands successful natural lines, sometimes at the expense of similar conventional lines.

For example, Kowalski's recently expanded its natural toothpaste selection and cut out certain mainstream items. “They [natural toothpaste SKUs] were selling, and we had a lot of duplicates in mainstream products,” Leland said. In addition, it adds to top-selling lines such as Kiss My Face, Nature's Gate and Burt's Bees, when appropriate.

Natural HBC products should get their own sections, but within the appropriate section, said Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill.

“A segregated/integrated approach generates the highest rate of trial and success. You now start shifting people out of low-profit, run-of-the-mill items and position yourself as someone likely to compete with Bath and Body Works,” Wisner said.

Popular products, retailers said, include skin care products that are high in antioxidants, which ultimately help reduce wrinkles, and products that are environmentally friendly.

Overall, U.S. consumers are expected to spend $11 billion on natural and organic personal care in 2009, according to the Natural Marketing Institute, Harleysville, Pa.
— C.B.

INITIATIVE 3:

Medicare Benefits Reclaim Senior Sales

Supermarket pharmacy and HBC departments are in danger of losing a significant share of revenue from Medicare shoppers who are taking advantage of the new prescription drug benefit.

While seniors on Medicare Part D now have about $36 billion more a year to spend because of an increase in government funding, they are increasingly being pulled to other channels by aggressive marketing from mass merchants and drug chains.

One way supercenters are getting seniors in the door is by offering significantly discounted prescriptions. For example, Wal-Mart Stores, Bentonville, Ark., and Target Corp., Minneapolis, recently expanded their $4 generic drug programs to all U.S. pharmacies. However, traditional supermarkets across the country have responded vigorously to such programs, some with more generous offers. The major drug chains have, to date, stayed on the sidelines.

Supercenters aggressively went after Medicare recipients, after the government opened Medicare plans in January 2006, saying recipients could review and change their plans and providers.

“We saw a major shift because grocery as a whole didn't go after these folks,” said Bob Doyle, senior vice president, Healthcare Solutions Group, Information Resources Inc., Chicago, which released a study on the changes in shopping behaviors of seniors after they enrolled in Medicare Part D earlier this year.

In the first four months of 2006, supermarkets lost 2.2 share points in prescription transactions and 1.1 dollar share points in non-prescription health care categories, according to IRI.

The largest drop in nonfood supermarket sales came from the eye care category, down 38% from 2005 to 2006 as of Oct. 1, 2006, according to IRI. Sales of facial products also dropped 15% .

Despite increased competition from supercenters and drug stores, all news is not bleak for supermarkets.

Seniors are buying more razors, home health care kits, foot care products and adult incontinence products, according to IRI. They are also buying more of certain foods and beverages in supermarkets, including energy drinks [nutritional drinks such as Ensure are included in this category].

A surprising trend for grocers to take advantage of: Medicare recipients are using part of their extra spending power to buy spirits, beer and wine, Doyle said.

Now Medicare recipients are again signing up for the benefit, so supermarkets have a new opportunity.

Many supermarket chains are already positioned to take advantage of the increased spending power of Medicare recipients. “A lot of positive things are going on,” said Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill., pointing to supermarket formats that cater to shoppers' overall health and wellness needs.
— C.B.

INITIATIVE 4:

More Cross-Marketing for In-Store Clinics

While the quick, in-store medical clinics are being added by more supermarkets every week, grocers face competition from supercenters and drug chains that are quickly adding these locations as well.

The recently formed Convenient Care Association in Philadelphia estimates that there are at least 200 in-store clinics open in retail outlets, and about one-third of those are in supermarkets.

By the end of 2007, there will be about 600 of these clinics open, according to the CCA.

“Supermarkets are in a better position to have these clinics because of the sheer amount of people that come into a grocery store compared to a drug store,” said Dan Milovich, director of pharmacy operations for Bashas', Chandler, Ariz.

“It is definitely a customer convenience. Often, our customers don't have an opportunity to go to the doctor, whether it be for a vaccine or a checkup,” said Maria Brous, spokeswoman for Publix Super Markets, Lakeland, Fla.

“There is more visibility in a supermarket [than a drug store], and you have a lot of traffic,” said Tine Hansen-Turton, executive director of the CCA.

Despite their potential success, the in-store clinics that will last in the future are the ones that partner with the local medical community and cross-market the clinics with the supermarkets' other services.

“This is like marketing consumer goods. You need to connect with people and teach them how to use it,” said Jim Wisner, president of consultant firm Wisner Marketing Group, Libertyville, Ill.
— C.B.

INITIATIVE 5:

Get in the Game With DVD Kiosks

Supermarkets continue adding DVD rental kiosks as they realize the low costs and healthy profit margins associated with the DVD dispensers. The kiosks are expected to be installed in at least 10,000 grocery stores by the end of 2007.

Benefits to supermarkets include: commissions on DVDs rented, zero installation and maintenance costs, and the small amount of merchandising space required — typically between 6 and 8 square feet.

While DVD kiosk providers declined to list the average profit for supermarkets, Richard Cohen, chief executive officer of DVD kiosk provider TNR Entertainment, Houston, said most stores make at least a few hundred dollars per month, “with no capital outlay.”

“It takes a low amount of square footage, with really no labor or operations impact on their end,” added Greg Waring, vice president of marketing for DVD kiosk provider Redbox Automated Retail, Oakbrook Terrace, Ill. Albertsons recently signed on with redbox to add the kiosks to some of its stores, so redbox now has kiosks in nearly 2,000 grocery stores.

Pathmark officials expect DVD kiosks to increase visits to its stores, particularly after DVDXpress, New York, added a subscription service in which shoppers can rent as many movies as they want for $12.99 a month.

That subscription service is “a valuable offering to any movie lover and will likely increase the frequency of their trips to our stores,” said Rich Savner, director of public affairs for Pathmark Stores, Carteret, N.J.

Typically, renting DVDs from a kiosk is more convenient for supermarket shoppers, who are already in the store at least twice a week, and the cost is lower than most movie rental chains: between $1 and $1.50 per rental at most kiosks.

Supermarkets and DVD kiosk operators have come up with some unique promotions to help spur DVD rentals and subscription sign-ups.

Bi-Lo, Greenville, S.C., and DVDXpress, for example, are using Bi-Lo's customer loyalty program to offer the chain's most frequent and loyal shoppers free and discounted DVD rentals. If those shoppers buy a certain dollar amount of groceries, for example, their receipt includes an offer for a free rental from the DVD kiosk.

Once those shoppers try renting from a DVD kiosk, “they tend to return and become a repeat customer,” said Greg Meyer, CEO of DVDXpress.

In addition, supermarkets with employees who get involved in promoting the kiosks have seen a sales boost.

“Some employees have gotten very enthusiastic and have almost taken ownership of the kiosks. When that happens, it has a big impact,” Cohen said. To boost supermarket employee involvement, TNR throws pizza parties for employees, hands out T-shirts, and provides other incentives.

In addition, TNR is getting new customers from its “first movie free” promotion in many stores. “The hurdle is getting people to try it,” Cohen said.
— C.B.