HURDLES IN THE AISLES 1994-12-26 (2)

STEPHEN DOWDELL

Some major product categories in center store were dealt major challenges this year, which kept the merchandising decision makers at supermarket chains on their toes.

Here's a handful of specific events that shaped the challenge in 1994 most acutely:

Rough weather in Brazil ravaged the coffee crop, sent wholesale and retail prices soaring and shook up the commercial ground coffee market.

General Mills tried to turn down the volume on couponing and slow down the

volume on couponing and slow down the roller coaster of pricing and promotions for cold cereal.

· Tobacco producers and merchandisers took serious hits from many sides, as anti-smoking sentiment mounted to new heights.

· The war of words over store brands was escalated in a provocative speech delivered by Coca-Cola Co.'s president, at the industry's biggest beverage convention.

· The new age beverage business grew bigger and bolder, punctuated by Quaker Oats' snapping up the seminal Snapple Beverage Co.

Even without such breaking news, 1994 still saw important, if more subtle, developments affect the dry grocery and frozen food aisles.

Retail chief executives continued to fret about protecting their dry grocery department sales and profits from mass merchants. (It was still the main thing on their minds as late as last month, when the heads of some of the best and biggest chains gathered for a retreat hosted by a leading supplier.)

Chains and wholesalers continued to explore ways to work the mechanics of Efficient Consumer Response into their core packaged foods buying and merchandising strategies.

Category managers continued to wrestle with leaking profit margins and damaging market share battles in traditional mainstays such as pet food, diapers, detergents and cereal.

Grocery and consumer relations departments continued to work together to translate the public's hunger for information about health and nutrition into concrete merchandising opportunities -- including, notably, the spread of shelf-tag programs, information kiosks and other vehicles to reach out to consumers at the store level and beyond, and help them buy, and eat, healthier.

The following stories provide a review of 1994 in the center store.

Beverages Pump Up

The sports drink business bulked up as never before in 1994.

Two big, strong players, Coca-Cola Co., Atlanta, and Pepsi-Cola Co., Somers, N.Y., jumped in and started pumping up distribution and marketing of their respective entries, Powerade and All Sport.

As a result, supermarket beverage category managers quickly found themselves straining to get a grip on a category that was busting at the seams.

Then, the biggest player in the sports drink field, Gatorade of Quaker Oats, Chicago, got even bigger, buying Snapple Beverage Corp. in a $1.7 billion deal, making it the third-largest nonalcohol beverage marketer on the continent.

The sports drink buildup was just one facet of the rapid changes coursing through the burgeoning new age beverage market, which kept retailers happy, if a bit out of breath, for most of this year.

While carbonated soft drink volume did not slouch, as many had expected it would, the hot categories like ready-to-drink iced tea, isotonics, bottled waters and fruit drinks were as robust as ever. Indeed, new age categories were a major focus of retailer's warm weather resets, special promotions and advertising in the peak beverage time of March to December.

Among the year's milestones was the April introduction of Coke's answer to Snapple, the studiously wacky Fruitopia. "New-age beverage is the new driving force in the soft drink category," said the grocery director for one of the nation's largest chains. "And Coke's just trying to get20into it."

Another was the innovative promotional packaging twist taken by Pepsi, when it linked three alternative beverages -- All Sport, Ocean Spray lemonade and Lipton iced tea -- in a single 99-cent sampler pack, and then distributed more than six million of them in the spring.

Sales gains were brawny. In iced tea, for example, dollar volume for the 52 weeks ended Nov. 6 climbed 74%, to $329 million; 16-ounce equivalent volume was up 79%, according to Information Resources Inc., Chicago.

Retailers tweaked their beverage sets, trying to figure out where the various new age segments belonged in the store. Do sports drinks belong in the juice aisle or soft drink aisle? Some opted to try separate sports drink sections. Options for alternative merchandising abounded -- checkout coolers, chilled cases near the deli, etc.

"We feel the new age segment has changed drastically over the last year," said one top executive at a New York metropolitan area chain. "A lot of the things that were great going into last summer are now on the way out. No matter how much space you have for teas, you can't have too much."

No pain, no gain.

Coffee's Big Chill

It can get pretty cold in the coffee fields of Brazil, even in June . . . cold enough for a chill to creep all the way up into grocery aisles all over the United States.

That's just what happened this June, and the coffee category is still shivering.

A freeze, compounded by drought conditions, pounded Brazilian crop yields and sent coffee futures instantly soaring. Before the extent of the damage was even fully determined, the big commercial roasters jacked up wholesale coffee prices, and jacked them up again almost immediately after that. Manufacturer deals withered as well.

Retailers were unable to hold the line in the face of multiple increases, and passed the costs along in the form of higher shelf prices. Although some operators tried to ease in the price hikes gradually, retail prices ended up climbing by at least half, and in many cases doubled.

"In the canned segment, the last thing they need is a substantial price increase," said Tom Pirko, president of the Bevmark beverage consulting firm in New York, reflecting the expectation of many other coffee watchers, roasters and retailers that a price point of about $10 for a typical 34.5-ounce can was going to be hard for consumers to swallow.

It proved an eye-opener for many coffee drinkers, and consumption slipped, particularly for ground and instant coffee. For the 52 weeks ended Nov. 6, 1994, pound volume for ground and instant dropped 5% compared with the year-ago period. Dollar sales, on the other hand, were up 15.9%, bringing the effects from post-freeze price hikes into sharp relief.

Pricing stabilized late into the year, but nowhere near the lows before the Brazilian frost hit.

As the dust settled, a compelling new consumer buying pattern had emerged. Retailers found that many coffee drinkers were turning away from the middle ground of the commercial ground brands, either down to lower-priced private-label ground coffee lines or up to higher-priced gourmet, whole bean varieties.

"Our coffee sales have definitely dropped off. But what they dropped off in the conventional canned coffee, we're more than making up with our gourmet coffee," explained Doug Keller, director of grocery at Save Mart Supermarkets, Modesto, Calif.

"Since the frost, we find that many of our customers have been switching to private label. On average, our coffee sales are only down slightly," said a chain buyer in New Jersey. "And those customers that buy the upscale coffees will continue to buy them, whether the price goes up or not."

Indeed, most retailers found that their gourmet whole bean programs, which in many cases had been up and running only for a relatively short while, remained quite resilient in the face of price hikes. Chains and independents continued to add new gourmet lines. They installed in-aisle grinders, sometimes in space they'd taken from canned coffee. They continued to install coffee bars and otherwise exploit the gourmet coffee craze with good success.

It was the same for private label. At public meetings, top officials of Kroger Co., Cincinnati, routinely boasted about the robust business the chain was doing with its Kroger brand ground coffees.

The chain's Atlanta division, always aggressive at marketing, ran full-page ads comparing the Kroger Select Blend to Maxwell House's Master Blend. The timing was propitious. Touting savings of $4 over the national brand, the ad delivered its message in big letters, "Change is Good."

A&P, Montvale, N.J., also made the best of the times, linking its famous Eight O'Clock house brand to a celebration of the chain's 135th anniversary, with advertising and special in-store displays.

"Coffee sales have slowed down tremendously. It is like sticker shock for the consumers. So, we thought it a very opportune time to use this very famous private label to stir interest in coffee sales," said Paul Gallant, president of the Eight O'Clock Coffee/Compass Foods division.

The coffee industry was also goaded into action, after a shopper survey in early September revealed that 21.3% were buying less coffee.

The National Coffee Association launched a consume education campaign called the Value of Coffee program, once it realized consumers were not taking the price hikes lightly. Association officials said the program, which included a coffee hotline, 1-800-461-JAVA, is intended to show consumers how natural events, such as a freeze, could lead to higher consumer prices.

Smokes Under Fire

Is the tobacco business in supermarkets going up in smoke?

Not yet. Supermarkets still sold about $6 billion worth of cigarettes in 1994. But that was almost 15% less than the year before, according to scanning statistics for the 52 weeks ended Nov. 6, 1994, from Information Resources Inc., Chicago.

Unit volume tells a similar story. Supermarkets sold 1.6 billion cigarette packages of some kind -- whether single packs, multipacks or cartons -- in those 52 weeks, posting a 5.1% decline compared with the year before. Carton sales, by far the supermarkets' mainstay, fell 7.2%.

And judging from the well-publicized bludgeoning the industry took this year, most stores were not likely to be competing for any tobacco merchandising awards.

In fact, retailers were increasingly confronted with embarrassing "teen sting" operations, as well as state and local legislation aimed to discourage overt tobacco merchandising, tobacco consumption or both.

In Washington, the tobacco industry was dressed down in congressional hearings, and subject to repeated direct attacks from David Kessler, the head of the Food and Drug Administration.

The industry fought back, with feisty testimony and expensive ads. One cigarette maker, Philip Morris, launched a legal attack of its own, suing the American Broadcasting Cos. over a televised episode of its "Day One" news program that accused the industry of deliberately adding nicotine to cigarettes to make them more addictive. (Fairchild Publications, which publishes SN, is owned by Capital Cities ABC.)

But as the year closed, tobacco was still under siege on many fronts. Retailers kept finding themselves in the line of fire all year long.

Stings sprang up in many markets during the year, including California and Michigan, and retail associations protested loudly, but to little avail.

"This will make it more difficult for retailers," said Don Beaver, president of the California Grocers Association, Sacramento. "They've got to look at identification because if they don't, the fines are going to be heavy."

Three Massachusetts supermarket chains were slapped with $77,500 in penalties in August, after they were caught selling tobacco to minors. Stop & Shop, Boston; Shaw's Supermarkets, East Bridgewater, and Purity Supermarkets, North Billerica, were snagged by a state-operated sting operation.

The attorney general's office said supermarkets sold cigarettes to minors more often than other retailers during the sting. The effect of the fines was sobering, and doubtless extended beyond Massachusetts.

"I think it's sort of hitting a lot of people on the head at one time, to say 'Look, if this happens, you're going to be in deep financial exposure,' " said Bernard Rogan, corporate public relations director for Shaw's.

His chain and others scrambled to improve their systems to prevent the sale of cigarettes to minors. Among the actions: a test of new front-end technology that stops a transaction from going through unless identifications are checked.

In other markets, local bills appeared and were being considered that would limit the extent to which retailers could merchandise tobacco. One such proposal, in bustling Suffolk County on Long Island, N.Y., would have point-of-purchase materials spirited away out of the sight of minors. The inherent problem for retailers is that it takes them away from adults, too.

The inevitable result of all this was a certain pervasive glumness among retailers when the subject of cigarettes came up. Many said they saw double-digit decreases in sales.

"There are now so many restrictions when it comes to selling cigarettes," said the spokesman for one of the country's biggest chains.

"One major New Jersey-based chain told me that the last few times they tried to run an in-ad coupon on cigarettes in their in-store circular, they received over 200 letters of complaint from customers, setting an all-time record," said Burt Flickinger, an industry consultant with A.T. Kearney in New York.

In Canada last month, Bentonville, Ark.-based Wal-Mart Stores decided to stop selling cigarettes at its 122 discount stores, citing government efforts to stem consumption and other factors that, it decided, were making cigarettes a business liability.

Petrini Markets, an 18-store chain based in San Rafael, Calif., decided to stop selling tobacco altogether, along with some other nonfood categories it decided were not in line with its upscale food emphasis.

However, it was not the absence of batteries from its checkouts that got Petrini attention on Capitol Hill. "Please accept my congratulations for this courageous marketing decision," said Senator Barbara Boxer, D-Calif., in a letter to Joseph Coulombe, president of Petrini's parent company Provigo Inc., Montreal. "I would hope that other retailers recognize the wisdom of your decision by adopting the same policy."

That "hope" is not shared by companies like Philip Morris. Through its Retail Masters incentive program, Philip Morris tried to encourage supermarkets to draw more attention to their cigarettes with in-store displays.

But it seemed the retailers most eager to draw attention to themselves for selling tobacco were in the emerging class of cigarette specialty stores. These new category killer operators sprang up in several major markets, underpricing supermarkets on single packs and cartons and using every merchandising bell and whistle they could get their hands on.

"They do high volume and are growing at a good pace," said one tobacco industry source, because they offer "a more customer-friendly environment, something that many smokers do not perceive supermarkets as having at this point."

'Cheerio' to BOGOs

nap, crackle, drop. Shelf prices and high-value couponing both took a dive in the cereal aisle this year as the category's biggest players tried to slow down the raging market share battle.

The goal was to divert from a bizarre course in which prices were propped up and then routinely knocked down by "inefficient" promotions.

Kellogg Co., Battle Creek, Mich., took the plunge early on, saying in February that it would reduce promotional spending.

But General Mills, Minneapolis, made a bigger splash on April 4, announcing that it was slashing promotions by $175 million and lowering prices from 30 cents to 70 cents per box on 40% of its brands, including most sizes of its flagship Cheerios, Wheaties, Whole Grain Total, Golden