SIMPLE, SOLID, STRAIGHTFORWARD

ROSEANNE HARPER

Supermarket operators have come to a crossroads in the meals arena and have taken a sharp turn back toward basics.

Herb-crusted salmon and artichoke souffle have yielded to good, old-fashioned rotisserie chicken, mashed potatoes, pizza and piled-high submarine sandwiches. Consultants and others familiar with the industry told SN that's what they've seen happening over the past year.

While the terminology may have changed and the glitz may have dulled, there's no doubt that home-meal replacement or retail food service is here to stay.

Retailers are accepting the fact that the demand for take-home dinners is flourishing and lots of them have buckled down to the job of figuring out the most practical and profitable way to get a portion of the market. For a lot of them, that has meant improving the familiar and expanding upon it, SN's sources said.

"The names may change but the trends in consumer shopping and eating patterns are continuing their 25-year course away from ingredient purchases and retail efforts are maturing," said Dennis Hedegard, principal and founder of Solutions North America, a Saco, Maine, consulting firm. "[Supermarket operators] are staying within their own culture and looking to build on their individual strengths," Hedegard added.

Expanding on existing programs or creating simple ones that customers associate with a supermarket is the way to go, said another consultant.

"People buy chickens and pork loin [in the meat department] at the supermarket. It's a natural extension to cook them for them, homestyle, and add some side dishes," said Brian Salus, president of Salus & Associates, Midlothian, Va.

Other consultants concurred that such a course makes sense.

"I see grocers making their meals programs simpler, easier and more effective. And they're focusing more on the top and bottom lines," said Anthony Tedesco, consultant at Arthur Andersen/Senn Delaney, Chicago.

They're making alliances with manufacturers to prepare products or components for them, and some are "selling the whole store" with new meals-merchandising efforts.

Here are excerpts from interviews with these experts and others on the state of HMR, its future, and making the most of change:

Jim Riesenburger

managing partner

RL & Associates

Rochester, N.Y.

HMR is in a great state of flux, and that state has been brought about by the industry itself because it doesn't understand what's needed to succeed. The demand for HMR is there and restaurants will take the business away if supermarkets don't do it right. They [supermarket operators] try to piecemeal programs together. There has been negativity generated by all the studies that say you can't make money on it, but the real problem has been lack of commitment and execution on the retailer's part.

Here's a classic example: We just talked to a large company that wanted us to do a meals program for them but they wanted to do it with part-time people they would pull from the front end. We walked away from it because we knew it couldn't work that way.

Successful programs have used certain core items with multiple uses, but they're fresh and have appeal. Some have fine-tuned existing programs. For example, they've expanded on rotisserie and packaged [rotisserie] items with side dishes. But they need some exclusives. I'm not an advocate of scratch preparation in the store, but recipes can be designed for the retailer and he then holds onto that intellectual property. Regional manufacturers can make the products or components for him.

There's still a market, too, for packaged fresh, prepared foods that have a short shelf life and no preservatives. The products in that category that have failed have done so because they have preservatives and have an unappetizing, look, feel and taste. Retailers themselves, because of their shrink mentality, were determining that such products had to have a long shelf life.

Ira Blumenthal

president

Co-Opportunities

Atlanta

I think the reason we're not hearing so much about HMR is that it has moved from a sexy, exciting thing to reality and what's exciting about reality? Both the consumer demand and HMR itself are still here.

Retailers have stopped going to conferences and retrofitting their cases. It's gotten down to block and tackle. And you know what? The consumer is going to get his dinner tonight whether it's from KFC or someone else. The question is whether the supermarket will be part of the equation.

KFC and Pizza Hut are bundling for delivery and we see more and more bundling of food-service brands to make it easy for the consumer.

Supermarkets, on the other hand, haven't made it easy. They've said, "If you want bread with your dinner, you'll have to go to the bakery department to get it." I think bundling simple fare with products from other parts of the store to make it easier and quicker for the customer to prepare for a meal, a party or a picnic is a natural.

But the battle [for share of the meals market] hasn't really started yet. There are some supermarkets doing it well. There's H-E-B and some pockets of Kroger. Supermarkets have raised the quality bar, but they've yet to raise the bar on marketing. The myth that "value means cheap" has to be exploded. I see too many big paper signs in windows that say how low the prices are.

Howard Solganik

president Solganik & Associates

Dayton, Ohio

I know there are people moaning about the death of HMR, but there are more people involved in retail food service than ever before. It's been a slow evolution. A lot of things are being done now that are taken for granted because they've become mainstream.

Five or eight years ago, people thought operators like Larry's Market were crazy. In 1971, you had to go to a specialty store to buy brie or a croissant. Things have changed in the meals category also. I think a lot of supermarkets are serving meals in some form; they just don't think about what they're doing as HMR.

Sure, there are places the envelope can be pushed and profitability enhanced, but packaging has improved. The next wave is software and better information systems.

I think the big opportunity for supermarkets lies in meals to be eaten slightly later, and we see people doing great. When somebody says to me that HMR is dead, I give them a list of stores to go look at. The consolidations have given the little guys opportunity to distinguish themselves with this category. I won't say the big consolidated companies won't be innovative but they have a whole other set of parameters that'll guide them.

The future should be great for HMR but the category does need attention. Look at it this way: QSRs spend a lot of time on a very small menu and we [in the supermarket industry] spend a minimal amount of time on a very large menu.

Brian Salus

president Salus & Associates

Midlothian, Va.

The demand for HMR hasn't changed. There have been failures in the supermarket industry because people tried to do things they weren't equipped to do, but the food-service people haven't done a good job either. They've all missed the fact that this [HMR] is a hybrid. Ukrop's may be the only retailer making serious money at it. Others are doing it to put people in the store.

I think a lot of retailers have been rocking along with a 50% gross but a real loss of maybe 7%. They woke up one morning and said, "This doesn't work. We're losing our shirts." And they don't want to spend any more money because they figure somebody is going to buy them. They're ultimately driven by the stock market and not by the consumer.

It [HMR or the meals business] is about sales and profits, too. Good-tasting, simple food can be profitable but the procedures have to be kept simple, too. The food doesn't have to be made from scratch. Most restaurants don't even do things from scratch. To make money, you have to bring some of the food in in component form to be completed in the store.

Supermarkets need to find out what their customers want. If it's Texas, they probably aren't looking for Asian-Fusian in their supermarket. They'd probably look for a really good brisket. They want good-tasting food that they're familiar with. Do we need chefs, restaurant quality? I don't think so. My mother isn't a chef, but she cooks a good meal.

Ed DeLuca

principal

Edward E. DeLuca LLC

Milford, Conn.

HMR is still alive and has been for a long time. In New York City in the 1940s, people were selling meals out of stores.

I've always been a proponent of HMR in the service deli. But in the '90s, people started defining it differently and boxing it in. They started hiring chefs and trying to compete with restaurants. That's when the mistakes began. It's impossible for a supermarket to compete with a restaurant. I think the people that stick with basics no matter what anybody else does are the ones that succeed. Look at Big Y. They're doing fine with chicken, sandwiches and pizza. Their aim is to offer the best there is in each of those categories and they're succeeding. They made their programs fit what they knew they could handle.

Before anyone goes around screaming doomsday, they might look to see if they set the right parameters for themselves or set up the criteria for labor costs correctly. I think the future for HMR is extremely bright for all venues. I think for traditional supermarkets to make the most of the HMR trend, they need to get a better understanding of technologies, lifestyles and demographics and how they affect meals buying. Successfully merging technology with conventional habits will be a key.

I don't believe there is any industry as well positioned as the supermarket industry to take advantage of the increasing demand for HMR.

Stephan Kouzomis

president

Entrepreneurial Consulting

Louisville, Ky.

HMS -- I call it home-meal solutions -- is not dead as long as baby boomers and members of Generation X and Generation Y are on this earth. They'll be searching for meals outside the home. The question is whether or not supermarkets will get in on the trend. Those that don't will lose all the way around.

Consumers want an entree that's hot or ready to heat for dinner, like you'd make at home. I don't think the category includes hot dogs and frozen burritos. For the future to be bright in this category, I think we in the supermarket industry have to stop guessing what shoppers want. There's a big need for micromarketing. Supermarket operators research demographics for their building locations. You would think they'd poll their shoppers to determine where the business opportunities are. There's also a need for some form of consumer advertising. The successful operators have been doing these things.

To be profitable, they'll have to source out some of the products. Manufacturers are getting more flexible in their dealings with supermarkets, and caterers and kettle cooking are sources emerging as suppliers.

Mark Garcia

principal

The Retail Food Group

San Antonio

The brass ring is still available, even in the midst of all the naysayers pointing to failures. People who say HMR is dead remind me of the guy who said there's no need for a patent office because everything has already been invented or the people who said a couple of years ago that the Internet was just for teenagers.

It's a great category, one that isn't as price-sensitive as others. We did get a little ahead of ourselves in the beginning. We didn't have to be so sophisticated. Comfort food is fine but we have to get rid of the perception consumers have that [ready-to-eat or ready-to-heat] food in the supermarket isn't as fresh as it should be. Supermarkets could bring in the local chef to kick off a program like Byerly's did with Charlie Trotter.

But do we have to do it ourselves? There are people who can do it themselves, but they could also outsource some of it or lease out a section to someone else. We also believe in selling the whole store and making all the fresh departments stand out.

The future for the category is great. People are even taking food home for special occasions. It's easier and more comfortable than going out to eat. Like on Mother's Day when the whole family is there but nobody wants to cook and they don't want to stand in line and corral the little kids at a restaurant either.

Dennis Hedegard

principal

Solutions North America

Saco, Maine

There's less talk these days about HMR and more effort from retailers and wholesalers, with great strides from manufacturers. And there has been a recent expansion into ready-to-cook items. The consumer hasn't told us that HMR is for the deli only. Whatever we call it, HMR or not, it's a trend that has enormous financial impact and it's here to stay.

The industry had reached beyond itself with chefs and a lot of in-store preparation and the results were mixed. The low-price culture companies failed with it. Now, retail efforts are maturing. Companies are recognizing that what works for their competitor may not work for them.They are retrenching to build on their core cultures. They're developing [meals] programs that are consistent with their overall image, and that does two important things: It makes day-to-day execution easier and consumer acceptance faster.

Many operators are addressing convenience meals with a total-store approach and value-added products. Meanwhile, grocery manufacturers are becoming quite aggressive in their recognition of and pursuit of the convenience-meals customer. Frozen foods as a category hold excellent potential.

The future will be good, especially when marketing and merchandising have caught up with the product innovations that have occurred in the last five years. Communicating via alternate-marketing channels will generate awareness and ultimately trial from consumers who do not currently read supermarket ad fliers. That includes the super heavy users of restaurants that we currently do not address. By repeatedly selling the "cooking-dilemma solution" to the current supermarket consumer vs. the price-off strategy, we'll generate impressive results.

Anthony Tedesco

consultant

Arthur Andersen/Senn Delaney

Chicago

The moniker "HMR" probably limits our thinking. The larger concept is prepared foods and who is doing the preparation homestyle. That definition opens it up to include a whole lot of venues from private chefs to C-stores.

I've seen a lot more venues going into the [takeout-meals] business, from restaurants to sandwich shops to more supermarkets. All of that fuels the choices [available to consumers] and will ultimately accelerate demand for the category. I've also seen an increase in ready-to-cook product.

I'm seeing a lot of retailers looking to redefine and improve their programs and they're also repositioning how they go to market. The thinking has matured.They're beginning to look at the category as a possible growth area [not just a convenience for their customers]. They're asking themselves: What are we prepared to do?

The leaders are improving their strategic alliances. They may go from preparing everything on site to forming alliances with the big manufacturers for ingredients, components or finished products, either in bulk or retail-ready. Notwithstanding that individual operators will have difficulties, the future looks good. Convenience will be the largest single driver. The Y generation expects readily available foods prepared for them. We haven't even seen the potential for fresh, prepared foods.

Bill Lotizo president

Strategic Marketing Resources

Minneapolis

There has been some disappointment about the category, maybe because it got ahead of itself and sales weren't up to what was expected in the beginning. But it's the astute retailer who will blot out the noise and figure out what he needs to do to succeed. The analogy I'd make is the stock market. If you listen to what the pundits say every day, it can be depressing. It's better to shut the television off, go into your office and think about the problems and make some decisions. The same thing applies to HMR.

Supermarket operators need to find what the business opportunities are for them in their own markets. Convenience has become more and more important whether you're the consumer or the operator and I see more preparation work tilting toward the manufacturer. To make the most of opportunities it [the meals business] presents, the retailer is going to have to make it easier for the customer to buy the product. Separate the checkout lines, put the meals center near the front. And it has to be a store-within-a-store concept that runs separately. Look at what the restaurants do. If a customer at McDonald's had to get behind someone in line that was buying milk and bread and bleach, he wouldn't go there again.