TOUGH CHOICES

CHRISTINE BLANK

Supermarkets will continue expanding general merchandise sets in 2005, but they also plan to be selective about the products and services offered.

Grocery executives who talked to SN said some of the top growth categories they will focus on this year include electronics, DVDs, toys, photo, housewares and seasonal.

While grocers are competing better with supercenters by featuring many of the same products and services, such as digital imaging kiosks, toys and apparel, they recognize the need to continue tailoring product selection to the right stores, rather than just expanding GM across the board.

"Just the proliferation of the supercenters should make everyone try a little harder, but you have to compete where you can," said Dan Spears, director of HBC and GM at Ingles Markets in Asheville, N.C. "We certainly do not carry everything that the mega-marts carry, but we do a lot more in-and-out and GM promotions. We probably sell a lot more GM than the typical supermarket."

Other retailers agreed that grocers do not necessarily need to compete with supercenters on square footage. "I believe the customer wants convenience and service above breadth of assortment, so the smaller the better," said Bill Mansfield, vice president, GM and HBC, Retail Food Division, Pueblo International, San Juan, Puerto Rico.

Neil Stern, partner at retail consulting firm McMillan/Doolittle in Chicago, noted that grocers are expanding to new, non-traditional categories, and making them destinations. These include some grocers' significantly expanded home office and toy sections, made possible either through co-branding agreements with Staples, Toys "R" Us and other national retailers with established reputations, or by the chains' own initiatives.

"Supermarkets are enlarging presence in categories they may have just taken a convenience stance on before. Now they are trying to be more of a destination for those categories," Stern said.

Top GM Growth Categories for 2005

The top growth categories for 2005, grocery executives and consultants said, bring style, technology, change and excitement into the store.

"Seasonal continues to show good trends, as well as electronics, appliances, toys, home fragrance, DVD sell-through, and kitchen-related decor and gadgetry items. The customer is fascinated with these items because the manufacturers are constantly changing and improving many of the items in these categories. The customer wants the latest and greatest," Mansfield said.

Batteries will also continue to be a big seller for supermarkets in 2005 because "everything seems to require batteries these days," Mansfield said.

Although grocers are expanding certain categories of GM, retailers agreed that the key to success is not in adding a host of new items, but adding the right items by store and merchandising them correctly.

"Successful merchants look deeply into their customers' purchase history by store cluster, then provide a merchandising solution based on the customers' desire for different products," Mansfield said.

For example, Mansfield cautioned against expanding culinary sets across the board. "Let the customer determine the variety. If gourmet food is a growth area, then an expanded GM culinary section makes sense," he said.

At the same time, supermarkets also need to latch onto new products and trends early. "We have to try to be there first. If a product pops up on the 'Oprah' show, or you get celebrity endorsements of a certain item, we need to have it in the store," said Dennis McCoy, category manager of HBC/imaging for Lund Food Holdings, Edina, Minn.

Photo

While photo department sales are shifting from film and film processing to digital processing and kiosks, grocers expect to profit from this transition in 2005. Some are expanding to digital imaging systems, which allow consumers with camera cell phones to print photos from their phones.

"Photo is an ever-changing segment of GM. Film is still decreasing. The one-time use cameras are holding pretty steady, but digital is certainly on the upswing," said Spears of Ingles.

Ingles is one of several supermarket chains that will capitalize on the digital imaging trend in 2005. "We're taking a strong look at digital imaging kiosks in some of the stores," Spears said. While Ingles plans to test digital imaging at some stores, Spears doesn't believe it will work for every location.

Bashas' Markets, Chandler, Ariz., is testing Bashas' Imaging Centers, an endcap that incorporates the "Pixel Magic" digital image processing system, along with film drop, digital media sales and a limited selection of digital cameras, at nine stores in the Tucson, Ariz., area in 2005, said Bryon Roberts, vice president, general merchandise.

"[Digital imaging] is a fairly expensive venture. But if it goes well, then we'll expand," Roberts said.

While Lund installed Sony digital print kiosks in all 20 of its stores about 18 months ago, executives still have questions about the long-term potential of in-store imaging. "With only about a third of all digital images taken being printed, over time, will there be enough digital printing at retail to make it worthwhile?" McCoy asked.

Home printing, he said, has become "cheaper and easier," while online ordering offered by retailers like Wal-Mart will cut into the use of store-based kiosks.

Still, Lund will be upgrading to "new generation" kiosks that print images faster -- in about 18 seconds. In the future, McCoy said, the chain will have two digital kiosks in certain stores instead of just one.

Housewares

All types of culinary gadgets and kitchen decor items, particularly upscale lines, will continue to be popular in 2005, as they were throughout 2004, grocers predicted.

"When you see Costco and other places going in with upscale kitchen items, there must be something there," Roberts said. Bashas' has been expanding the culinary category for the past two or three years, and will be adding more upscale items in 2005.

"Supermarkets have always been in housewares in some shape or form, but they are really moving up from a price standpoint and a brand standpoint. It is a big opportunity for exploration, and I think we're going to see big growth there," Stern said.

At the same time, upscale does not work for every store and every chain. "If a retailer has the reputation of being innovative and quality-driven, then upscale works, where appropriate, within a category. This may not be applicable within every store in a chain," Mansfield said.

In addition, for the culinary category in 2005, supermarkets must keep products new and interesting, and integrate them throughout the store.

For example, Stern commended Publix Super Markets, Lakeland, Fla., for its "Apron's Cookbook" program, which provides recipes for shoppers, and its related merchandising. "Where they have Apron's, sometimes they put in a cooking school. Where they put in a cooking school, they have demo stations and upscale cookware. It's all very integrated," Stern said. "Apron's Cookbook" is also highlighted on the retailer's Web site.

For a culinary program like Publix's to be successful, the product selection must be kept "fresh," or rotated frequently. "Customers are going into your stores 80 times a year. If they see the same housewares stuff every time, they're going to start to ignore it," Stern said.

Seasonal

Supermarkets that constantly update the seasonal category with new items and displays will also be successful in 2005, retailers agreed.

"The key to success in the seasonal aisle is getting a different look out of the same type of products," Roberts said.

"Buy early, ship it early, and place it all in one location within a store. Create a destination category for seasonal and reap the rewards," Mansfield said.

The strategy for grocery buyers should not necessarily be to buy more seasonal products; rather, they should merchandise seasonal better.

"Have display contests that involve all departments for a particular season, with rewards coming from the total sales," Mansfield suggested.

DVDS

While grocers have expanded their DVD sets in the past couple of years, in 2005, Stern predicted they will capitalize on sales of all media, including DVDs, games, CDs and books. "Media in general is an area we're seeing supermarkets be successful in. The sell-through of those items [is strong]. Skimming off the top items in key media categories adds a lot of potential draw," Stern said.

For example, Quincy, Mass.-based Stop & Shop Supermarket's Bestsellers! media departments allow the chain to take some sales off the top of the most popular media categories, Stern said.

Trying On Apparel

While some supermarkets are expanding clothing sets, many retailers interviewed by SN do not plan to add more apparel beyond standard T-shirts, sweatshirts and other non-fashion items.

"We just do in-and-out promotions. We don't have enough space to do apparel year-round," said Bryon Roberts, vice president, general merchandise, Bashas' Markets, Chandler, Ariz. Bashas' plans to stick with four- to six-week clothing promotions.

However, Neil Stern, partner at the retail consulting firm of McMillan/Doolittle in Chicago, predicted some chains will start experimenting with apparel lines in 2005, following the trend started in supermarkets in the United Kingdom. "Maybe kids' clothing would be the ripest area for that -- integrating the products you're already selling, such as diapers and baby food, along with apparel, creating a destination section for a pretty key constituency: young moms," he said.

One apparel-related product on the decline is hosiery. Ingles Markets, Asheville, N.C., plans to cut space allocated for pantyhose selections after its 2004 category review. "It has been down, across every channel of trade," said Dan Spears, director of HBC and GM.