MASS MERCHANDISERS, WAREHOUSE CLUBS AND CONVENIENCE STORES ARE BOOSTING MILK SALES -- AT THE EXPENSE OF SUPERMARKETS

LYNNE MILLER

Make no mistake: Supermarkets remain the dominant channel for milk, responsible for more than three-quarters of sales.

However, alternative formats are milking sales and increasing share. Even Sears, the major appliance giant, sells quarts and gallons of skim, whole and 2% at the new Sears Grand store in West Jordan, Utah. The 210,000-square-foot store is the retailer's answer to competition from Kohl's, Target and Wal-Mart.

"There was a time when people went and bought their milk at the grocery store," said Bruce Peterson, senior vice president and general merchandise manager of Wal-Mart Stores, Bentonville, Ark. "So many different outlets are [now] available to them. It's clear customers are buying food products increasingly in places other than supermarkets."

Indeed, non-traditional food retailers are steadily siphoning supermarkets' share of milk sales. From June 2002 to June 2003, supermarkets saw their share of sales slip from 78.6% to 77.4%, according to Information Resources Inc., Chicago. The same data showed mass merchants increased their share, from 12.6% to 13% of sales; convenience stores inched up from 2.5% to 2.6% of sales; and club stores moved up from 3.2% to 4% of sales.

Industry analysts attribute the number shift to several factors, among them the overall growth of non-traditional venues as a primary food-shopping destination. Convenience and price also play a role.

For example, the price of milk, unlike other foods, is a hot-button issue that's triggered accusations of price fixing and lawsuits in some cities. The alternative retailers have gained share mainly by selling milk at lower prices and, in some markets, having sharper merchandising strategies and greater in-stock product selection, sources said.

"Price is nine-tenths of the story," said consultant Jerry Dryer of Dairy and Food Market Analyst. Dryer examined milk prices at Chicago-area supermarkets in spring 2002 and found stores were charging consumers roughly twice the wholesale price of milk.

"Price is probably the primary factor" behind the supermarkets' loss of market share, he said.

For retailers, milk's appeal is obvious. It is profitable -- net margins range from 12% to 15% for milk, compared to 1% to 2% on average for all supermarket food items, noted Dryer.

"It's way more profitable to sell milk than anything else in the grocery store," he said.

For the past two years, supermarkets on average have charged the highest prices for milk of any retail outlet tracked by IRI. A comparison of prices for a gallon of milk at the various outlets showed a wide spread. Supermarkets were the price leaders, charging on average a high of $2.98. Club stores offered the lowest prices, averaging $2.12, according to IRI data for the year ending June 15, 2003.

Milk customers are worth their weight in gold -- liquid gold. A market basket analysis involving more than 200,000 transactions showed those involving milk and one other dairy item were nearly four times higher than non-dairy transactions, according to research for the dairy industry conducted by Willard Bishop Consulting, Barrington, Ill.

Alternative formats have picked up that conclusion, to their advantage. One of the most successful non-traditional milk retailers, Wal-Mart Stores, is today responsible for 14.4% of all retail milk sales. The Bentonville, Ark.-based retailer, in fact, saw a 10.4% increase in fluid milk sales for the year ending Oct. 5, 2003, according to IRI.

Price definitely plays a part in the shift favoring mass merchants and other alternative milk sellers, according to Peterson.

"Customers are always looking for value whether they're buying milk or blue jeans," he noted. "Milk has been a big part of Wal-Mart's merchandise assortment in all formats since 1995. In supercenters, discount stores and neighborhood markets, all of our formats carry milk."

Supermarkets also lag behind the competition with respect to merchandising the right products, and maintaining full cases, Dryer said.

"You can't sell it if you don't have it on the shelf," he said. "Out-of-stocks is a big problem in the dairy aisle. You very rarely see out-of-stocks in the convenience stores. Supermarkets are not doing a good job of presenting and merchandising single-serve packages. They're not putting enough facings or enough variety of those smaller sizes."

Beyond offering low prices, alternative venues are giving supermarket retailers another reason to worry -- they're enhancing their product selection to appeal to a variety of consumers.

"Those dairy aisles are big and wide," said Kikke Riedel, assistant director of market research for the International Dairy Foods Association, Washington. "They don't just have white gallons. Within the last year or two, they've gotten more diverse in terms of product assortment."

Some milk retailers succeed by deliberately keeping the assortment small, such as BJ's Wholesale Clubs. The Natick, Mass.-based warehouse club chain, operating mostly along the East Coast, stocks four gallon-sized milk items at most of the company's 148 locations.

Milk sales have been climbing steadily at BJ's, the No. 3 club store operator behind Costco and Sam's Club. Low prices are the main reason consumers buy the beverage at club stores, the official said.

"The milk sales at BJ's have increased tremendously over the past year," said Maureen Hines, a buyer/merchandiser for the chain. "We have made BJ's a destination stop for milk purchases. We have made a huge effort to be at the best possible retail on milk every day in our clubs."

While convenience stores managed to increase their share of sales, overall milk volume declined by 10% this year, probably the result of a steep drop in cigarette sales at C-stores, an official with the National Association of Convenience Stores told SN. The two items are often linked by the convenience factor.

Nevertheless, many C-store operators report brisk milk sales. Officials at 7-Eleven attribute their growing volume to more competitive pricing and fresher product, which the retailer provides through its daily distribution system, a spokeswoman for Dallas-based 7-Eleven told SN.

Single-serve products designed for immediate consumption represent a hot new category in milk cases, especially those in convenience stores.

"C-stores have seen growth in the number of single-serve sales of milk," said Jeff Lenard, director of communications for the NACS, Alexandria, Va. "The way the packaging has changed over the years, it encourages more single-serve sales. You've also seen the introduction of flavored type milks. That's also driving single-serve sales."

In the last year, officials at Canastota, N.Y.-based Nice N Easy Grocery Shoppes introduced a number of new flavored milks in plastic pint containers. They moved the drinks from the milk case to the beverage cases to enhance their appeal with consumers looking for an alternative to soda, a company official said.

Associates also make it easy for consumers to pick up a gallon of milk by positioning the gallons level with the handles on the refrigerated cases. Also helping sales is price. The chain frequently sells milk for as much as 50 cents less per gallon than local supermarkets, said Matt Paduano, director of purchasing for the 79-unit chain.

"For us, milk is considered a destination," Paduano said. "We spent years developing that business. We try to make a conscientious effort to have product in stock."

In recent years, the company has seen low single-digit increases in overall milk sales, with single-serve drinks generating the strongest sales, he said.

Another convenience-store chain known for its dairy products uses technology to make milk buying even more convenient. In the last year, Miami-based Farm Stores rolled out a pre-paid milk program that cuts the amount of time milk buyers spend on a purchase transaction to under one minute. Shoppers who have already paid for the milk use a 10- or 25-gallon electronic card, which is scanned and processed in the stores.

"It is the quickest way to shop for milk in Florida," the retailer noted on its Web site.

Walgreens, CVS, Rite-Aid, Eckerd and other drug retailers sell milk, too, though they actually lost market share, according to IRI. Sales of milk at drug stores dropped from 1.9% during the year ending June 16, 2002, to 1.8% for the year ending June 15, 2003. One of the few remaining privately held drug chains, Durham, N.C.-based Kerr Drug, is in the process of re-evaluating and developing its dairy case business.

"The 12- to 16-ounce, single-serve flavored milk products are increasingly popular as replacements for soda out of convenience and drug coolers," said James Hill, category manager at the 120-store chain. "At about $1 each, the ring is similar to a half-gallon of milk. It's a profitable product line."