SQUEEZE PLAY 2008

CHRISTINE BLANK

As food shoppers get squeezed by food price inflation, supermarkets' nonfood sales could benefit if retailers concentrate on offering value packs and emphasize the one-stop shop in the face of soaring gas prices, sources told SN.

Supermarkets will likely experience more traffic in their stores, as consumers eat in restaurants less, visit fewer stores and nest at home. Consumers will still buy health and wellness products, and personal care items, and use supermarket pharmacies, retailers and analysts said.

At the same time, shoppers are looking for value and will probably buy more private-label versions of their favorite general merchandise and health and beauty care items.

“Most HBC items in grocery are necessities, and consumers won't stop consuming. But they could trade down. Thus, private label and better-value options are key,” said Scott Van Winkle, managing director of equity research, Canaccord Adams, Boston.

Shoppers will be looking for more HBC and GM products in value packs, which could hurt supermarket nonfood profits, since the items are typically offered by club stores.

“If somebody takes daily vitamins or glucosamine, they buy the twin-packs. Half of the supermarkets don't even carry those items,” Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill., said.

Supermarkets will have to be more price-aggressive on nonfood in this economic environment, said Bill Mansfield, a former supermarket nonfood executive and now president and chief executive officer of consulting firm VIP International, Garland, Texas.

“The mass market/club store chains impact supermarkets with much lower everyday prices and value packs for the heavy user,” he said.

Still, many grocery chains are taking strong, preemptive steps to promote nonfood — including fuel — during the recession.

REBATE CHECKS

The most immediate boost to supermarkets' sales may come from promotions that focus on gas savings and IRS economic stimulus checks.

Kroger Co., Cincinnati, Supervalu, Eden Prairie, Minn., and other supermarket chains are urging consumers to use all or part of their rebate checks and economic stimulus checks on grocery store gift cards, and receive extra money on the cards.

“Grocery bills represent a significant expenditure for the average American family. Kroger's program allows our customers to stretch their grocery dollars further,” said Kroger CEO David Dillon in a press statement.

The Kroger promotion allows shoppers to exchange their tax refund or economic stimulus checks for a Kroger gift card, with an extra 10% — $30, $60 or $120 — added to the card, depending on the amount received from the IRS. Supervalu also adds 10% to gift cards acquired with the checks.

Two-store natural food chain Ada's Natural Supermarket, Fort Myers, Fla., is running a similar promotion, offering an extra 10% on gift cards when shoppers use part or all of their IRS rebate checks on gift cards at its stores.

“People still need to eat. And we want to let them know what we're all about,” said Eddie Bonadies, co-owner and co-manager of Ada's Natural.

In addition, Bonadies believes people may be driving less because of the high price of gas, so they will be looking for one-stop shopping. He expects that to bode particularly well for Ada's recently opened store in Cape Coral, Fla., which includes a fitness center with babysitting service.

“We offer one-stop shopping. They can work out, and go to a clothing store within the store,” Bonadies said.

Fuel Promotions

Supermarkets with fuel centers are continuing successful rewards and discount promotions, showing consumers that they are trying to save them money on this costly item.

For example, Meijer, Grand Rapids, Mich., offers text alerts to let customers know when the price of gas at Meijer's fuel centers is going to rise, before the increase is seen at the pump.

“It's quick and easy and gives you time to gas up before prices go up,” according to a statement on Meijer's website.

Publix Super Markets, Lakeland, Fla., operates seven Pix gas stations, which have a standing offer of 3 cents off per gallon of gasoline when shoppers bring their grocery receipts into the gas station, or when they use a Publix gift card to purchase gas. When shoppers bring in a receipt and use a gift card, they receive 6 cents off per gallon.

“That is a great value for our customers, so we're not currently looking at other [discount programs],” Publix spokeswoman Maria Brous told SN.

In addition, gift cards to gas stations are becoming more popular because of the high cost of gas, according to nonfood executives.

“Gas [gift cards] are a big one right now,” Nick Barainca, director of nonfood, Scolari's Food and Drug, Sparks, Nev., told SN.

Supermarkets with fuel centers should get more shoppers into their stores with gas discounts and rewards.

“Cross-promotions with fuel are very natural tie-in possibilities. Supermarkets should focus on the ‘cannot do without’ list of categories, plus food products that tie in with these promotions,” Mansfield said.

Last month, Giant Eagle, Pittsburgh, offered an extra 20 cents off per gallon in its fuelperks! program to shoppers who bought four DVDs from a selection of 90 titles from Warner Home Video, Burbank, Calif.

Holistic Shoppers

Meanwhile, retailers and analysts paint a rosy picture of organic and natural products, because consumers have already changed their buying habits to more holistic and sustainable options.

“That is a change for many folks looking for alternative lifestyles. Our Greenwise and Publix natural and organic products are our fastest-growing categories,” Brous said.

Shoppers are expected to continue buying natural and organic HBC and, in particular, vitamins and supplements.

“Thus far, I haven't seen any economic impact on the natural/organic channel, including food, supplements and personal care,” said Van Winkle. “Vitamin sales are actually accelerating.”

Notably, Wal-Mart's sales of wellness products have been strong recently, he said.

Although vitamin sales have always accounted for a large portion of Ada's Natural's business, sales have been particularly strong this year, according to Bonadies.

“Our vitamin department is really kicking — about 40% of store sales. We can't get enough of those products in,” Bonadies said.

Organic skin care sales will also continue to grow, despite their premium prices, Wisner said.

“That is the hot subcategory, economy notwithstanding. Globally, skin care is all going that way,” he said.

Personal Products

In addition, certain HBC items will fare well in the recession, because consumers still need to buy personal products.

“Deodorant, oral care products, sanitary protection, incontinence products, diapers and possibly hair care top my list of the nonfood categories we can't live without or, at least, don't want to remove from our daily existence during economic downturns,” Mansfield said.

Brous believes Publix HBC sales will remain steady, because the chain carries a variety of products, from low-priced items to upscale offerings.

However, grocers have already lost some HBC sales to mass market chains and club stores by not offering value packs and aggressive discounts.

Wisner suggested that supermarkets pick certain hot HBC and GM items to sell as value packs.

“On the things that people go to club stores and stock up on, such as batteries or maintenance OTC items such as glucosamine, I would try to be preemptive. When times are tight, people are going to be pretty rational about making an extra trip,” Wisner says.

Pharmacy Strong

Pharmacy sales also remain strong, and are expected to draw shoppers into the store for combined food and pharmacy trips.

“We're always looking at pharmacy to meet the needs of our customers. That doesn't change because of economic [changes],” Brous said.

Already, the large supermarket chains have gotten more pharmacy customers with their free or inexpensive generic drug programs.

“Many pharmacies, in all retail channels, have developed strong generic promotion programs for maintenance prescriptions. This is a huge asset during these economic times,” Mansfield said.

“Filling our millionth prescription under our free prescription drug program is a milestone we're proud to accomplish. Our customers and the medical community have been very pleased with the program,” Brous with Publix said earlier this year of the chain's free generic antibiotics offer.

GM Concern

While the future may look bright overall for HBC and pharmacy, retailers are concerned about general merchandise, especially big ticket items such as patio furniture and grills. Many supermarkets have made a big push toward carrying more of the items that mass merchandisers and other retailers carry.

“If you have some upcoming trend, such as jewelry, patio furniture or anything that grocery stores were trying to get into, people aren't spending on those items now,” Barainca said.

Scolari's is combating the decreased interest in those GM items by focusing on its private-label offerings and “trying to be more choosy about what we put on the floor, vs. tying up inventory,” he said.

At the same time, some “necessary” GM products might fare better, including light bulbs and batteries, according to Mansfield.

A new survey from NPD Group, Port Washington, N.Y., found that consumers are least likely to decrease spending on toys, video games and home improvement products during a recession.