A CALL TO ARMS

In 2004, supermarkets began to focus on using nonfood categories in the battle against other classes of trade.Among the strategies employed were improving the design and merchandising of sections like housewares and health and beauty care; taking greater advantage of cross-merchandising opportunities; and using DVD promotions to build traffic and sales of other products."Supermarkets are only now

In 2004, supermarkets began to focus on using nonfood categories in the battle against other classes of trade.

Among the strategies employed were improving the design and merchandising of sections like housewares and health and beauty care; taking greater advantage of cross-merchandising opportunities; and using DVD promotions to build traffic and sales of other products.

"Supermarkets are only now beginning to understand the increased importance of HBC and general merchandise in maintaining the frequency of trips to their stores," said Jim Wisner, president, Wisner Marketing Group, Libertyville, Ill.

"General merchandise and health and beauty care are more important today than ever," said Al Jones, vice president, procurement and merchandising, Imperial Distributors, Auburn, Mass. "More and more of the items that would have been department store in the past are now showing up on grocery store shelves. The price barrier is broken once and for all."

Meanwhile, pharmacy was a hotbed of activity, with the implementation of the Medicare discount drug card program, a flu shot shortage that resulted in long lines in supermarket aisles, a lingering controversy over cough and cold products containing pseudoephedrine, and the release of a study by the New York-based Educational Foundation of the General Merchandise Distributors Council, Colorado Springs, Colo., that demonstrated the sales benefit across the store of marketing programs based around certain medical conditions.

"If you are competing with the CVSes and Walgreens of the world, you have to differentiate, and whole health solutions are a way to do that," said John Beckner, director of pharmacy and health services, Ukrop's Super Markets, Richmond, Va.

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GM/HBC:

Crossing Lines

Branded sections, innovative marketing and merchandising tactics, and expanded product offerings marked retailers' efforts to tap the potential of general merchandise and health and beauty care in 2004. The efforts, by many accounts, were successful.

Retailers are increasingly aware that when handled properly, GM and HBC products not only have the potential to be profit drivers, but also are a means to create differentiation in a highly competitive marketplace, industry sources said. That awareness has fueled the continued development of nonfood categories.

"General merchandise and health and beauty care are more important today than ever," said Al Jones, vice president, procurement and merchandising, Imperial Distributors, Auburn, Mass. "It continues to be a struggle, but the good will survive and do better with it."

"As the consumer shopping landscape has become far more diverse, and it is far easier for shoppers to buy almost anything almost anywhere, the new, competitive reality is in pre-empting shopping trips to other retailers," said Jim Wisner, president, Wisner Marketing Group, Libertyville, Ill.

The old price barriers associated with HBC aisles have been broken down to a large extent, industry sources said.

Upscale skin care products, higher-ticket electric toothbrushes, and other products that weren't associated with supermarkets in the past are making their mark, Jones said. "More and more of the items that would have been [in] department store[s] in the past are now showing up on grocery store shelves," he told SN. "The price barrier is broken once and for all."

Supermarkets have an increased focus on the high and low ends of the product spectrum, reflecting a continuing trend among consumers and manufacturers, said Diane Garber, president, In Sight Communications, Buffalo Grove, Ill. Economic pressures don't always affect the "small indulgence" products that people buy, such as personal care items, she said.

"In the next year, if the grocery channel really gets behind general merchandise and health and beauty care, they can outperform their expectations," said Garber.

If economic hardships continue to force consumers to pare down their spending, supermarkets stand to reap further benefits as well, Garber pointed out. While the mass merchants are a good deal for some major purchases, such as electronics, consumers go to the easiest and fairest source for core items, she pointed out.

"From a consumer perspective, there's actually a disincentive beginning to bubble for purchasing too many items in the big-box mass merchants," Garber said. "If you needed to put your own household on a buying diet, you would still go to the grocery channel."

To attract more consumers to un-traditional GM categories, supermarkets have increasingly started retailer alliances across channels, Jones said.

"The benefit is a retailer has name-brand recognition in a category they can expand on like stationery. If they have a Staples name or an Office Max name in the store in expanded sets, there [are] extra sales to be had there," he said.

Stop & Shop Supermarket, Quincy, Mass., recently switched its office supply department from Office Depot to a Staples branded section. Stop & Shop has tested other co-branded endeavors. Kroger recently started a Staples test in some divisions.

Other retailers this year focused on establishing their own brand of GM success with unconventional supermarket departments. The Market Street format of United Supermarkets, Lubbock, Texas, has an increased GM presence. Hy-Vee, West Des Moines, Iowa; and Pathmark Stores, Carteret, N.J. have focused on GM categories like housewares to keep consumers in their stores.

The "Merchandising for Success" study produced this year by the New York-based Educational Foundation of the General Merchandise Distributors Council, Colorado Springs, Colo., noted consumers no longer care about channels when shopping for GM and HBC items.

According to findings from the study's focus groups and data analysis, supermarkets with an upscale housewares section featuring a wide variety of products and price points could compete on the same level as a mass merchandiser. The execution was key to a successful department.

With the proper merchandising approach, nonfood categories can be redefined for supermarkets, the study said. Other categories offered as examples included batteries, cosmetics, skin care and over-the-counter remedies.

OTC products occupy a spot in both the HBC and pharmacy worlds. This year, those lines were blurred further as abuse of popular OTC cold remedies containing pseudoephedrine, a key ingredient in the production of methamphetamine, became an increasingly visible problem. The problem shifted from the Midwest and other rural areas to the national stage when Oklahoma passed a law in April. Oklahoma's law gave products with pseudoephedrine as their main ingredient Schedule V status, mandating the products be kept behind the pharmacy counter. Prior to that, most retailers had voluntarily implemented sales limits to address the problem.

"In looking back on 2004, pseudoephedrine has escalated in priority among the states. When the Oklahoma law passed, that changed the dynamics," said Mary Ann Wagner, vice president, regulatory affairs, National Association of Chain Drug Stores, Alexandria, Va.

Recently, a hearing was called by the U.S. House of Representatives Government Reform Subcommittee on Criminal Justice, Drug Policy and Human Resources to discuss possible government measures to address the problem nationally. The Oklahoma statute has been held up by many as the model to follow. Oregon passed a similar law in November, and industry sources expect similar legislation to come up for debate in other states when state governments return to session in 2005.

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Pharmacy '04:

Medicare Muddle

In 2004, supermarket pharmacy executives contended with customer confusion over Medicare drug discount cards, a flu vaccine shortage, and legislation directed at a popular OTC cough-and-cold remedy.

Starting with their introduction in May, Medicare drug discount cards had a significant impact on retail pharmacies, casting time-pressed pharmacists in the role of counselors for many confused patients. More customer education will be needed as the January 2006 implementation date for the permanent prescription drug benefit of the Medicare Modernization Act nears.

"There is still a major lack of understanding about the plans on the part of the consumer," said John Beckner, director of pharmacy and health services, Ukrop's Super Markets, Richmond, Va. As a result, it was pharmacists and their staffs who had to provide information on which card would best meet the needs of individual customers.

Many supermarket retailers joined with card providers to help ease the process for consumers, or to offer alternatives. Yet by the end of the year, adoption rates were lower then expected. Ukrop's and H.E. Butt Grocery Co., San Antonio, partnered with ScriptSave on co-sponsored cards. Price Chopper Supermarkets, Schenectady, N.Y., steered consumers toward its own Senior Advantage Card Program. While other retailers promoted cards sponsored by industry organizations and other providers, many simply announced they would accept all cards.

A study released mid-year focused on the role of the pharmacy in the context of the whole store.

"Leveraging the Connection Between Pharmacy & the Whole Store" was produced by GMDC's Educational Foundation. The study found a strong potential to lift sales across the store by creating marketing programs around prescriptions sold for certain medical conditions.

A consumer-centric approach to marketing built around specific disease states was the central focus of the study. Examples of program concepts included heart health, allergies, flu centers and a "life changes" theme.

"The initial numbers I got back showed almost a 47% lift in the items we featured," said Mike Juergensmeyer, group vice president, general merchandise and pharmacy, Schnuck Markets, St. Louis.

Ukrop's already has implemented this whole health approach with the pharmacy. The chain offers quarterly diabetes classes in-store; a 12-week weight-loss program for store associates; and a dietician who leads consumer seminars on menopause, and teens and vegetarianism, among other topics. The chain took part in the GMDC study, too.

"It's a point of differentiation with the major drug chains. If you are competing with the CVSes and Walgreens of the world, you have to differentiate. Whole health solutions is a way to do that," said Beckner.

Even as retailers turned inward to focus on leveraging the pharmacy in other store departments in 2004, challenges from the outside world intruded.

In the fall, a surprise announcement by flu vaccine manufacturer Chiron, Emeryville, Calif., that its British plant would be unable to provide nearly half of the United States' flu vaccines created an unprecedented shortage. In supermarkets, hundreds of people formed lines to wait for the limited supplies of vaccines. This created logistical problems that in some cases affected sales. Most retailers were forced to cancel flu shot clinics, an important part of whole health positioning for many of them.

"From our standpoint -- and our pharmacists are very involved in providing immunizations -- it impacted our business," Beckner said.

In coping with the long lines, many stores reported providing refreshments for seniors who waited for hours to get their vaccines. However, there was one reported case of an elderly customer dying after waiting in the heat outside a Safeway store.

"Pharmacies have really stepped up to the plate," said Deb Faucette, director of pharmacy operations, NACDS. "Despite the fact that it impeded sales and inhibited business, retailers did their best to provide food and drinks and crowd management."

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Video:

DVD Drives Sell-Through

DVD kept growing in supermarkets this year with more promotional tie-ins, a broader array of product genres and a heightened awareness by suppliers of the shrink problem.

At the same time, rental at retail outlets saw a sharp decline and by the end of the year, the major rental specialty chains were talking merger in an effort to stem their losses.

Two areas of the rental business did show an increase. Subscription services, such as those offered by Netflix, Blockbuster and Walmart.com, grew rapidly enough to nearly offset the industrywide decline in rentals, which is estimated at around 15%, according to the Home Video Essentials research service of Rentrak Corp., Portland, Ore. Subscriptions, including mail and store programs, now comprise 7% to 9% of rentals, up from last year's 2%.

Additionally, many supermarket chains began installing vending machines for renting DVDs, while McDonald's embarked on an aggressive test of $1 video rentals through vending machines in 105 Denver-area restaurants.

Among the supermarket chains known to have installed video vending machines, either in a test or as part of a rollout, are: Smith's, Price Chopper, Food Lion's Bloom store, Safeway, Kroger in the Houston area, H.E. Butt Grocery Co. and Albertsons.

"The idea behind Bloom is to make the grocery shopping experience more convenient and hassle free," said Food Lion spokesman Jeff Lowrance. "The DVD rental service, combined with Table Top Circle and its home meal solutions selections, enables Bloom to truly offer dinner and a movie."

Price Chopper began testing video vending in three stores this fall, said Mona Golub, spokeswoman. "We have high hopes for the program, and if it is as successful as we expect it to be, there will be more stores on board soon," she said.

"Many chains are experimenting with rental vending machines," said Bill Bryant, vice president, sales, Ingram Entertainment, LaVergne, Tenn. "Vending machines can't replace the revenue that dedicated rental departments contribute, but they are a way to obtain incremental sales."

Others who have seen video vending machines' past failures during the VHS era were skeptical about whether they would succeed now. "There are some real problems with the machines," said Andrew Miller, director, Supermarket Division, Rentrak Corp. Vending units are expensive and need to be serviced weekly with new titles, he said. Also, credit card fees are relatively high for the low transactions involved. "I think you have a high level of overhead for a very low-volume business per machine," he said.

Vending machines "were essentially a flop with VHS," said Tom Adams, president and senior analyst, Adams Media Research, Carmel, Calif. While McDonald's is pleased that the units are successful enough to bring customers back into their restaurants, "supermarkets don't have that problem. People are coming back into the supermarket anyway."

There is no disputing the success of DVD. As of the end of the third quarter of 2004, DEG: The Digital Entertainment Group, Los Angeles, reported that almost 1 billion DVDs had been shipped to retail so far this year, and over 64 million homes had DVD players. These numbers were expected to increase in the fourth quarter.

"DVD sales continue to explode and look like they will once again beat our projections this year," Adams said.

"2004 was a breakthrough year with regard to the number of supermarket retailers that dedicated space to merchandise catalog DVD. The retail margins are higher than new release DVD and consumer demand has enabled supermarkets to sell larger quantities of catalog DVD than VHS in the past," Bryant said.

Many retailers launched more aggressive cross-promotional programs linked to the release of video titles, such as Kroger and Albertsons on "Aladdin," Safeway on a "Schoolhouse Rock" DVD, and Albertsons on "Mickey's Once Upon a Christmas." "The chains have become more aggressive about it. The studios have done a good job of tailoring programs," Miller said. Also the success of "The Passion of The Christ" resulted in a trend to religious videos.

Previously viewed sales of DVDs -- used copies that are sold off by retailers after the hot initial rental period -- have become a significant trend for many supermarkets, Miller said. "If you add previously viewed sell-through to the equation, it's a major business in supermarkets," he said.

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