More sophisticated eating habits, increasing multicultural populations and international travel are among the reasons retailers are giving special treatment to specialty foods.Such special attention is taking the form of relocated and remerchandised specialty sections, cross-merchandising programs and increased promotional support, among other efforts."Specialty consumers are the backbone of our business,"

More sophisticated eating habits, increasing multicultural populations and international travel are among the reasons retailers are giving special treatment to specialty foods.

Such special attention is taking the form of relocated and remerchandised specialty sections, cross-merchandising programs and increased promotional support, among other efforts.

"Specialty consumers are the backbone of our business," noted Tom Hann, director of international foods, Jungle Jim's, Fairfield, Ohio.

Sales of specialty foods -- or those that have limited distribution and a reputation for being high quality -- in mainstream, specialty and natural food stores increased 20% between 2001 and 2003 to $23 billion, according to Mintel International's just-released "Specialty Foods: State of the Industry" report, conducted for the National Association for the Specialty Food Trade, New York.

"There's more of an awareness of fancy foods among all demographic segments," said Marcia Mogelonsky, senior market analyst for Chicago-based Mintel. "Even kids are interested in trying new things."

Offering a broad selection of fancy foods can give traditional supermarkets an edge over mass merchandisers and other retailers because it provides customers with a one-stop shopping experience. By getting more involved in specialty food retailing, "supermarkets can keep customers coming back to their stores instead of going to other stores," said Mogelonsky.

Retailers polled by SN concur that their involvement in specialty food retailing enables them to carve out a competitive niche in the marketplace.

"The specialty consumer is the person I want to attract because that's how I differentiate myself from the competition," said Al Lees 3rd, owner, Lees Market, Westport, Mass.

Scott Silverman, vice president, specialty food and wine, Rice Epicurean Markets, Houston, agreed, saying his five stores have a reputation for being the first to market with unique food and beverages.

"There's only one retailer in Houston that carries Trump brand water, and it's us," he said, referring to Donald Trump's bottled water, promoted on Trump's reality television show "The Apprentice."

The time is right to delve into specialty food retailing because fancy foods are more popular than ever. Silverman attributes this in part to a rise in sales from the young adult demographic. Such consumers are eating out more and trying new flavors and textures. This, in turn, has led them to replicate their restaurant experiences in their own kitchens.

"They're cooking food that tastes like what they get when they eat out," Silverman said.

What's also helping is that specialty foods are becoming a popular way for consumers to spend their discretionary dollars. After all, specialty foods are a luxury nearly anyone can afford, said Silverman.

"Not everyone can get a Lexus or a mink coat, but just about anyone can get specialty food," he said.

While specialty items are certainly available to the masses, the typical specialty buyer is a more upscale consumer. Most have higher incomes and spend more on food. In 2002, for example, households with annual incomes of $70,000 and more spent twice as much on food as the lowest-income households, according to Mintel.

Retailers agreed that the specialty buyer is a profitable consumer. Shoppers who purchase specialty groceries typically buy better cuts of meat, higher-quality wine, and spend more per trip than other shoppers, they said. Since specialty consumers have more economic clout than traditional consumers, retailers are employing a number of strategies to cater to them and make them loyal shoppers. Many stores are devoting more space and promotional support to the category.

Specialty foods are performing so well at Lees Market, for instance, that the retailer has remerchandised the section, and moved it from the middle to the front of the store. Specialty now takes up the first 25% of the store.

"We've created a destination for people who are serious about cooking," said Lees.

Specialty foods now not only have a new location, but also a new look. The section has been redesigned, complete with eye-catching Metro shelving.

"We want to make it easier for our specialty shoppers to find the products they need," said Lees.

Product selection has also changed. Lees has remerchandised the section to offer more variety in specific categories. For instance, it previously stocked olive oil from about four different regions of Italy. Now, with minimal impact on the number of stockkeeping units offered, nearly every region of Italy is represented. And in the spice section, the retailer has cut in a new flavor -- smoked paprika -- in place of one of several different types of rosemary it previously carried.

"We're de-emphasizing numbers [of SKUs], while emphasizing variety," Lees said.

Lees Market is highlighting specialty Center Store foods in other ways as well. For instance, barbecue sauces, marinades, spices and rubs are performing so well that Lees has opted to cross merchandise several selections in the prepared foods department.

Condiments like these comprise more than an 11% share of the specialty foods market in all retail channels, making it the largest segment overall. After condiments, leading categories are teas and cheese/cheese alternatives, each of which accounts for about 5% of the market.

Condiments are also the No. 1 category in mainstream retailers, generating $1.2 billion in sales in 2003, a 5.7% increase from 2002. Rounding out the top five Center Store categories are teas, coffee, salty snacks and cookies/snack bars. The bottom five Center Store categories, meanwhile, are conserves/hams, puddings/shelf stable desserts, Asian foods, hot cereal and rice cakes.

At Jungle Jim's, the biggest change in specialty sales has been in the Italian category, whose sales have decreased slightly due to the low-carb craze.

"People are not buying as much pasta, both domestic or specialty," Hann noted.

Indeed, the popularity of low-carb diets has changed the dynamic of the specialty foods industry, said Silverman of Rice Epicurean. For sure, it's hurt sales of products like specialty pasta and cereal. Conversely, though, it's actually helped bring new users into the specialty foods arena, Silverman said.

The reason for this is that shoppers searching for a low-carb version of their favorite foods may choose, say, a specialty food bar that contains what they think are higher-quality or better-tasting ingredients, vs. bars from mainstream companies.

"The specialty market is not just made of smaller companies making the same foods as the big companies," said Silverman. "It's products that are made in smaller batches from manufacturers who aren't trying to hit a certain price point."

Rice Epicurean is testing low-carb sections in a few of its five stores. The sets range in size from 12 to 16 feet, and contain a variety of new low-carb products.

Meanwhile, Jungle Jim's is enjoying sales gains in Indian, vegetarian and Hispanic foods.

"Demographics are changing, and we're getting more Hispanic customers," Hann said.

Jungle Jim's has been expanding its specialty offerings over the last few years. Specialty foods are merchandised in a 60,000-square-foot "international foods" section of the retailer's massive 300,000-square-foot store.

To promote the specialty market, Jungle Jim's has three built-in sampling stations in its international department, where events are held every Friday and Saturday. Hann said the demos are one of the more effective consumer intercepts employed to encourage trial purchases of unfamiliar products.

Fancy Favorites

Two of the leading Center Store specialty categories -- coffee and salty snacks -- have witnessed double-digit sales growth over the last few years.

Category: 2001 Sales; 2003 Sales; % Change 2001-2003

Condiments: $1.2 billion; $1.3 billion; 9.3

Coffee/Coffee Substitutes: $511 million; $608 million; 18.9

Teas: $511 million; $555 million; 8.5

Salty Snacks $418 million; $468 million; 11.9

Cookies/Snack Bars: $429 million; $461 million; 7.5

Source: Mintel International, based on sales in food, drug and mass merchandisers