Food is an ever-moving target for those who make it, sell it and eat it.The challenge for those in food distribution is to satisfy and appeal to consumers' changing tastes and attitudes.Last year, breakfast was out but granola bars were in. People liked to eat at home as long as they didn't have to cook. Smaller serving sizes replaced hearty portions. Trans fats were avoided while fat-free and cholesterol-free

Food is an ever-moving target for those who make it, sell it and eat it.

The challenge for those in food distribution is to satisfy and appeal to consumers' changing tastes and attitudes.

Last year, breakfast was out but granola bars were in. People liked to eat at home as long as they didn't have to cook. Smaller serving sizes replaced hearty portions. Trans fats were avoided while fat-free and cholesterol-free foods were sought. While low-carb died a fast death, the glycemic index became an important indicator. Everyone, meanwhile, looked for value, whether it was an extra vitamin boost in bottled waters or easy-to-consume, on-the-go foods that tasted good. Value now reaches beyond price to embrace quality as well.

Health and wellness, convenience, value and flavor are just some of the trends derived from SN's 2006 analysis of the 50 significant food and nonfood categories that represent largest dollar sales volume and top sales gainers and decliners, compiled by Chicago-based Information Resources Inc., for the 52-weeks ending May 21, 2006.

IRI statistics indicate supermarket operators can cheer about the food channel this year maintaining its share of the business. Supermarkets posted a slight gain of 0.7% with $254.7 billion in total food and nonfood volume for the calendar year ending Dec. 25, 2005, in categories tracked by IRI.

"The fact that the grocery channel has successfully maintained share across competing channels is huge," said Sheila McCusker, editor of IRI's Times & Trends reports.

McCusker believes this marks a turning point for supermarkets because it also is the first time supercenters have slowed their share gains.

"Supercenter markets are becoming saturated, and simultaneously, grocers have put into place new formats, a new focus on fresh foods and a new emphasis on organics - all successful [tactics]," she said.

McCusker said the supermarket segment is headed in the right direction and has an opportunity to recapture some sales it lost over the last decade, especially with its continued focus on growing fresh foods and organics. Organic food is the highest growing segment of the consumer packaged goods categories, posting 13% annual growth vs. 2% for the food industry as a whole, she noted.

More targeted marketing and merchandising tied to high-growth categories is needed to further boost supermarket sales, McCusker said.

"We are definitely seeing a lot more micro-marketing. A lot of it is done with demographics, but increasingly we are seeing lifestyle variables as well. In a market that is essentially not growing, you have to find niche markets and subsegments that are growing. Lifestyle segmentation helps you do that," she said.

Meanwhile, drug stores worked hard to position themselves as strong convenience purveyors, and the channel was rewarded with a double-digit increase of 12.5% with $147.7 billion in total food and nonfood sales. Combined food/drug/mass channels, excluding Wal-Mart and the bakery or nonedible segments, produced $261.4 billion in sales, up 1.4% during the period.

Nonfood, which is a $17.7 billion segment for supermarkets, continued to lose share to competing formats.

"Nonfood is an area where you see the most intense cross-channel competition vs. food and beverages," McCusker said.

"Grocers can't go and slash all their nonfood prices on every nonfood item to compete with supercenters, but they could follow aggressive pricing and promotion strategies on those products that matter most to their targeted consumer segments."

Underlying demographics are driving food trends.

"When baby boomers change their shopping behavior, the entire industry changes," McCusker noted. The 78 million baby boomers will be followed by a wave of 75 million young adults, called echo boomers. How supermarkets and CPG companies market to these demographic groups will impact future sales and product development.

Right now it's health and wellness, convenience, taste and variety driving sales growth. "Value is the cost of entry," McCusker said. "Demographic trends can't be overlooked and it is driving much of what we see in terms of category channel results."

What follows are summaries of IRI category sales trends for the key categories in Nonfood, Page 45; Fresh Market, Page 59; and Center Store, Page 79.


Some Nonfood Business Is Booming

Supermarkets continue to face big challenges in their core nonfood categories, according to SN's annual review of IRI data.

For example, the largest nonfood categories, such as internal analgesics, vitamins and toothpaste, all saw single-digit declines. Other nonfood categories, like photographic supplies and panty hose/nylons dropped by double-digit percentages.

However, that's not all. As radio personality Paul Harvey would say, here's the rest of the story. A number of categories not covered by IRI showed robust strength.

While the biggest nonfood category, internal analgesics, registered $890.3 million in supermarket sales for the period tracked by IRI, SN found five other categories that exceeded $1 billion: pharmacy, fuel, gift cards, magazines and greeting cards.

Prescription sales in supermarkets were $27.6 billion in 2005, reported the National Association of Chain Drug Stores, Alexandria, Va., up 2.5%. Fuel was a $10.9 billion business for supermarkets, according to numbers derived from a report by the National Association of Convenience Stores, Alexandria, Va., up 35%.

A conservative estimate by SN of the gift card market, based on industry numbers from the Packaged Facts division of MarketResearch.com, New York, and Safeway-owned Blackhawk Network, Pleasanton, Calif., indicates that it will be a $2.8 billion business this year in supermarkets. Safeway reports gift cards as its fastest growing category and second or third biggest category overall.

Magazines were a $1.1 billion category in the food channel, according to the Strategic Planner of ACNielsen, Schaumburg, Ill., for the 52 weeks ending June 17, the first year this category was tracked. Greeting cards also were a $1.1 billion supermarket business in 2004, reported Unity Marketing, Stevens, Pa., with another $470 million derived from gifting and party ware. Meanwhile, the Educational Council of GMDC, Colorado Springs, recently reported that seasonal products gained 14.6% in sales from 2004 to 2005.

"Seasonal is truly a growth engine in the GM and HBC departments," said Jon Hauptman, vice president, Willard Bishop, Barrington, Ill., the consultancy which produced GMDC's "Seasonal Best Practices" study.

Pharmacy is one area where supermarkets are beating Wal-Mart, noted Jim Hertel, senior vice president at Willard Bishop. As supermarkets seek differentiation, "they look at pharmacy as a place that is very consistent with their whole health orientation," he said.

Many nonfood categories are surrendering space because supermarkets are finding more success differentiating themselves with food presentations, said Art Turock, sales growth strategist, Art Turock & Associates, Kirkland, Wash. Health and beauty care in particular is losing out to the drug channel because it offers greater convenience. On the other hand, "some retailers are trying to differentiate with unusual GM products. So it depends on what the retailer's differentiation strategy is going to be," Turock said.

With consumers trading up and trading down at the same time, supermarkets are losing out on price with many commodity products while gaining ground with other upscale items, like salon-type HBC items, said Jerry Johnson, president and founder of Voltaggio Johnson Design, St. Paul, Minn. Candles, which switched from the top declining list to a top sales gainer with an 8.2% increase, are an example of this trend, he said.

"Consumers are shopping differently than before because of the multichannel phenomenon," Johnson said. "A ton of pressure exists for grocers as consumers become more mobile, have more options and more empowerment; they are willing to go more places to get what they want."

"It is possible that with imagination, with good products and with new ways of coming to market that supermarkets have the power to experience growth in health and beauty care," said Roy White, the Pelham, N.Y.-based vice president of GMDC's Educational Foundation.


Refrigerated Food Leads Fresh

Shoppers want food to be convenient, healthy and tasty. How do those desires play out at food stores? Manufacturers have introduced a lot of new products to satisfy the desire for healthy, easily prepared or ready-to-eat food. Many can be found in the refrigerated cases. In fact, refrigerated entrees and side dishes were among Fresh Market's top sales-gaining categories in SN's IRI category review. These products, refrigerated and stamped with expiration dates, imply freshness unlike items in freezers or on shelves in the dry grocery aisles.

Refrigerated foods appeal to consumers looking for something relatively nutritious for tonight's dinner, said Kat Fay, editor/consumer analyst for Mintel International.

"There will always be consumers out there who want to avoid too much fast food," Fay said. "I think supermarkets are trying to cater to that crowd [by offering products] that are much more reminiscent of a home-cooked meal but not as decadent as takeout."

Refrigerated foods also have come a long way in terms of quality. Many refrigerated soups, for example, are a far cry from the old salty, condensed soups that used to be staples in American pantries. Refrigerated soups, included in IRI's refrigerated entrees category, saw double-digit increases in sales.

"Refrigerated soups are being positioned as healthier," Fay said. "I think they've taken cues from the restaurants and moved into the refrigerated section soups people really enjoy. It may not be gourmet but it's certainly not run-of-the-mill."

On the other hand, Fresh Market categories that have been around forever - and are perceived to be unhealthy - fared poorly. Sales dipped for hot dogs, margarine and spreads, processed cheese and breakfast meats.

At the same time, consumers, having heard good things about the Mediterranean diet, have warmed up to Middle Eastern and Greek foods. Once a specialty store item, hummus has moved into mainstream supermarkets. Manufacturers have rolled out many new lines of the chickpea dip. Those sales are included in IRI's refrigerated spreads, another Fresh Market category posting healthy increases in sales.

"I think what happens is it gets introduced, people try it, they like it and that creates demand for it," Fay said. "People are always looking for something new. People in their heart of hearts welcome variety."

Consumers also like variety in their shopping. They've helped drug stores capture a small but growing piece of the food pie. Having been described as convenience stores for women, most drug stores have refrigerated cases stocking a small assortment of milk, eggs, prepared foods and other fresh items. By making food available, drug stores capture incremental sales from shoppers who may have stopped in strictly for nail polish or panty hose.

Drug stores are seeing rapid growth in food categories that have plateaued or declined in conventional food outlets. New at selling fresh food, the stores reported increased sales of natural cheese and fresh eggs, whereas the traditional supermarkets and supercenters saw declines in both categories.

"Drug stores are taking share away from traditional grocers," said Jon Hauptman, vice president of Willard Bishop, a retail consulting firm based in Barrington, Ill. "Their new formats have more space dedicated to frozen and refrigerated foods. That's driving a lot of growth but it's not by sheer accident. They understand these categories are key drivers of store traffic."

Yet of all the formats selling food, drug stores actually are the least threatening to supermarkets, Hauptman said. Drug stores' share of the grocery and consumables business is estimated at 4.8% and is not expected to increase over the next five years, according to Willard Bishop's data.

"They'll grow at the same rate as the industry as a whole," Hauptman said. "We see other formats taking share, [with] supercenters increasing the most."


Easy Does It in Center Store

Americans are ever in search of ways to cut the time it takes to get or prepare food. From frozen foods to malted milk, Center Store categories this past year seemed to be impacted by demand for convenience more than anything. "What we clearly are always looking for is the easiest way to prepare our meals," said Harry Balzer, the NPD Group's longtime researcher of America's eating habits.

Thus food and drinks that can be consumed straight from the package continued to be winners. Sales in the $7.8 billion dinner and entree category grew 3.2% in supermarkets. Particularly strong were sales of handheld products for quick bites on the go or family-sized meals.

Demand for instant gratification also has spurred sales of ready-to-drink beverages, while powdered and frozen ones have fallen out of fashion. Once considered convenient, frozen juice has continued its downward sales slide as consumers opt for shelf-stable or refrigerated options.

When they aren't looking merely for quick fare, consumers are seeking foods that will contribute to their health or wellness.

That's been bad news for soda and cigarettes, whose supermarket sales declined 1.3% and 1.4%, respectively, in the past year, but good for snacks like trail mixes and rice cakes, whose healthy patina has helped make them among the fastest-growing categories in the Center Store of the supermarket. "Nuts have staged a comeback. For a while people were convinced they were bad for you," said Tom Vierhile, director of Productscan Online, Datamonitor's new-product database.

The Center Store also has reflected the trading-up phenomenon, as evidenced by growth in gourmet/specialty versions of packaged foods. "Premium has become more affordable, through lower prices on branded products, certainly lower prices on private-label products," said Don Montuori, publisher of Packaged Facts, a Market Research report.

The desire for better health has claimed some unlikely casualties in the Center Store. Juice in all forms, not just frozen, has taken a beating. Its high-sugar content has led many to forgo it in favor of bottled waters and diet drinks, although new diet and light juices have helped the juice aisle recapture some of that lost interest.

The push for health and wellness expressed itself this past year in the growth of foods in portion-controlled packaging and functional foods. Snack, frozen dessert, energy drink and sports drink categories benefited from this trend. "It's the whole idea of, 'I can have my cake and eat it too - the opposite of depriving myself,'" Montuori said.

Experts expect the portion-controlled and convenience themes to remain strong in the coming year.

The rapid growth of take-out underscores the demand for fast meals, Balzer said. "The way that it's manifested itself, and it hasn't hit the supermarket yet, is through the drive-through," he said. "We don't want to get out of cars, and at some point, supermarkets are going to see it."

Health, indulgent and packaging attributes may satisfy the consumer's yen for new experiences, but they may be short-lived fads, he said, pointing out that better-for-you versions of food still consist of only a small part of food sales. "But the long-term trend," he said, "is going to be about, 'How do you make my life easier?'"

Vierhile predicted more organic versions of conventional products, application of the portion-control concept to new categories, and portable packaging.

Rushed lifestyles are one reason, but not the only one. "You're seeing more single-serve products for these smaller households," Vierhile said. "I think it is portion control, but I also think it is smaller households. Household creation is arising faster than population growth. More people are living alone."


How to Read The IRI Numbers

In analyzing food and nonfood category trends within the supermarket channel, SN presents dollar sales data compiled by Information Resources Inc., Chicago, for the 52 weeks ending May 21, 2006, and percentage changes from the previous 52 weeks. That data are used to compare performance of supermarkets to drug stores and combined food, drug and mass channels. Dollar sales and sales shifts in supermarkets for all 296 categories tracked by IRI are published on Pages 34-43. The data are broken down for further analysis into 50 key categories representing large sales volume, top gaining and declining categories in supermarkets. The 50 categories are ranked by highest to lowest dollar volume on Page 34 and ranked by sales shift - highest to lowest percentage change on Page 36.

In depth analyses of Nonfood, Fresh Market and Center Store categories start on Pages 45, 59 and 79, respectively. Each of the 50 category profiles includes dollar volume of subsegments, if the categories are broken down into subsegments. Supermarket dollar volume is compared to drug and combined food, drug and mass channels for the reporting period. Historical trend data are presented with dollar volume and percentage changes for the calendar years 2003, 2004 and 2005 for supermarkets, drug stores and food, drug and mass channels combined. While unit sales are not reported here, they were taken into consideration by SN editors in choosing the 50 categories. Unit sales can be based on the item purchased. For example, in wine, a unit equals a case, but in paper towels, it could be one roll, four rolls, etc. So, theoretically, if shoppers are increasingly buying paper towels in bulk, unit sales could go down.