SHAKY GROUND

The coffee market has been an unstable landscape since crop damage in Brazil sent prices through the roof this summer.And as far as retailers are concerned, the most treacherous spot on the playing field now is the middle ground.Retailers said that after prices rose, and then became tangled in fluctuations brought on by major frost and drought damage in Brazil, shoppers started switching to private-label

The coffee market has been an unstable landscape since crop damage in Brazil sent prices through the roof this summer.

And as far as retailers are concerned, the most treacherous spot on the playing field now is the middle ground.

Retailers said that after prices rose, and then became tangled in fluctuations brought on by major frost and drought damage in Brazil, shoppers started switching to private-label ground at one end and whole-bean gourmet coffees at the other.

As a result, total coffee department sales have been perking along for the most part -- in some cases even showing increases -- in spite of many retailers cutting back on advertising.

Supermarket coffee category executives told SN that the growth they are seeing in private-label and whole-bean gourmet has come largely at the expense of national-brand canned ground coffees, and to some extent instant and freeze-dried.

In response, retailers said they've been plumping up their gourmet selections and trumpeting their store-brand programs.

The Atlanta division of Kroger Co., for example, was recently touting its private-label canned coffee as a better buy than a leading national brand, Maxwell House Master Blend from Kraft General Foods.

In a full-page, four-color newspaper ad that ran last month, Kroger featured a can of its Kroger Select Blend Ground Coffee for $5.99 a 34.5-ounce can, with the headline "Change is good."

Kroger officials declined to comment about the promotion, but ad's message speaks for itself: "Save $4 over Master Blend Coffee."

"Our coffee sales have definitely dropped off. But what they dropped off in the conventional canned coffee we're more than making up and compensating for with our gourmet coffee," said Doug Keller, director of grocery at Save Mart Supermarkets, Modesto, Calif.

Duane Smith, grocery buyer at Haggen Inc., Bellingham, Wash., said, "People are going either for a good inexpensive ground coffee, like our Haggen brand, or they are going the other way to whole-bean gourmet. That middle ground is not a safe place to be right now.

"Now the national brands are starting to come back with some deals to see if they can get back their share, but they are still over that $10 mark and private label is under $10. When you start getting into the four figures, psychologically that is a big step. So private label has done very well," he said.

"We found that when word of the frost first came out, people hit it and jumped on hard, expecting prices to go to pot -- which they did, with the prices jumping two or three different times," recounted Brian Hettinghouse, general manager at Harding's Markets West, Plainwell, Mich.

"Pricing seems to have stabilized more recently, and we haven't had any major changes in coffee in the last four to six weeks. I believe that our sales have come back to a point where they are somewhat consistent to what they were prior to the cost changes," Hettinghouse added.

Mark Azzolina, a grocery buyer at Food Circus Supermarkets, Middletown, N.J., said he has been having success with his Foodtown brand of private-label coffee.

"Since the frost, we find that many of our customers have been switching to private label and cheaper brands of coffee. On average, our coffee sales are only down slightly and people have mostly shifted their purchases to other brands," he said.

"We find that when prices go up they will go to another price level brand, because they are not going to cut out their coffee," Azzolina explained.

"And those customers that can still afford the upscale coffees will continue to buy them, whether the price goes up or not," he said. "In fact, we just brought a few additional varieties of whole-bean gourmet coffees that the customers grind themselves."

"Our coffee sales are up slightly, they are a little bit improved, but they are not flying out the door. I think that money has been tight and people have been very careful with the economy right now, based on the election and everything; I think they were holding back," said Dick Salmon, senior vice president at Melmarkets Inc., Garden City, N.Y.

"Our coffee sales have been holding steady. We have noticed people deserting national brands for private label, because of the cost factor," said Mike Post, grocery buyer at Morgan's Holiday Markets, Cottonwood, Calif.

"At the same time we're seeing the upscale headed towards the gourmet coffees. They try the gourmet coffees when they are out, and now that we have them available they pick them up in the grocery store. The national brands are the ones suffering from these trends," he said.

While gourmet coffee has been growing in importance for some time, retailers said a noticeable shift to private-label and gourmet beans from national brands began after heavily publicized frosts in Brazil in June and July wiped out 40% of that nation's coffee crop for next year and sent prices through the roof.

Coffee futures prices went from 75 cents a pound in January to more than $2 a pound in August. Retail coffee prices, in turn, shot up at least by half, and in many cases, doubled.

While pricing has somewhat stabilized, retailers said it has not gone back down to its prefrost levels.

Even before the frost, supermarket coffee sales data from Nielsen North America Scantrack supported the switch to private-label ground coffee. For the 52-week period ended June 11, 1994, ground coffee had supermarket sales of $1.88 billion, an increase of 1.3%.

While Nielsen did not have scanning data available for the post-frost period, retailers said the price fluctuations caused by the frost have helped spur private label's growth even further.

During the prefrost period, private label had sales of $123 million, an increase of 16%. Most national brands, however, exhibited sales declines in the low single digits during the same period, Nielsen data shows.

Eight O'Clock coffee, the private label of A&P, Montvale, N.J. -- which is sold as a name brand in markets where A&P does not operate stores -- had sales of $80.7 million, an increase of 11.1%. A report on the coffee and tea business released in October by Find/SVP, a New York City research and consulting firm, estimates total coffee sales will have grown 1% to $5.6 billion in 1994, and it projects sales will increase at a relatively slow rate to $5.8 billion by 1998, largely from gourmet coffee.

"Sales of regular ground coffee will continue to decrease as they did in the first years of the 1990s," the report stated. "From 1994 on, ground regular coffees will no longer be the largest segment of the coffee market, as sales of ground specialty and gourmet coffees will surpass it."

Post of Morgan's Holiday Markets theorized that the national brands will seek to regain market share by putting their emphasis on gourmet varieties.

"There are some flavored ground coffees coming out from the national brands that are getting a lot of play, like Hills Bros. People are picking them up, and I think the national brands are fighting back to bring them back into the fold," he said.

The Find/SVP report projects whole-bean coffee to double in share by 1998, when it will comprise about 9% of the total coffee market.

"Gourmet coffee sales were on the increase before this [frost] situation and that trend is still clearly there," said Hettinghouse of Harding's.

"We have really seen a tremendous increase in whole-bean coffee," said Mark Polsky, senior vice president, Magruder, Rockville, Md. "Whole-bean is a little higher priced anyway, and the price didn't jump up as much. We're finding that we're selling a ton of bean coffee." Retailers said the turmoil in coffee pricing has affected the way many of them advertise and merchandise the category.

"We have actually cut back on putting coffee in our ads, and we are not really promoting it as much because with the prices jumping from week to week, people really don't know if it is on sale or not," said an official at Charlotte, N.C.

The official said Harris

Teeter plans on merchandising the category differently this winter as a result. "We're planning to use coupons, around Christmastime, for example, instead of running a straight price in the ad," the official said.

"We've been putting grinders and gourmet displays in line in our coffee sets, and getting the space from the national brands. We haven't really discontinued items; we are just cutting back on rows," said Post of Morgan's Holiday Markets.

"With coffee sales the everyday buys are still there, but we're not promoting it like we used to, because it looks kind of funny promoting it at the price that we would have to promote it at," said Keith Dauterive, senior vice president and director of buying at M&E Food Mart No. 2, a 38-unit chain based in Nederland, Texas.

"Our coffee sales have been holding pretty steady. But since we haven't been promoting, we haven't had much volume aside from our everyday sales. We haven't hurt our everyday sales; we have just hurt our promotion sales. And I don't look to promote coffee very much until the price comes down," he added.

"What the price hikes in coffee have meant for us is that the featured coffee has really started to pick up, and off-the-shelf sales are still slow," said Polsky of Magruder.

"We have been advertising gourmet coffees more, but the time of year is probably just as much a factor when it comes to that as the price, because of the holidays," he added.

Smith of Haggen said he has increased coffee advertising around holidays, but at other times of the year he prefers to advertise whole-bean coffees, such as the Millstone line. "It [Millstone] is more upscale and they are now finally starting to come back with advertising dollars," he said.

Other retailers have elected to leave their coffee advertising status quo.

"We continue to advertise coffee pretty heavily, and our sales have been holding pretty steady," said Scott Leake, a buyer at Winn-Dixie Stores' Texas division in Fort Worth.

Springfield, Mass.-based Big Y Foods saw its coffee sales tumble 20% to 25% as thrifty New Englanders refused to pay higher coffee prices. As a result, Big Y has sought to increase its sales of other beverages. "We are advertising tea and cocoa more often and we are trying to promote coffee as often as possible at a higher retail sale price. Our advertising has remained at the same level," said Allan Young, category manager. He added that instant and freeze-dried coffee sales were off by 14%.