As consumers cut back on restaurant dining, they appear to be finding a reasonable alternative in the prepared-food section of their local supermarket, chain executives told SN.
Supermarkets are jumping on that trend by developing programs that make it easier to pick up a quick prepared meal to go — which they anticipate will become more of a trend of its own once the recession is over, they said.
“Many people perceive the experience of going out to dinner as an expensive proposition right now, but they still want the luxury of eating out,” noted Tom Hobt, vice president of perishables for Hy-Vee, West Des Moines, Iowa.
Hy-Vee's efforts to fill that void have resulted in sales increases in prepared foods of 5% to 6% in the last few months, he said.
For Bashas', Chandler, Ariz., the lift has been between 6% and 7% over the last year, said Scott Triplett, vice president and general manager of perishables, with the growth in dinnertime volume compensating for a drop in lunchtime business, he pointed out.
“People are not going out to eat as much, so they're eating at home more and getting some of that eating-out gratification from the service delis at the supermarket,” he explained.
Jack Brown, chairman and chief executive officer of Stater Bros. Markets, San Bernardino, Calif., echoed Triplett's remarks, saying, “We're offering some great deals for people who would normally eat out — and by giving them the opportunity to buy their meals at our stores and bring them into their homes, it's somewhat like eating out.
“It's also clear that, in this economy, with everyone under pressure at work, people just want to get home and relax rather than having to scavenge around the kitchen putting a meal together, and buying a prepared meal and bringing it home can be a big relief.”
The increased emphasis Stater has put on meal solutions has resulted in a sales lift of approximately 8%, Brown said.
Tom DeVries, vice president of prepared foods at Giant Eagle, Pittsburgh, was not specific about sales, noting only that they are “exceeding industry trends.”
However, he was adamant that sales of prepared foods at his stores are not a reflection of “trading down” from restaurants.
“We are not positioned as a ‘trading down’ option to restaurants — we are delivering an overall better value for the quality the consumer receives,” he explained.
At Winn-Dixie Stores, Jacksonville, Fla., sales of hot foods, salads and side dishes “are experiencing positive growth over the prior year, largely due to the fact consumers are eating at home more often and turning to retailers for fresh meal solutions at a value — with a focus on comfort foods, ethnic offerings and rotisseries/grilling,” spokeswoman Robin Miller told SN.
While retailers expressed enthusiasm about the short- and long-term prospects for prepared-food sales, industry analysts are skeptical.
“A supermarket's prepared-food section is generally viewed as a convenience, not a reward,” said Gary Giblen, executive vice president of Goldsmith & Harris, New York.
“Given the tough economy, people are looking for nice indulgences that are small ticket, and the prospect of buying from a prepared-food department may be OK in a pinch but it's not really an amazing indulgence.”
Simeon Gutman, a New York-based analyst for Canaccord Adams, Vancouver, British Columbia, said he believes the tradeoff from restaurants to prepared foods at the supermarket has been overstated.
“Maybe people went to Applebee's once a week or they went out for pizza once a week, and if they switch to the supermarket instead of going out twice a week, how much more will they have available to spend? Probably not much.”
Prepared-food sales at a company like Whole Foods Market, which relies heavily on its foodservice departments, are going down, Gutman said, “and the same may be true for Safeway, which also relies on its high-quality prepared foods.
“But for a chain like Kroger, which has a very positive overall price perception, prepared foods have been improving and they're probably driving additional foot traffic because of the stores' overall positive price perception.”
According to the 2009 Trends report by Food Marketing Institute, 69% of U.S. households said they are eating out less often this year, compared with 46% in 2008.
While some of that business is trading down to supermarkets, the recession has softened demand for prepared foods among middle-income shoppers, the report indicated, “[which gives] food retailers in this economy a real opportunity to win back meal time with the correct marketing message and focus for each demographic.”
Despite the softening of interest for prepared foods among middle-income shoppers, “demand among shoppers who continued to be pressured for time while trying to save money on eating out actually grew over the past two years,” the report said, with 17% purchasing prepared meals more frequently than a year earlier.
“For those shoppers, convenient supermarket solutions are a great way to save money and eat a meal they perceive as more healthful,” FMI said.
Supervalu's efforts to win customers over to prepared foods at its retail chains — Albertsons, Shaw's, Jewel-Osco and Acme — led to the introduction last March of its “Simply Good Meals” program, including the “4:15” effort.
“As soon as the economy worsened, more people turned to our stores to provide them with meal solutions, and that's what we're trying to help them with,” Supervalu spokeswoman Haley Meyer told SN.
The “4:15” program offers a selection of ready-to-eat meals that encompass a protein, side dishes and bread priced at under $15 for a family of four.
By bringing together all the components for a meal and making them available in a prepackaged form, Supervalu believes it's made it easier for customers, Meyer said, “because they can zip into the store, pick up whatever they need for a great meal off a merchandising kiosk and head right to the checkstand, which helps them save time and money.
“We've also seen the products that are merchandised for two weeks as part of the ‘4:15’ program sell better after they have been featured than they did when they were not part of the merchandise set, which proves the program is meeting consumers' needs,” she added.
Hy-Vee has likewise developed a series of high-impact promotions to market its prepared-food options more aggressively, Hobt said.
For example, it held a companywide “Customer Appreciation Steak Fry” at all stores on June 4 — grilling 8-ounce sirloin steaks, combining them with two side dishes and bread and making the meal available for $6 — selling 45,000 dinners in a three-hour period, Hobt said.
“Times are tough,” he acknowledged, “and this was our way of letting customers know we understand that.”
With each Hy-Vee store running independently, the company-sponsored steak fry “was also a way to let the stores see how much excitement they could create with foodservice and to inspire them to do more of that kind of thing on their own,” Hobt pointed out.
Hy-Vee has also ramped up its “pizza-palooza” events — where it promotes its store-branded pizza — from four times a year to six or more times, Hobt said, “to draw more attention during these down times.”
The chain has been putting out a separate flier for foodservice items — for eight months as an in-store ad; the next six months as a direct-mail piece; and for the last six months as an online offer — all featuring a page of coupon offers.
Originally the fliers bundled offers on full meals for a family of four for $12; however, Hy-Vee recently opted to feature items at $3 per person — essentially the same price, Hobt said, “but we saw the benefits of a lower price point.”
Other coupon features include entrees for $3.99, 12-inch pizzas for $4 and two pieces of chicken for $3.99.
At Bashas' the pickup in ready-to-serve and heat-and-serve foods began last fall, Triplett said, and has continued to grow gradually but steadily since then. “As the recession worsened, people have been looking for more comfort foods like chicken, meatloaf and mashed potatoes,” he pointed out.
Accordingly, Bashas' has introduced its “Feed a Family of 4 Meal Deal,” in which it offers a choice of one protein, two side dishes and bread for a single price point of $9.99.
At stores in areas with more small families or seniors, Bashas' features dinners for two, with smaller portions of the same meals, for $4.99; and in five stores in more affluent areas, it offers pasta meals instead of meat-and-potatoes, including fettucine alfredo, rigatoni and lasagna, for $9.99.
A single store in Goodyear, Ariz., that opened last December has been testing a Mongolian grill in which customers can fill up a bowl with vegetables and then select from beef, pork or chicken, which store personnel stir-fry with the vegetables, at a cost of $5.99 a bowl. Triplett said the Mongolian grill has shown “a lot of promise, and we are planning to expand it to other stores.”
Bashas' is also developing a line of healthier meals for families that will feature fewer calories and less salt and fat, Triplett said. The selections will be different from the existing items, though he said he was uncertain when they will be available at stores.
Customers at Stater Bros. are coming into the stores looking for value, Brown said, and they seem especially pleased with the values they're finding in the prepared-food section.
One new item, turkey meatloaf, has helped boost the entire meatloaf category by 40%, Brown said.
The chain also promotes entrees with either a free side dish or a free beverage.
Reflecting on the chain's 8% increase in prepared-food sales, Brown said, “The No. 1 reason for the increase is that we offer quality meals that can be purchased and eaten at home for a good value.
“Second, we provide savings over what it would cost to eat out at a restaurant. And third, we give them the convenience of getting home to relax.”
Brown said he believes the uptick in prepared-food sales will continue once the economy recovers. “It will continue to some degree because people have discovered the department and are finding out about the variety we have.
“During 2009, we have increased our customer count by 70,000 a week, and that means people who might not have shopped with us before have discovered the value, quality and service we offer, and when this downturn ends and people have more money to spend, a large number will stay with us.”
DeVries said Giant Eagle has been effective in communicating the value of its prepared-food offerings by leveraging existing menus and price points in developing its “Five Meals for Under $5” program, a weekly offering of hot foods priced at $4.99. One week's selection included chicken pot pie; two drumsticks and two thighs; two breasts and two wings; meatloaf; or chicken tenders.
He said the chain has not made significant changes in its product mix to accommodate changes in the economy.
“Even in the current economic climate, we are seeing these quality-based concepts continue to grow,” he said. “We've highlighted some existing product lines to better communicate the value they represent, and we are assessing portion size and potentially right-sizing some items — including prepack salads and sandwiches — so they can achieve more attractive price points.
“That said, these changes are being driven less by the economic climate and more by what we see as appropriate portion sizes.”
Very little change has occurred among the top sellers at Giant Eagle from a year ago, DeVries said, “other than where we've added new concepts such as self-service hot and cold bars.”
Winn-Dixie has been adding demographic touches to its prepared foods — as it has storewide — as it's remodeled locations over the past couple of years, Miller pointed out, with Hispanic offerings at stores in Miami and Orlando, Fla.; Creole options in the New Orleans area; and kosher foods in other communities.
“We strive to meet the ever-changing needs of our customers by listening to their requests and staying updated on current trends that are important to them,” she explained.
“As part of our remodel initiatives, each deli department undergoes a renovation and expansion that includes the addition of wood-burning rotisseries, salad bars, made-to-order sandwich stations and wing bars, as well as ethnic items tailored for each individual community.
“Our goal remains to be fresh and local in every neighborhood we serve.”
Among Winn-Dixie's most popular prepared items, Miller said, are fried chicken, rotisserie chicken and the chain's new 12-inch subs for $5.
Most of the executives surveyed said their prepared-food departments are profitable, though only one addressed the question head-on.
“The question of profitability depends on how one measures the results, but in general our profit contribution has continued to improve year over year,” Giant Eagle's DeVries said. “Balancing the need for innovation and stability in performance is our primary objective going forward.”
Regarding return on investment, DeVries said, “It depends how you measure ROI. In delivering our ‘famous for fresh’ concepts [an internal designation for its approach to freshness], we may make conscious decisions not to look strictly at financial returns, though our long-term strategy must provide continued improvement in differentiated product as well as bottom-line contribution.
“The ability to generate a positive ROI is also related to placement of concepts in the appropriate markets.”
Industry analysts were hard-pressed to put a hard number on ROI.
Gutman said ROI for prepared foods is tough to determine “because it drives traffic through the rest of the store at the same time it carries a high labor cost. It certainly has a higher gross profit dollar than the Center Store, but it requires a lot of labor to support it.
“And prepared foods create theater or excitement in the stores and enhance the shopping experience, which makes the return harder to pinpoint.”
According to Giblen, “The ROI in a prepared-food department will vary more than in other parts of the store — so even if volume is good, with little shrink, and even if the operator is able to absorb the high labor costs, the ROI will vary because of the volume-sensitivity, the higher labor cost and the spoilage.
“A retailer that does as good a job as Whole Foods does in prepared foods will have a good ROI. But even a store with a well-established prepared-food business will throw out a lot of product, and that destroys margins and returns.”
For Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., determining the ROI of a prepared-food section “requires a different model from most other parts of the store. For example, Whole Foods does some in-store cooking, while other chains use a central commissary and some use a combination of both. So there are variables of scale and freshness and a lot of skill necessary to get both right.”