SN's yearbook of category sales trends in this week's issue reveals how much the ups and downs of category movement are based on satisfying consumer needs.
Presented here are 50 top food and nonfood categories to watch in terms of overall dollar sales at supermarkets and growth (or lack of growth) within the food channel. Charts showing the movement of the 50 categories appear on Pages 23-30. Detailed analysis of each category appears in the interior sections of this magazine, specifically in the Fresh Market, Center Store and Nonfood Strategies sections, beginning on Pages 35, 45 and 61. The presentation includes results for each category in the Supermarket, Drug and F/D/MX channels. The last refers to Food (Supermarkets), Drug and Mass excluding Wal-Mart, which doesn't share its data.
In addition, charts on Pages 23 to 30 show sales of close to 300 product categories at supermarkets (including the 50 chosen for special focus), providing a more extensive look at category trends.
All data is provided by Information Resources Inc., Chicago. The most recent sales period highlighted is for the 52 weeks ending June 13.
As these snapshots of category sales movement reveal, America's shopping list contains foods and products that indicate an increasing appetite for items that can make consumers look and feel good. However, the numbers show there is an increasing indifference as to where consumers fulfill their food and product needs.
According to annual dollar sales figures in some of the categories, low-carbohydrate diets had an enormous impact over the last year, while foods that speak to -- or in some cases, just suggest -- healthy, active lifestyles continue to be among the fastest-growing items in the supermarket.
In Center Store, categories that speak to vitality (energy drinks) and the health and wellness trend (bottled water and granola bars) experienced rapid growth. The forbidden fruits of Dr. Atkins (rice and regular sugars) saw some dramatic declines. Consumers' desire for more convenient, on-the-go items showed in the performance of Center Store staples in new packaging, such as cereals, snacks, carbonated beverages and candy, and reflected negatively on foods requiring preparation, such as frozen juices. Competition from alternative formats ranging from discounters to dollar stores impacted Center Store in categories like pet food, detergents, cigarettes and diapers.
In Fresh Market, a combination of low-carb mania and volatile commodity pricing sent dollar sales for beef, poultry and other proteins soaring over the year -- reversing years of decline in some cases. Yet an emphasis on all things fresh showed in declines for such categories as processed cheese and margarines. Fresh categories overall showed the strongest resistance to channel erosion, IRI figures reveal, underscoring the importance of perimeter departments in today's supermarket.
Trends toward health, vitality and convenience, particularly as they relate to an aging demographic, also impacted the nonfoods department, with categories such as adult incontinence products and men's grooming supplies showing strong dollar growth. However, nonfoods continued to be under siege from alternative channels, with supermarkets losing dollar share in categories like batteries.
Here is a summary of factors affecting category movement in specific areas of the supermarket.
Manufacturers began passing along increased ingredient costs to consumers at the tail end of the IRI 2004 survey period, ending June 13. So it's likely they had minimal, if any, effect on sales. Consumer passion for low-carbohydrate diets, however, made a deep impression on what products shoppers bought. Industry experts told SN that in Center Store, especially, the low-carb diet trend seemed to be a common thread woven throughout several key categories.
"Almost all these categories seem to have a good-for-you connotation, and the growth is strong," observed Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill. "It's pretty evident that people are looking for things they believe, or hope will be, good for them. In the center of the store, there is not one on the IRI list that couldn't be explained that way."
In the growth categories, nothing compared to energy drinks. Dollar sales shot up to $154 million -- growing nearly 55% over the year before, when supermarket sales were nearly $127 million.
"It's already a fairly significant category, and for it to be growing that fast I think is absolutely phenomenal," Bishop added. "If it was a small category, that would be one thing. But it's already rather large, so this is amazing."
The category includes everything from bottles of shelf-stable Gatorade to refrigerated four-packs of Red Bull.
"They're a badge for people, and associated with attributes like vitality. That category finds itself in a nice, sweet spot relative to youth and things that make it more relevant than just an energy drink," Bishop said.
Water, the other beverage listed under the growth column, has a life of its own and enjoys a universal appeal that taps deeply into the overarching health and wellness trend. Sales for the year-period grew nearly 11%, to $2.8 billion, on top of calendar-year growth averaging 11% during 2003 and 2002.
Snack/granola bars, snack nuts/seeds/corn nuts, and sugar substitutes also enjoyed strong growth through June 13. The sugar substitute category alone grew more than 18%, propelled by the addition of McNeil Nutritionals' Splenda-brand sugar substitute to many shelves. Conversely, sales of white and brown/powder/flavored sugar were down a combined 3.5% in dollar sales over a year ago, to $996 million.
"Americans gravitate toward something new, even if it doesn't satisfy our need for lower cost or convenience," stated Harry Balzer, vice president of NPD Group, Port Washington, N.Y. "If it's new, they'll try it. Sugar substitutes fit into that line with Splenda. It's the hot new product, and it's in just about everything."
Along with regular sugars, rice also experienced a big sales hit, with supermarket sales of both dry rice and mixes falling a total of 1% over the prior year, to $1 billion -- on top of sales drops approaching 3% for the calendar years 2003 and 2002. Again, low-carb diets are blamed for taking the fluff out of sales.
Key frozen food categories fared little better, particularly pasta and juice. Here, however, the factors at play extend beyond simple diet mandates -- which largely prohibited the consumption of pastas and citrus juices -- and incorporate the larger umbrella trend of convenience.
"Americans today are less likely to buy the frozen form of the product and more likely to buy the ready-to-drink version," said Balzer. "I think if you went back and examined frozen juice, the decline has only accelerated because of low carb. But I don't think it's necessarily a move away from juice as much as a move away from the form."
The numbers indicate this to be true. Supermarket sales of frozen juices were down just over 13% for the year ending June 13, to $543 million. By comparison, sales were $671 million in 2002, just two years prior -- even then, sales were off more than 17% from the year before.
Ice cream/sherbet sales rounded out the categories experiencing the largest declines, down just over 2%, to $4.2 billion, for the 52 weeks ending June 13. Here, Balzer believes the opening of a new generation of outside concepts is drawing Americans away from home consumption and more into a food-service experience.
"There are some new venues and experimentations that are bringing people back to specialty formats again -- Cold Stone Creamery comes to mind -- just like Ben & Jerry's stores did in the 1980s," he said. "It speaks to the newness of the form." Cold Stone's combination of premium flavors and customized mix-ins has proved popular with consumers.
Balzer cited statistics showing that half of the population is going to consume ice cream in the next two weeks. "The only question is, where are we going to get it?"
The top volume food categories read like a short list of Center Store's "Who's Who": carbonated beverages ($12 billion in supermarket sales); salty snacks ($6.5 billion); cold cereal ($5.8 billion); frozen dinners/entrees ($5.3 billion); and candy ($2.3 billion for chocolate and $1.3 billion for non-chocolate). All are stalwarts of the supermarket experience.
"These categories are the hotbeds for new products to have a major impact on the way Americans eat because they are the staples of our diet," Balzer told SN. "It's about a new product, or a new way of delivering it, or packaging or promoting it. They attract a high level of interest from everybody in the food chain. Whether you like it or not, these are the categories that people spend a lot of their money on."
Bishop agreed, noting that certain categories also speak to the way Americans consume their food today. The convenience aspect plays a strong role in the top volume categories.
"Carbonated beverages, salty snacks and candy all speak to snacking occasions rather than meals occasions," he said. "Carbonated beverages is huge, and it's one big category. It's safe to call it an anchor, which makes it all the more important for retailers to make sure they're doing the right job with it."
An examination of Center Store's nonfood top sellers exposes not only the most popular products, but some potential cracks in the formerly impregnable supermarket fortress. Many of the items listed -- dog food ($2.4 billion in supermarket sales); toilet tissue ($2.5 billion); laundry detergent ($2.5 billion); cigarettes ($5 billion); and diapers ($1.4 billion) -- are also targeted by competing formats like pet superstores, baby discounters, drug chains and mass merchandisers. Notably, all experienced sales declines in the supermarket channel, ranging from 2% to more than 8%, over the 52 weeks ending June 13.
"Just about all of these volume nonfoods are being targeted by other retailers," noted Bishop. "They are big producers under attack by these other formats."
As a result, he predicted that, while they are still top earners for the supermarket channel, sales are likely to shrink ahead of the grocery food numbers "because they're subject now to more aggressive competition from a broader range of retailers."
Unlike Center Store or nonfoods, where price fluctuations are largely stabilized -- and subsidized -- by manufacturers, the commodity-driven fresh categories are at the mercy of market conditions. The extension of brand names into areas like produce, meat, dairy and even seafood has helped alleviate some of the pricing pressures, but products here are still subject to wild price swings.
Indeed, the first half of 2004 saw tremendous increases in the price of beef and related proteins, butter and milk, among other items. Market conditions conspired to put a squeeze on supply during a time of higher demand. Some estimates place the spikes as high as 35% for butter and 25% for fluid dairy. Nevertheless, consumers continued to eat it all up.
"The emphasis on protein is real evident across almost all of the fresh-foods growth categories," noted Bishop.
Refrigerated fresh eggs, meat/poultry, yogurt and natural cheese comprised the fastest-growing fresh-food categories, based on dollar sales. This protein emphasis does have strong roots in the low-carb diet phenomenon that peaked earlier this year. In some cases, sales declines were reversed in dramatic fashion. For example, butter sales in supermarkets fell by more than 5% to just a pat over $1 billion for calendar year 2003; sales took a 3.6% jump, however, for the 52 weeks ending June 13 of this year -- when prices were at their highest.
"These high-protein, low-carb diets have played havoc with these types of categories this past year," said NPD Group's Balzer. "The question is, are these long-term shifts or short-term blips, where a year from now we'll be looking at gains in these categories?"
Supermarket sales for fresh eggs and egg substitutes grew 25% to $2.9 billion for the 52 weeks ending June 13; meat/poultry items increased nearly 19%, to $794 million; refrigerated seafood grew nearly 1% to $266 million; yogurt products increased nearly 6% to $2.7 billion; and natural cheese sales jumped 9.5% to $5.4 billion.
Those kinds of numbers show supermarkets remain the primary channel for fresh-food purchases. However, alternate venues, such as drug stores, warehouse clubs and even dollar stores, are making small but noticeable inroads to the fresh consumer. Evidence of this blurring can be found in the drug channel, which enjoyed $5 million in natural cheese sales for the 52 weeks ending June 13, up nearly 6% from the 2003 calendar year.
Items that went against the "fresh" image seemed to take the brunt of sales losses, including processed cheese (down 0.88%, to $2.2 billion in supermarket sales); margarines/spreads/butter blends (down 0.64%, to $1.2 billion); and refrigerated lunches (down nearly 4%, to $647 million).
"The declines in categories like butter, margarine and spreads are pretty predictable," said Bishop. "But I am surprised in the decline of lunch kits because they are the essence of convenience. Combined, it seems to be a continuation of the 'good for me/not good for me' scenario."
Balzer at NPD Group concurred, adding that health and wellness issues, which include the low-carb diet trend, have had a profound impact on food sales over the past year.
"Sixty-two percent of the U.S. population wants to lose 20 pounds, and one way to do that is to eat your way to weight loss," he told SN. "Consumers clearly have tried to do that, over the past year especially, with protein and by moving away from breads and pastas."
Each of the primary fresh-food categories is featured in the top five volume movers, an indication of just how important the perimeter departments are to the supermarket format. By far, fluid dairy captures the lion's share of fresh dollars, at $10.3 billion for the 52 weeks ending June 13. Sales increased 3.3% combined for the category, which includes whole milk, skim/low-fat, flavored/eggnog/buttermilk, kefir/milk substitutes/soymilk, and milk shakes/non-dairy drinks. During this period, however, the analysts noted that sales might have been influenced by wholesale and retail price increases earlier this year.
"Because of the higher milk prices, this category -- which has historically been a foundation of the supermarket -- is probably now under greater risk," said Bishop. "In Chicago here, we can save a dollar a gallon by shopping different stores. I'd flag that one for future examination."
NPD Group's Balzer also believes that outside events, such as the announcement regarding mad cow disease in Washington state late last year, further influenced purchase patterns of those products coming from cows, namely beef and fluid dairy.
"This was something that caused some restrictions on the supply of beef and dairy products," he noted. "There were food safety issues at work that played into the disruptions we saw in price and volume."
Other top sellers include fresh bread and rolls, down less than a half-percent, to $7.9 billion in supermarket sales; and pre-sliced luncheon meats, up nearly 5%, to $3.3 billion. Refrigerated juices/drinks and salad/coleslaw round out the top five.
Balzer agreed that using the price/unit sales formula in fresh foods is most crucial to determining overall channel activity, noting that dollar sales data alone can be misleading.
"I think most of the increases could be due to pricing, and not due to consumption, or people buying more," he said. "Put another way, they could be spending more, but not buying."
In keeping with health and wellness trends across the store, a focus on looking good and feeling good has fueled the health and beauty care segment from a consumer perspective. From a retail perspective, as consumers shop more channels and care less where their dollars go than they do about a positive shopping experience, recent research shows that HBC and general merchandise have become new frontiers in the fight to win store trips.
Changing demographics are starting to have an impact on the health and beauty care categories in both subtle and not-so-subtle ways, according to IRI figures. In categories like adult incontinence, where dollar sales are up 5.73% to $177.6 million for the 52 weeks ended June 13, the implications of an aging population are easy to see. The historical numbers show increases as well: Dollar sales in the food channel were up 5.86% for calendar year 2003 and 5.93% for 2002.
"Adult incontinence has a lot of years of growth left because of the aging population," said Jim Wisner, president, Wisner Marketing Group, Libertyville, Ill. He pointed out that the baby boomer generation, whose average age ranges between 40 and 58, will only fuel the trend as they come of age for these products.
The same aging population will also fuel steady increases in the vitamin category moving forward, Wisner said. Dollar sales in the food channel for vitamins in the 52 weeks ended June 13 were $776.6 million, making it one of the highest volume nonfood categories. That figure is up 0.4% over the previous year. IRI figures for fiscal year 2003 show a 2.94% increase over the previous year, however.
"Usage of vitamins increases with age," Wisner said.
Self-care trends more than demographics have affected over-the-counter products, industry sources said.
"One of the things we're definitely seeing is a focus on self-care, particularly facilitated by Rx-to-OTC switches," said Bishop. He pointed to cough, cold and sinus products and, to a lesser extent, internal analgesics, vitamins and adult incontinence products as examples of where this trend has an effect.
On top of self-care trends, recent new product introductions of Rx-to- over-the-counter switch products have particularly fueled strong growth in the cough/cold/sinus category. The introductions of blockbuster OTC medications like Claritin and its private-label counterpart, loratadine, combined with a busy cold and flu season, helped fuel growth of 9.74% in dollar sales for the cough/cold/sinus category in the food channel. Sales were at $667.3 million for the 52 weeks ended June 13. Increases for the 2003 calendar year were even more impressive, as sales shot up 25.35% over the previous year.
"For all of the OTC categories, there is long-term, fundamental, underlying growth. It deals to a certain extent with an aging population; it deals with the rise in self-care; it deals with consumers' better understanding of what these products do and how to use them," Wisner said. In the current five-year period, there will be billions of dollars of new Rx-to-OTC products hitting the market, he said.
Self-care has affected other areas as well, playing a role in supporting nearly $1 billion in sales of internal analgesics in the food channel.
Other HBC categories showing growth included razors, up 40.51% for the recent year-end period, and shaving lotion/men's fragrance, up 9.92%, in response to shifting trends in men's grooming that have reverberated across a number of categories, although some have shown declines as dollar share shifted between categories within the segment. Traditional shaving cream declined 8.83% to $124.7 million in dollar sales for the same period that razors and shaving lotion/men's fragrance were up, IRI reported.
In the areas of decline for GM and HBC, the one constant force, industry sources said, has been increased competition from other channels. Categories like batteries in particular highlight this risk with dollar sales declining 8.19% to $555.7 million in the food channel for the year ending June 13.
"A shift to clubs, Wal-Mart and dollar stores may be impacting what is being reported for batteries," said Don Stuart, partner, Cannondale Associates, Wilton, Conn. "It's a shift to convenience in the dollar store or convenience store channel and a shift to savings in Wal-Mart or the mass merchandisers."
The drop in batteries for supermarkets is surprising in light of the proliferation of devices that call for them, Stuart said. Technology needs have increasingly emerged as an important consumer demand.
"If you go to the battery departments in many chains, they haven't adapted to what's going on in the consumer marketplace. They all try to sell the same stuff, the same way they did five or 10 years ago," Wisner said. Wisner was a co-author of a recent study from the General Merchandise Distributors Council's Educational Foundation, New York. In "Merchandising for Success: Maximizing GM and HBC Sales and Profits," he recommended that supermarkets merchandise batteries in more locations throughout the store to capitalize on the category's potential. The study also found that shopping a specific channel is no longer a key driver for consumers' GM and HBC purchase decisions. Instead, customers look for the retailer who meets their needs in the best shopping environment.
Falling behind the technology curve has impacted other areas of sales for supermarkets, too. The switch from traditional film and photographic supplies to digital cameras and processing has affected film sales across all channels. For supermarkets, the drop has been significant as the most recent 52-week period saw the photography supplies category fall 12.79% to $388.6 million, according to IRI.
The biggest declines in the nonfood categories were in anti-smoking products. "Isn't it intriguing to have a category where the more people buy it, the less it sells? With people smoking less and utilizing these products, they self-remove themselves from the market," Wisner said. Cigarette sales were also down, according to IRI data for the same time period.
The highest volume nonfood categories, for the 52 weeks ended June 13, continued to be products with rapid replenishment rates and high convenience factors: internal analgesics ($967.3 million); sanitary napkins/tampons ($711.4 million); toothpaste ($674.6 million); shampoo ($620.3 million); and vitamins ($776.5 million).
"These categories are critical to the core HBC and drug aspect of the whole company because of their rapid replenishment. With shampoo and toothpaste, if you look at the dollar volume, it's very significant that supermarkets have the highest dollar share," said Diane Garber, president, In Sight Communications, Buffalo Grove, Ill. Drug stores, by comparison, have $427.3 million in dollar sales of toothpaste and $348.3 million in sales of shampoo for the same 52-week period, IRI reported.
Traditionally, high dollar volume in these areas does not, however, mean these categories are impervious to industry trends like increased channel competition. To the contrary, these categories make very attractive targets to retailers in other channels, industry sources said.
"With sanitary napkins and shampoo, you have two very significant categories that are repetitive, habitual and involve certain brand loyalties that would be ripe for a competitive assault from either supercenters or clubs," said Bishop.
"The core GM categories and all of HBC can't be looked at as just convenience items anymore," Wisner said. "GM and HBC have increasingly become destination categories. They determine where people go to shop" and, as a result, can take dollars from the whole store "because there are so many classes of goods sold in so many places."