Center Store -- generator of two-thirds of supermarket profits, yet neglected as the perimeter took the spotlight -- is poised for a renaissance.
"I think we've done a good job focusing on our perishable areas, but all grocers have kind of ignored Center Store a bit, and categories that are significant have eroded," said Mike Houser, vice chairman of Schultz Sav-O Stores, Sheboygan, Wis., which operates 90 Piggly Wiggly units.
"We are moving forward now, picking up significant share points in the last four months in categories that are important to Center Store," Houser said, even as Schultz Acquisition Corp. bought Brodbeck Enterprises, the Platteville, Wis.-based operator of Dick's Supermarkets, on April 18. Dick's Supermarkets operates eight stores in southwestern Wisconsin and northwestern Illinois.
Acquisition mode may continue, but grocers believe they should be able to do a better job with staple goods than some other classes of trade. Variety and value can lead to organic growth of the section.
From gasoline tie-ins to refrigerated pasta appearing in dry grocery aisles, growing Center Store is a priority for food retailers, particularly after the wave of mergers the industry has just seen.
Category management will emerge as the key to sustained growth in the grocery department, experts say. An expanding U.S. population and low inflation will keep prices steady and increase volume.
John Heinbockel, an analyst at Goldman Sachs, New York, said there are some pricing issues that are worth looking at. "The Center Store constitutes, by our estimate, about two-thirds of operating profit, so it is a very important part of the store, although it often gets overlooked. There are some clear ways that you can win the battle in the center of the store. Some of it is price-based; some is merchandising, [including] product adjacencies and in-stock conditions."
Jonathan Ziegler, a San Francisco-based analyst for Deutsche Banc Alex. Brown, New York, said Center Store has been a challenge. "It seems Kroger is doing a pretty good job, a pretty impressive job, in category management. I don't mean to imply that they are the only ones.
"Safeway is doing its 'breakaway sales strategies,' and I think some of them have ramifications for Center Store," Ziegler continued. Eleven such strategies, relating to different departments, are being rolled out and are expected to result in 1% sales growth each, according to industry sources. For the moment, analysts and others said, Safeway is focusing on five such strategies. Safeway did not return calls seeking a fuller explanation.
Robert Urquhart, senior vice president, Oppenheimer Capital, New York, said, "Two years ago, if you went into a Safeway store and asked 'Where is the Grey Poupon mustard?' they would have said, 'Look on Aisle 9.' Today, they will walk you over and actually point out the mustard. I am sure the reason they do that is based on some statistic, like 10% of people come into the store and don't find all that they want, or only get 90% of what they actually came to get."
Schultz is both acquiring and trying to build comparable store sales, largely focusing on key categories like paper, coffee, cereal "and all the things that have typically been eroded in the supermarket for the last three or four years," as Houser said. "Our volume increases are really coming from those areas," he said.
Urquhart said analysts of organic growth usually look at sales results minus acquisition and currency (overseas sales). For supermarkets, the only other components of organic growth are price and volume.
For the fourth quarter, for instance, second-largest food retailer Kroger, Cincinnati, reported 12.9% total sales growth to $12.7 billion. Identical store sales grew by 1.5% during the quarter, said spokesman Gary Rhodes, beating the company goal of exceeding the cost of food inflation by at least 1%. Kroger estimated the inflation to be at 0.2%. Still, the company has no way to break out Center Store results, "at least not that we'd talk about publicly," Rhodes told SN.
Analysts said Kroger and Safeway, Pleasanton, Calif., which ranks fourth among food retailers in terms of sales, with $33.2 billion for last year, are both well positioned to grow Center Store organically.
A 22-store independent retailer in the East uses price in Center Store to drive volume in the perimeter departments, where margins are higher. "Luckily, we've got some growth going on," said the group's director of merchandising, who wished to remain anonymous. He predicts 8% to 10% growth in Center Store, versus 20% to 30% in perishables. The stores' pet aisle has been reconfigured, and its stockkeeping units increased, and candy has been moved to the snack aisle -- counter to what most retailers do -- to try to match customers' thinking. Another difference is seen in the beverage aisle, which contains all beverages, including coffee, tea and juice, along with the expected soda and water, the source said.
"It's all together, where most people are thinking about beverages," he said. "It marries better."
In this time of ever-increasing gasoline prices, supermarket purchases that translate into savings at the pump have what another analyst called "an almost magical" impact.
The 36 Farm Fresh stores, based in Norfolk, Va., have such a program, called Save-On-Gas, explained Ron Dennis, president and chief operating officer. The customer shops, and those items that carry a dollar amount in free gasoline are accumulated at the checkout. "She receives a certificate, which she takes to a Miller Oil station [a gas dealer with about 100 stations of differing banners] and redeems it as cash. You don't need any special card," Dennis said, adding that the program has just been enhanced by joining with Fuel Marketing Solutions, Dallas.
"We feel like it's a big enhancement for us, because they solicit untapped co-op sources, so you're not using your own funds. These are targeted co-op dollars, therefore we are able to provide the customer with an even better value," Dennis said.
"They do a lot of advertising with us, so we will be able to offer deeper discounts. Another advantage is that their software prints the gas coupon on the bottom of the customer's register tape. Previously, we had it with Catalina [Marketing Solutions, St. Petersburg, Fla.]. Many would walk off and leave it, or lose it, but this way it's put right in their hand.
"We think it's a key ingredient to the growth of the Center Store sales. We see it as a major incentive. We very firmly believe in not having the customer carry a frequent shopper card. We're able to do this for every customer."
Dennis said a number of other initiatives are under way, as well. On April 30, all Farm Fresh stores were to kick off the company's on-line virtual shopping network, Internet X-Press Shopping, which enables customers to order a whole week's groceries in a partnership with MyWebGrocer.com. Not only can customers order on-line, they can also designate a time to pick up the order. Dennis said, "We guarantee you will be in the store and out in eight minutes, or we waive your selection fee of $4.50."
Underlining the trick to category management, Dennis said Farm Fresh's "ongoing commitment to variety is key to Center Store sales. We are seeing a lot of growth in Center Store, and a lot of it is because our competitors are skinnying down those SKUs, which forces the customer to go to another store -- us -- for specialty items."
Urquhart makes it sound simple. "You just have to give them [the customers] what they're there for. The objective is to increase the average purchase by 10% or whatever. Now they have taken it a step further. A lot of times, you don't even have to ask the clerk where an item is, because they will ask you first [if you need help]."
Regarding pricing, in January the Schultz Piggly Wiggly stores initiated a campaign called Preferred Power Pricing, strongly price-oriented, but focused on mega-sizes and aggressively promoting on a month-long basis.
Emphasizing the brands that drive consumption is what Preferred Power Pricing is doing, in a card-based program that measures what loyal shoppers are buying and how their market basket totals increase, Houser explained. "Pet and baby are of significant focus for us," he added.
This program takes the top 20%, top brands that really drive consumption and drive it into the household. "It's very aggressive, and the store execution is significant," said Houser. "There is a lot of bannering, outdoor advertising, and a radio campaign around it, a full gamut of media that tries to have our shoppers make our stores a one-stop shop, so they don't have to go to supercenters or other classes of trade."
Ziegler expects a lot of Center Store growth to come from business-to-business exchanges and improved communication among vendors and retailers, as well as from tried-and-true techniques, such as moving multiples. Some discipline on line extensions and on branding, he said, will help, along with kiosks with next-day delivery to please top customers whose favorite products just got category-managed out.
"There is a lot of innovation, and in the end, you're taking a mature section of the store and trying to goose some growth out of it. The food-drug combination is a very powerful format," Ziegler said. "I have known stores to do diabetes tours, as a food solution for a medical problem. They could do the same for high cholesterol."