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2004 presented significant challenges to Center Store.Supermarkets faced enormous pressure on prices and margins, as alternate formats fine-tuned their own business strategies. Within the industry, retailers reset pet aisles, developed baby clubs and installed dollar sections to better compete with those formats siphoning off customers.2004 was also a year of progress.Retailers made advances in many

2004 presented significant challenges to Center Store.

Supermarkets faced enormous pressure on prices and margins, as alternate formats fine-tuned their own business strategies. Within the industry, retailers reset pet aisles, developed baby clubs and installed dollar sections to better compete with those formats siphoning off customers.

2004 was also a year of progress.

Retailers made advances in many areas, particularly in regards to technology and merchandising. The economies of scale allowed operators large and small to invest more in back-office software that resulted in smarter shelf sets and better availability of product.

Along the way, retailers took additional steps on the road to efficiency by working more closely with manufacturers, and developing a store-level database for new customer insights. The most obvious example of this dynamic at work was the ability of both players to react quickly to the low-carb phenomenon a year ago with new products, speed-to-market distribution and consumer-centric merchandising.

The stories that follow were judged by the Center Store staff to be among the more influential occurrences of the past year. Certainly, some evolved from the prior year (or years), while others will spill over into 2005 -- and beyond.

If nothing else, the events of this year show that Center Store does not have to be the stagnant, moribund department, dying of low-price deprivation, that everyone fears it is. Indeed, this year shows that supermarkets are not about to give up the fight.


Highs and Lows of Low-Carb Diets

Spurred by high year-end sales and tons of New Year's resolutions, the low-carb food and beverage business started off 2004 as a real heavyweight in the grocery aisles, with numerous product introductions and brand extensions hitting the market.

Early in the year, Unilever Bestfoods North America, Englewood Cliffs, N.J., rolled out a new line called Carb Options. Plenty of other manufacturers -- including Coca-Cola Co., Nestle, Sara Lee, Hershey Foods and Frito-Lay -- followed suit.

Retailers responded to the avalanche of new products by creating dedicated low-carb sections, promotions and advertising. The popularity of these higher-margin products gave retailers intense, though short-lived, competition from specialty stores like the Castus Low-Carb stores chain, San Ramon, Calif.

Yet by midyear, just when it seemed the business was moving full-speed ahead, there was talk that the low-carb craze had peaked. While about 13% of Americans were following a low-carb diet at the start of the year, the number dropped to about 11% by midyear.

In April, the NPD Group, Port Washington, N.Y., issued a report that found virtually none of 11,000 people studied were cutting carbs to the degree that low-carb diets recommend. Among people who said they were on low-carb diets, only one out of four was actually significantly cutting carbs, according to the report.

"Low-carb diets are a fad, just like the low-fat craze of the late '80s and '90s," said Harry Balzer, NPD's vice president. "The question is how long will it last."

Low-carb sales growth soon began to soften. Dollar sales of "carb-conscious" food and non-alcoholic beverages stood at $589.9 million in the third quarter of 2004, a 6.1% increase from the second quarter, according to ACNielsen, Schaumburg, Ill. This is a big difference from growth rates in the first and second quarters of the year, which stood at 105% and 26%, respectively.

Looking ahead, the majority of 25 manufacturer respondents to a propriety SN survey conducted in October said they planned to focus their 2005 product development and promotions on health and wellness areas like fiber and whole grains -- not low carb.

"We approached [low carb] as a short-term solution, with health and wellness concerns being a long-term goal," one unidentified manufacturer said.

"Low carb appears to have peaked," said another. "We will focus on health and wellness, specifically whole grains."

Still, many maintained that the low-carb craze is here to stay. More than half (51%) of consumers polled in an Information Resources Inc. study, for instance, said low-carb dieting "will last forever." In a teleconference sponsored by Smith-Barney, Matthew Wiant, senior vice president and chief marketing officer at Atkins Nutritionals, maintained that growth rates are affected by the seasonality of dieting. So, stay tuned for New Year's 2005.


Healthy Sales

Americans woke up and finally heard all the government warnings about obesity, children's nutrition and the health problems caused by overeating. Consumer packaged goods companies responded with a number of initiatives.

From PepsiCo to General Mills, CPG manufacturers issued new policies, products and tools for consumers to use in making better food choices: This past July, PepsiCo announced SmartSpot, a green symbol designed to help consumers identify food and beverage products that meet nutritional criteria on saturated and trans fats, cholesterol, sodium and sugar. In September, General Mills announced all of its Big G cereals would be made with whole grains. Kraft announced a number of initiatives, including reformulations and a new dual-column Nutrition Facts panel that reflects more realistic consumption habits. Other companies unveiled similar efforts.

Studies that were released throughout the year showed Americans were eager to improve their health through smarter eating. Mintel International released a report showing that the functional foods market will increase 23% by 2009, recognizing that such products are "very much in demand as an offshoot of the long-term trend toward more healthful diets and lifestyles." Natural and organic foods also enjoyed sales increases and additional facings in supermarkets. The Organic Trade Association said snack foods experienced the highest increase in sales of all Center Store categories, growing more than 29% to $484 million last year -- with predictions that rate of growth would continue.

At store level, retailers saw the results of these changes. Sales of Splenda totaled more than $160 million as of October, up more than 63% from the same period a year earlier, according to Information Resources Inc., Chicago. Qualified health claims for some forms of omega-3 fatty acids were approved by the Food and Drug Administration, bringing in new signs and package redesigns for those products with the approved formulations. Sales of energy and nutrition bars continued to increase, with retailers resetting aisles to reflect the greater number of choices available.

In the coming year, look for a new emphasis on children's nutrition, such as smaller serving cans of carbonated soft drinks; additional health positioning claims as FDA reviews more applications; and reformulations of existing products that add a degree of health value through a fortification of additional nutrients.


Bottom's Up?

It wasn't easy being a beverage category manager in 2004. A dizzying quantity of product was introduced last year, as just about every major food trend found expression in beverages.

Drinks that promised an energy jolt or a nutritional boost sought out consumers. As the low-carb diet trend swept through supermarkets, beer, soda, juice and even wine came out with new or repackaged lower-carb versions.

In the beer aisle, diet or low-carb versions continued their reign. Me-toos from companies like Coors and Labbatt USA tried to mimic the success of low-carb smash Michelob Ultra. Sales of lighter beers were poised to overtake those of regular beer, a category suffering from an increased reliance on promotions, a lack of innovation, and loss of share to wine and spirits. Against this backdrop, young consumers began moving on from flavored malt beverages, but that didn't stop manufacturers from pushing extensions in new fruity flavors, low-carb formulations and new packages.

Seeking to benefit from interest in health, New Age drinks touting functional properties jostled for shelf space. Tea makers and retailers introduced new branded and private-label lines to get in on the growing interest in the health benefits of green, red and white teas.

Bottled water, whose volume surpassed that of beer, milk and coffee in 2003, continued to innovate at the pricey end through new, nutritionally enhanced versions. On the higher-growth lower end, price promotions threatened to erode profits.

Meanwhile, with consumers increasingly reaching for alternatives to soda, major cola producers sought to restore growth in their now-mature brands. Coca-Cola and PepsiCo this past summer launched half-sugar, Splenda-sweetened versions of their flagship colas in an attempt to rev up their core business. The hope was that the sodas would appeal to light soft-drink users and male consumers who have embraced low-carb dieting, but shun traditional diet drinks.

Whether it was the taste or premium pricing that turned people off, the half-sugar versions quickly fizzled. Cadbury Schweppes sought a new road by appealing to health-conscious women. The company added fruit juice and Splenda to its flagship soda, which it called 7 UP Plus.

On the legislative front, Texas supermarkets got permission to sample wine, while New York retailers and winemakers revived a push to permit wine sales in supermarkets. Two control states, Oregon and Pennsylvania, began piloting liquor sales in supermarkets.

Sales of functional beverages and energy drinks are expected to increase in the coming year. Energy drinks have already found new life in alcoholic beverages, as evidenced by Budweiser's B-to-the-E, which combines beer with ginseng, caffeine and guarana. Don't be surprised if others follow suit in 2005.


Label Mania

Growth came at the high and low ends of the private-label spectrum last year, as retailers sought ways to stand out amid an increasingly crowded selection of food channels. Examples ranged far and wide: Giant Eagle, Pittsburgh, expanded its private-label program into a line of value-oriented products, as well as specialty and natural/organic offerings. Price Chopper Supermarkets, Schenectady, N.Y., launched a premium private-label line of frozen upscale appetizers, entrees, side dishes and desserts, becoming the latest retailer to claim a bigger stake in frozens.

Retailers also made sure their efforts got noticed. Safeway, Pleasanton, Calif., made the statement that its store-brand products were as good as their national-brand counterparts when it plugged them via a tie-in with the hit movie "The Incredibles."

Naturals and organics also provided a platform for private-label expansion, reflecting their growing acceptance by mainstream shoppers. Ahold USA in October launched a natural and organic line, Nature's Promise, in its Giant Food of Landover, Md., and Stop & Shop Supermarkets banners, with plans to have 200 grocery and dairy stockkeeping units by January. Topco Associates, Skokie, Ill., this past fall added organic milk to its Full Circle natural and organics line.

Retailers' faith in private label extended to wine, with Dorothy Lane Market in Dayton, Ohio, and Jungle Jim's International Market in Fairfield, Ohio, among those launching store-brand varietals.

Shoppers who once turned up their noses at these types of products have responded to, and encouraged, such efforts, allowing the $43 billion supermarket private-label industry to grow faster than national-branded products. It's no surprise, then, that supercenters and warehouse clubs have been gaining share of the private-label business, according to ACNielsen, Schaumberg, Ill.

In supermarkets, private label's dollar share of all grocery volume stands at 16.3%. In the year ahead, look for retailers to try to increase that by focusing on underdeveloped categories, such as ethnic and frozen foods, meat and produce. BJ's Wholesale Club, for one, said it is looking to develop ethnic private-label lines. With the price spread between national and store brands widening, the carbonated soft-drink category also could see increased activity, as some retailers see the opportunity to make their store-brand sodas a destination item.


Food Control

Center Store received a measure of government intervention this past year, triggered in large part by the nation's obesity epidemic and other health issues.

On the positive side, some areas of retail grocery departments reaped the rewards of the Food and Drug Administration's newly enacted qualified health claims, such as omega-3 fatty acids and olive oil. The agency announced the availability of a qualified health claim for monounsaturated fat from olive oil. The claim states there is limited, but not conclusive, evidence that consumers may reduce their risk of coronary heart disease if they consume monounsaturated fat from olive oil and olive oil-containing foods in place of foods high in saturated fat.

"Since CHD is the No. 1 killer of both men and women in the U.S., it is a public health priority to make sure that consumers have accurate and useful information on reducing their risk," said Dr. Lester M. Crawford, acting FDA commissioner.

While qualified health claims helped highlight the benefits of some categories, other government actions put some products under the microscope for less-than-positive reasons.

Canned tuna was one of them.

FDA and the Environmental Protection Agency announced a joint consumer advisory on methylmercury in fish and shellfish. Among other recommendations, the guidelines state that pregnant women, women who may become pregnant, nursing mothers and young children should eat no more than 6 ounces of albacore ("white") tuna per week. Albacore has more mercury than canned light tuna.

Meanwhile, the snack category remained a political target in the form of proposed snack taxes. While the concept was first announced more than a decade ago, it remained alive and well in 2004.

Some politicians have tried to tax certain snacks, and use the revenue to subsidize more healthful foods and fund public-awareness campaigns. Proposals range from a national tax of 1 cent per 12-ounce soft drink to 1 cent per pound of candy, chips and other snack foods.

One such effort, however, was blocked in Maryland. In March, Grocery Manufacturers of America, Washington, congratulated the Maryland House Ways and Means and Appropriations committees for rejecting a proposal to impose a snack tax on state residents.

Along with tax proposals, the government took steps to combat obesity in other ways. In March, FDA issued a report aimed at helping consumers make wise food choices at supermarkets and other places. Updating food labels to more accurately reflect serving sizes was among the recommendations.

Some food manufacturers responded by changing food labels and introducing more healthful choices. Kraft Foods, Northfield, Ill., for example, announced in October that it will begin printing new nutrition labels on multi-serving packages that reflect consumption information for the contents of the entire package. Also, the total number of servings will be stated on the front of the package.

Food manufacturers were proactive in other areas, such as stepping up to the plate in terms of notifying consumers about the presence of trans fats in their products. Come Jan. 1, 2006, FDA will require food companies to include the grams of trans fat found in their products.