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Retailers threw big support behind some nonfood categories that added excitement to their stores this year, and positioned the chains as leaders in other segments.New-product introductions suchas prepaid phone cards, big-hit theatrical home video releases and new prescription-to-over-the-counter switches provided retailers with many profit opportunities.Besides the big sell-through video titles pushing

Retailers threw big support behind some nonfood categories that added excitement to their stores this year, and positioned the chains as leaders in other segments.

New-product introductions such

as prepaid phone cards, big-hit theatrical home video releases and new prescription-to-over-the-counter switches provided retailers with many profit opportunities.

Besides the big sell-through video titles pushing supermarket video revenues to new heights, retailers expanded video's exposure by aggressively cross-promoting it in their grocery aisles and coordinating merchandise with co-promotional partners. In some cases, retailers executed retail-specific marketing events with such hit titles as "Forrest Gump."

Supermarket pharmacy again grew this year, but retailers said it is becoming increasingly difficult to maintain prescription margins.

In other news, supermarkets exercised clout in the periodical distribution business when major chains moved to significantly cut the number of distributors they have traditionally dealt with, resulting in a major consolidation among the more than 300 magazine and book wholesalers.

These bright spots in supermarket nonfood areas, however, did not overshadow the fact that supermarket and drug channels continue to lose nonfood market share to mass merchandisers.

Here is a summary of this year's important news stories in nonfood.

Phone Cards: All the Talk

It was a calling card year for many supermarkets.

Chains such as A&P, Pathmark, Winn-Dixie, Acme Markets, Vons Cos. and Meijer either introduced or expanded their prepaid phone card programs to meet the lifestyle needs of those customers wanting to purchase phone time at a discounted rate.

Retailers view the phone card business, which is fast approaching the $1 billion mark in retail sales this year, as a unique merchandising item. The cards not only can produce revenue but also provide promotional opportunities, and are being used as an advertising medium.

For example, Vons Cos., Arcadia, Calif., ran a calling card promotion in which it gave out three-minute phone cards when customers purchased certain Vons private-label products.

Cards can be customized with the chain's logo and imprinted with selected products. Under many programs, an audio message promoting the chain is played each time the consumer uses the card.

"This is a new category that takes up little space for a high margin. If promoted properly, it can help drive traffic," said Craig Ryason, director of marketing and sales at GTE Card Services, Irving, Texas.

The cards also have attracted the attention of branded marketers such as General Mills, Nestle, Sony, Gibson Greetings and American Greetings, who have packaged or tied in phone cards with their products.

"A lot of companies are offering cross-promotions, which helps sales even more," said Jeff Kunnen, director of nonfood at Family Fare, Hudsonville, Mich.

The cards also have become collectibles because many feature well-known personalities from sports, music, comics and art on them.

"They're getting to be just like baseball, basketball and football cards," said Ron Henningsen, advertising director at Fleming Cos.' Milwaukee division. This year the wholesaler offered its retailers a phone card series featuring the Green Bay Packers.

Magazine Consolidation

Supermarkets began to change the way magazines and books have traditionally been distributed to them.

Safeway, Oakland, Calif., was the first chain to cut the number of periodical distributors that service the company.

Before the consolidation, most large retailers, even within a single market, were served by numerous local wholesalers, each of which employs a store delivery force to manage the racks in a few stores.

Other major chains and channels of trade quickly followed Safeway's lead. Among them were Albertson's, Kroger Co., Ralphs Grocery Co., Smith's Food & Drug Centers, Save Mart Supermarkets and Lucky Stores. Those in other classes of trade included Wal-Mart Stores, Walgreens and 7-Eleven.

Some sources said the consolidations were taking place because the periodicals industry was slow to respond to supermarkets' Efficient Consumer Response initiative.

"They want to get away from multiple invoices, multiple service levels and pricing," said John Harrington, president of the Council for Periodical Distributors Associations, New York.

The result of all this has been an upheaval in the periodical distribution business, with many smaller regional companies being forced out of business while contracts are being won by so-called "mega-wholesalers."

Many contend that the ramifications of all this have yet to be felt. "It's going to change the whole nature of the industry and I think it is an open question whether it turns out to have adverse or beneficial consequences," said one source.

Slip-Sliding Away

The supermarket industry again saw share of its nonfood go to the mass channel.

The trend continues despite some valiant efforts among some chains to maintain their share of the business through innovative private-label programs, new store and department formats, and promotional and pricing strategies.

"The biggest concern we see out there is the mass outlets. They are big, and have the traffic and selection," said Michele Arnault, national product manager for health and beauty care at McKesson Drug Co., San Francisco.

Several consumer surveys commissioned by SN pointed out where consumers are going to buy their nonfood products.

In a poll of 1,000 consumers conducted by America's Research Group, Charleston, S.C., shoppers voted discount stores as their chief source of HBC products by a margin of more than one in three, or 35.2%, according to SN's second Consumer Health and Beauty Care Survey.

In another poll conducted by America's Research Group to assess the industry at mid-decade, shoppers reported by nearly a 2-to-1 margin, or 41%, that they are purchasing fewer nonfood items in supermarkets than a year ago.

For the year ended Oct. 8, 1995, Information Resources Inc., Chicago, put total nonfood sales across all three channels at $45.6 billion. Of that amount, supermarkets took a 29.6% share, mass merchandisers had a 32.5% share and drug stores took a 37.9% share. In 1992, supermarket market share of the HBC business alone was 41%.

"Our sales have definitely fallen off in the last couple of years. Wal-Mart can sell Crest toothpaste for cheaper than Gerland's can buy it," said Kim Botkin, HBC buyer at Gerland's Food Fair, Houston.

The Food Marketing Institute tried hard to get the industry to support nonfood through its GM/HBC Conference. In promotional materials at the conference, Nielsen statistics were listed showing that supermarkets lost $64 million in sales over a 10-year period in seven HBC categories.

Calling nonfood "insular inside each company," Tim Hammonds, FMI's president and chief executive officer, told SN he saw a direct correlation between slipping nonfood conference attendance and supermarkets' loss in nonfood share points. "When the show is declining, you send a very strong message to suppliers that if they want to grow the category, they'll have to look elsewhere," he said.

This month FMI said it would disband its nonfood conference despite strong efforts to revive it in Philadelphia this year.

Acid Tests

Supermarket chains began remerchandising their antacid shelves to make room for an emerging new segment, the H2 antagonists.

Johnson & Johnson/Merck Consumer Pharmaceuticals, Fort Washington, Pa., was first to market with Pepcid AC, which it began shipping in June. Following close on its heels, SmithKline Beecham Consumer Healthcare, Pittsburgh, introduced Tagamet HB in August.

Both are low-dose versions of their anti-ulcer prescription counterparts. Unlike other antacids that neutralize stomach acids, H2 antagonists inhibit gastric acid secretion.

Still waiting in the wings as the year came to a close were Zantac 75 from Warner-Wellcome, Morris Plains, N.J., and Axid from Whitehall-Robins, Madison, N.J. Both drugs were still pending full Food and Drug Administration approval to go over the counter, which is expected next year.

"The logical thing would be to create a special section within or near the stomach-remedy area in HBC," said Don Spence, pharmacy manager at Haggen Inc., Bellingham, Wash.

Living up to its namesake, the two antagonists soon began duking it out with lawsuits and countersuits over false and misleading advertising claims about the product's duration of action and number of doctor recommendations. As a result, a federal court ordered both Johnson & Johnson/Merck and SmithKline Beecham to modify their promotional materials and ad campaigns.

The most recent research figures from IRI show the anti-ulcer drugs quickly began to affect the $1.2 billion stomach-remedy category, which was up 7.8% for the 52-week period ended Aug. 27.

During that period, Pepcid took a 3.6% share of market generating $42 million in sales at food, drug and mass merchant outlets. With only a few weeks on the market, Tagamet generated a 0.8% share of the market, with $8.9 million in sales.

Scott Shevick, an analyst with Bear, Stearns & Co., New York, predicted that within three years, sales of H2 antagonists could be as high as the entire antacid category, especially if the H2 blockers capture the high-end prescription user, or those likely to self-medicate.

Most supermarket retailers hailed the profit opportunities the H2s offered.

"The more good offerings we give to the consumer, the better it will be for our profits and for our position in the HBC market," said Gary Crawford, HBC buyer at Tom Thumb Food & Drugs, Dallas, and its parent company, Randalls Food Market, Houston.

But many supermarket pharmacies feared the H2 switches would result in a loss in prescription sales, since they expected many of their customers to switch to the lower dosage and cheaper over-the-counter versions.

Healthy Gains for Pharmacy

It was another very good year for supermarket pharmacy expansion, according to SN's third State of the Industry Report.

The industry saw the number of pharmacies in supermarkets grow to 6,613, up 5.4% over the previous year. Prescription sales also were up to $5.48 billion, a 12.1% increase.

However, executives cited eroding prescription margins as their biggest challenge next year. This is an industrywide issue as more prescription sales go through low-margin third-party sources. With third-party payers expected to represent 80% of retail prescription sales by the end of the decade, retail pharmacy is slowly losing control of its profitability.

According to this year's survey, the percentage of prescriptions paid for by third-party plans continues to climb, estimated at 57% this year.

Pharmacy share of total store sales also rose, to 5.6%, compared with 5.1% last year.

Other growth statistics showed that supermarket executives expect a 17% sales gain in its pharmacy business. The average revenue among stores surveyed is expected to hit $4.5 million, compared with $3.8 million last year.

Generic drug sales are up, with a projected 43% of prescriptions filled using generics. Last year 39% of the prescriptions dispensed were filled with generics.

The Hits Keep On Coming

Sell-through's continued growth was the big video story in 1995.

"Sell-through has been better than ever," said Sharon Stagner, merchandising coordinator at Seaway Food Town, Maumee, Ohio.

Driving this growth again was the rapid-fire release of numerous theatrical hits. Disney's "The Lion King" and Paramount's "Forrest Gump," two big direct-to-sell-through titles, were out of the box early in the year to set sales precedents.

This year's fourth-quarter releases, including "Cinderella," "Batman Forever" and "Apollo 13," will help retailers further establish themselves as a destination for video sales.

"Sell-through is getting larger, and retailers are missing an opportunity to benefit from this growing audience that extends beyond handling the hot new blockbuster releases," said Laurie Webb, video buyer at Fleming's General Merchandise division, Topeka, Kan. This year the Fleming division developed an aggressive video sell-through program for some of its 500 retailers.

SN's 1995 Video State of the Industry Report projected supermarket sell-through volume would hit $861 million this year, up 24% from $696 million in 1994. Of those retailers responding to this year's survey, 47.1% said they were expanding their sell-through inventories, and 27.5% said they were expanding the number of sell-through sections.

Also, some studies showed supermarkets gaining ground in 1995 on other classes of trade, especially in selling nonchildren's theatrical hits, like "Forrest Gump" and "Apollo 13."

"Years ago the only thing you could sell was kids' product. Today, the market has matured and the family-oriented action and comedy movies have done very well for us and they continue to be a growing percentage of our total business," said a video executive from a large Midwestern chain.

Video Ties Score

Cross-promotion of videos in supermarkets reached a new level of sophistication in 1995 with effective tie-ins on titles like "The Lion King," "Forrest Gump," "Swan Princess" and "Cinderella."

Studios became more adept at joining forces with packaged goods companies like Pillsbury, General Mills, Tropicana and Pepsi in solving the political structures of many chains.

"Pillsbury, for one, is doing an excellent job in our stores promoting not only their products, but the sale of the videos that they're tied with," said Clifford Feiock, video coordinator at Nash Finch Co., Minneapolis.

Retailers grew more receptive to creating exciting in-store events linked to the big titles. For example, "Forrest Gump," which was released with no national tie-in partner, resulted in creative marketing events from retailers who promoted the release with tie-ins with shrimp, chocolate and park bench giveaways.

For example, Dierbergs Markets, Chesterfield, Mo., promoted Gump cookbooks and held drawings for free shrimp. Personnel working for Bi-Lo, Mauldin, S.C., wore Bubba Gump hats and red aprons to serve shrimp to customers.

"Having 'Forrest Gump' in with the regular grocery items will help us establish video as a destination department," said Eileen Ustasewski, video merchandiser at Seaway Food Town, Maumee, Ohio.

SN co-sponsored its first video conference in Los Angeles on "Cross-Promoting Video Titles in Supermarkets." During the conference, Kirk Mueldener, director of video operations at Hy-Vee Food Stores, West Des Moines, Iowa, urged suppliers to be more open to more store-specific promotions.