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America's become a nation of pesto eaters.As fancy food eats up increasing space in supermarkets, suppliers are retooling their organizations and product assortments to make it easier for retailers to grow the category.Mergers and acquisitions have created bigger, better-equipped specialty-food companies, said Ron Tanner, vice president of communications and education for the National Association

America's become a nation of pesto eaters.

As fancy food eats up increasing space in supermarkets, suppliers are retooling their organizations and product assortments to make it easier for retailers to grow the category.

Mergers and acquisitions have created bigger, better-equipped specialty-food companies, said Ron Tanner, vice president of communications and education for the National Association for the Specialty Food Trade, New York.

"Larger companies are more sophisticated in terms of collecting scan data and having information that will help retailers determine if they're in a market that demands more of certain products than others," he said.

Such firms are also better positioned to be retailer partners, rather than just suppliers, distributors told SN.

"We see ourselves as an extension of the retailer's own business process," said Greg Leonard, vice president, trade marketing and communications, Tree of Life, St. Augustine, Fla., a marketer and distributor of natural and specialty foods.

Leonard noted, for instance, that Tree of Life can perform category captain tasks just like a mainstream food company does.

"In order for retailers to succeed, they need to be aligned with knowledgeable supply-chain partners," Leonard said.

The changes come amid a boom in the specialty-food business.

Fueled by increases in immigration and travel, retail sales of specialty food rose almost 8% to $24.7 billion between 2002 and 2004, according to a report from NASFT and Mintel International Group, Chicago.

About 200 million Americans -- including about 67% of consumers between the ages of 25 and 34 -- buy specialty, the report states.

"Consumers are looking for products that are different and healthy, and retailers and wholesalers are responding appropriately," said Jack Block, chairman of the Wholesale Division at the Food Marketing Institute, Washington.

Suppliers are enhancing their products and services and streamlining their organizations.

Tree of Life last month adopted a new corporate identity to permit all of its Tree of Life and Gourmet Award Foods companies to operate under the Tree of Life name.

Tree of Life serves 12,000 supermarkets and natural food stores per week using a national network of 14 distribution centers.

The goal of the new identity is to present the distribution network as a unified company. The network was created through a series of acquisitions during the 1980s and '90s. Distribution centers catering to natural-food stores operated under the name Tree of Life, while those that focused on supermarkets were called Gourmet Award. The name conversion is expected to be complete by January 2006.

Tree of Life has also merged the staff at its headquarters with those at its Northeast region and Southeast divisions to form a new East region. The merger consolidated its distribution business into three regional offices in St. Augustine, Dallas and Bloomington, Ind., and improved efficiency by eliminating redundancies, Leonard said.

As part of its reorganization, Tree of Life developed a new customer tool called Smart Assortment. Scheduled for a third-quarter rollout, the tool analyzes data, including store size, format, location, consumer transaction data and local demographics, to determine the best assortment of Tree of Life's 15,000 natural and specialty-food stockkeeping units for shoppers in a given retail location.

"Specialty distributors are traditionally push-oriented merchants -- trying to get consumers to buy the products we carry," Leonard said. "Smart Assortment lets us go from push marketing to embracing the needs of the consumer -- finding out what they want and then getting them into our warehouse."

Another supplier, Distribution Plus Inc., Wilmette, Ill., which distributes about 55,000 SKUs, in March unified its five divisions that focus on food retailers. Until this year, the divisions -- in Baltimore, Chicago, Denver, Los Angeles and Portland, Ore. -- ran their merchandising and marketing operations independently.

DPI also hired Andrew Kramer as vice president of marketing and new business development, a new position. Kramer, a 15-year Jewel and Albertsons veteran who most recently served as national director of ethnic marketing and specialty at Albertsons, was assigned to coordinate regional and national programs.

Distributors also are upping their assortments to reflect shopper demand.

In concert with Kramer's hiring, DPI has been expanding product offerings in four growth areas: kosher, Hispanic, Asian and natural/organic.

"The American palate has changed with the influence of immigrants, cooking shows, ethnic restaurants and travel," Kramer said. "Ethnic and specialty [are] becoming a much greater part of the American cuisine and diet."

DPI also has strengthened its cheese, deli and bakery portfolio by rolling out a cut-and-wrap cheese room at its retail divisions.

Grocers Specialty Co. is the specialty and gourmet product distribution subsidiary of Unified Western Grocers, the Commerce, Calif.-based retailer-owned grocery cooperative. GSC recently separated Hispanic from specialty in order to put more emphasis on the fast-growing consumer segment.

GSC represents about 11,000 SKUs, including about 2,000 ethnic, 3,500 natural/organic and 5,500 gourmet. In response to growing consumer demand, it's added 120 British items, 90 Eastern European products and 220 Asian selections.

Traditional retailers are poised to make a strong impact in these and other specialty categories, said Ray Burtner, GSC'sgeneral manager of sales.

"We work with retailers to find out how they can use specialty to maintain existing customers and attract new ones," Burtner said, adding that GSC also helps retailers advertise and promote specialty.

Catering to specialty shoppers can help traditional retailers set themselves apart from competitors. Yet distributors say they find that many retailers don't understand the importance of neighborhood marketing, focusing instead on chainwide programs.

"The biggest challenge with conventional grocery stores is that there tends to be a cookie-cutter approach," Burtner said.

Using Tree of Life's Smart Assortment requires a change of mind-set by retailers, Leonard said. Many develop a standard 24-foot natural and organic in-line set and roll it out to all their stores, but such one-size-fits-all merchandising doesn't take into account each store's distinct consumer demographics and shopping patterns, he said.

A Smart Assortment pilot found that a Northeast retailer with stores in upscale communities carried too few kosher foods based on the market and competition. As a result, the kosher food set increased from 6 feet to 12. Leonard declined to name the retailer.

"Retailer needs may be different among stores that are not only one mile apart, but even right across the street from each other, due to different retail strategies," Leonard pointed out.

Along with product assortment, merchandising decisions -- such as whether to integrate specialty foods with mainstream products -- should depend on the go-to-market strategy of a particular retail unit, according to suppliers.

The decision to integrate or segregate specialty depends on a number of factors, including the store's location, size and strategy, DPI's Kramer said. If a retailer wants to make a statement that it has the largest variety of natural/organic, it might go with a store-within-a-store. If that's not the goal, or it doesn't have room for a dedicated section, integration may be the answer.

"There's no nationalized, one-size-fits-all solution," he said.

Collaboration Pays Off for Retailer

SAN JOSE, Calif. -- Joey Franco's PW Supermarkets credits its distributor, Unified Western Grocers, with helping its specialty-food sales soar 25% for the year that ended April 30.

"They're a true partner," Mike Stigers, PW's senior vice president and chief operating officer, said of UWG's Grocers Specialty Co. division.

The nine-store retailer has worked with UWG, Commerce, Calif., for more than a decade. The relationship has strengthened over the past few years as UWG ratcheted up efforts in itemization, schematics, promotional planning and other areas, Stigers said.

The bond is so strong that when PW builds new stores, UWG plays an active role in the planning process. Before opening its two newest stores -- in San Jose and Livermore, Calif. -- PW toured other supermarkets with the distributor to get merchandising and product assortment ideas.

Likewise, UWG was the motivating force behind PW's successful natural/organic program that involves both integration and segregation.

"We discussed with UWG whether we should completely segregate or integrate and came up with the idea to do both," Stigers said.

In addition to a dedicated natural/organic section, PW also incorporates top-selling natural/organic items with their mainstream counterparts.

The setup shows existing natural/organic customers that PW has a separate section just for them. At the same time, integration entices mainstream customers to switch to natural/organic products.

The business relationship also led to the development of a natural/organic store within a store. To distinguish the department from the rest of the store, the section has natural-wood flooring, lower gondolas and radius shelving.

"It makes our customers feel as if they're in a natural/organic food store," Stigers said.