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However specialty foods are defined -- as ethnic, gourmet, natural, functional or organic -- this category is one of the fastest-growing in mainstream supermarkets today.Driven by the demands of shoppers who are well-educated, widely-traveled, health-conscious and increasingly concerned about the safety and quality of the food they eat, these products have moved beyond health-food and specialty stores.Nonetheless,

However specialty foods are defined -- as ethnic, gourmet, natural, functional or organic -- this category is one of the fastest-growing in mainstream supermarkets today.

Driven by the demands of shoppers who are well-educated, widely-traveled, health-conscious and increasingly concerned about the safety and quality of the food they eat, these products have moved beyond health-food and specialty stores.

Nonetheless, mainstream retailers have further to go. "The products are available now, but they are not easy to find," noted Paddy Spence, chief executive officer of SPINS Inc., a San Francisco market-research company that focuses on health and nutrition products. "In five years, I expect to see a robust selection in mainstream aisles with clear signs and explanations."

Specialty subsegments can be loosely defined as authentic ethnic foods (not to be confused with Americanized products such as Old El Paso or Prego); gourmet foods, consisting primarily of premium-priced products that are often imported, hand-processed or composed of higher-priced ingredients; and natural and "functional" foods, which promote some health benefit and which can also include processed organic foods.

In many cases, products fit into more than one category. For example, tea is a popular product in the gourmet area, but green tea is touted for its antioxidant health benefits as well. Many ethnic products also fit the gourmet profile. And some ethnic cuisines, particularly Asian and Mediterranean, are gaining in popularity, because they are considered healthier.

At retail, merchandising approaches include a separate section, the "store-within-a-store" concept; total integration with mainstream products; and special sections within the mainstream product category. But most retailers and consultants agree that it's essential to use signage and other materials to identify specialty foods and to educate customers about them, regardless of where they are displayed.

Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., a supermarket consulting firm, noted that his company's research indicates it is vital for supermarkets to

boost their inventory in specialty categories to avoid losing some of their most important customers.

In a study last year, the firm found that the 10% of customers who spend the most in a supermarket are buying 25%-32% of the specialty foods, and the top 20% of customers (by spending) account for 38%-52% of specialty-food sales. An added plus for the retailer, according to the study, is that specialty foods are higher-margin products, typically sold at full price.

"Retailers have a dilemma," Bishop acknowledged. Specialty foods often are "not very fast-moving items, so they are subject to scrutiny, but retailers need to satisfy their heavy shoppers.

"In a number of instances, retailers using a straightforward approach to category management are cutting a little close to the bone in reducing specialty foods, taking the approach that if they are not there, they won't be missed," Bishop said. "But retailers have to carry specialty foods to appeal to the people they want to keep coming back."

Growth Potential of Specialty Foods

A look at the growth potential of specialty foods indicates why they deserve retail consideration.

For example, the ethnic-foods subsegment appeals to two markets. While authentic ethnic items sell very well in ethnic communities, they are increasingly popular in the broader market as well.

Mike Trueblood, president of TruMarketing, Santa Fe Springs, Calif., a marketing consultant specializing in reaching the Hispanic community, pointed out that supermarkets in California are "looking at the products selling well in the Hispanic community" and adding them to their shelves. Some California chains, he added, are looking at a line of frozen, Asian dim sum-style hors d'oeuvres.

He noted that pinto beans, once strictly a Hispanic item, now sell well in mainstream markets and that Jumex, a canned nectar from Mexico, has jumped from the number eight spot in Southern California to number two.

The growing Hispanic population in the United States -- projected by the U.S. Census Bureau to reach 31.4 million, or 11.4% of the total population next year -- is likely to boost the appeal of authentic Mexican and Caribbean cuisine.

"Our Hispanic population is what the national average will be in 2015," commented Jay Milner, vice president of grocery, dairy and frozens for the eight-store Superior Super Warehouse chain in Lynwood, Calif., where both U.S. and Mexican brands are important to customers.

"The growth of Hispanic products appears to follow the population. First you get authentic Mexican, Cuban or Puerto Rican restaurants and mom-and-pop groceries to serve that population; then the regular groceries take note," said David Thomas, vice president at Strategy Research Corp., Laguna Hills, Calif., a market-research firm.

Retailers who want to spot coming ethnic trends where their stores are located should check to see which ethnic restaurants are opening and becoming popular nearby, said Thomas.

Tracy Carlson, director of the strategic marketing group at Promar International, Alexandria, Va., a market-research company, agreed.

"Generally, cuisines start out highly authentic and attract core ethnic users," she said. "They get watered down as they become more mainstream to appeal to American palates. As these cuisines mature [in the American market], they can plateau and have to reinvent themselves to keep growing." An example, she said, is the introduction of regional-style sauces and other new products in the mature Italian category.

Promar's study found cuisines are popular in restaurants before moving into the retail arena. Currently, she noted, non-Chinese Asian cuisines are among the fastest-growing ethnic categories, led by Thai and followed by Indian, Japanese, Vietnamese and Korean foods. Mediterranean foods are "growing fairly briskly," she added, and Caribbean and Ethiopian cuisines are seeing a 6% growth rate, though off a small base.

Kosher products, said Carlson, are enjoying a 15% growth rate, but much of that can be attributed to established mainstream products being certified as kosher rather than to a growth in ethnic products.

Natural food is another high-growth subsegment of specialty foods, having registered spikes of 15% to 25% each year from 1990 to 1997, with 1997 sales reaching $5.5 billion, according to a study released in April by the Henry A. Wallace Institute for Alternative Agriculture, Greenbelt, Md.

"Industry analysts predict similar growth rates over the next five to 10 years. If they are correct, natural food will comprise nearly 10% of the total retail food market by the year 2008, or more than $60 billion in retail sales," the report's executive summary stated.

The Organic Trade Association, Greenfield, Mass., in a survey of 56 organic-products manufacturers released last November, reported a 36% increase in sales from 1996 to 1997 and average annual growth of 42% for the five years from 1992 to 1997. The survey projected last year's growth would be 30%.

Trends in Specialty Subsegments

Two specialty-food distributors who spoke with SN identified some trends in the ethnic, gourmet and natural-food subsegments. In the ethnic area, kosher products are growing as they become more widely available, noted Steve Arthurs, vice president of specialty foods, purchasing and merchandising at Millbrook Distribution Services, Leicester, Mass.

"Kosher noodles, snack crackers, soups and baked goods are starting to be merchandised in regular in-line grocery sets," he said, citing as an example Manischewitz egg noodles displayed in the pasta aisle at Wal-Mart Supercenters.

Authentic Indian products are appealing to health-conscious consumers and to vegetarians, he added. Specialty crackers and teas, especially green teas, are leading the gourmet pack, he said.

"In the natural-food category, nondairy beverages, natural bars and natural snacks are strong products. Natural products are also seeing new lines and extensions of lines and sizes. For example, nondairy beverages used to be sold in three-packs. Today, they are sold in quarts and liters, and more and more vendors have nondairy lines," said Arthurs.

Joe Shannon, vice president of sales and marketing at Kehe Food Distributors, Romeoville, Ill., which supplies supermarkets in 12 Midwest states, finds retailers beefing up departments with gourmet products formerly sold in department stores, such as salad dressings and mustards.

Jack Porter, Kehe director of sales, said popular ethnic categories include Hispanic, Asian, Italian, Mediterranean, Polish, German, kosher and French. He credited the Food Network and New Orleans chef Emeril Lagasse with popularizing a variety of foods formerly unfamiliar to a mainstream audience.

"The Asian products have changed," noted Shannon. "It's not Chinese, but Korean, Japanese, Thai and Vietnamese," and sales are strong in both suburban and inner-city stores.

In whole-health products, such as power bars and other "good-for-you" foods, "our business has been extraordinary," Shannon said.

Paddy Spence of SPINS agreed that the power- or energy-bar category and functional beverages are leading the natural-food pack and projected a 20% to 25% annual growth for them in the next couple of years. In the gourmet area, Spence tagged chais (Indian teas), chocolates and other candy, jams and jellies, and mustards as key growth areas.

Strong growth areas for organic products, according to the OTA survey, are grain snacks and candy, frozen foods, ice cream, cheese, milk and other dairy products, and organic soda and refrigerated juices.

Factors Driving Specialty-Food Growth

A number of factors are driving the sales of specialty foods. Most industry watchers agree education level is the single strongest demographic factor in determining the customer for specialty products, followed by income level.

"I see more interest in premium and imported foods, but that's demographically driven. They sell in markets where people travel," said Jay Rosengarten, president of Rosengarten Group, Rye, N.Y., a marketing and consulting firm. "Ethnic foods cut across the demographics better. You'll find Chinese restaurants in the inner city."

The natural and functional-foods category is driven by consumers looking for some benefit beyond nourishment -- perhaps as a supplement, said Spence -- and also by the same desire for convenience that fuels the home-meal-replacement market.

Several executives noted that while many specialty foods carry premium prices and have benefited from the current strong economy, they are also unlikely to suffer in an economic downturn.

"These products are premium-priced, but that is decreasing as time goes on, and many are already cost-competitive," said Spence. "And there is an increasing realization that preventive health care is less expensive than treating symptoms."

"Even when the economy is down, the specialty-food business doesn't change much," said Shannon, because of the health initiative for some products and the "desire for a little reward" for others.

Merchandising Strategies

Retailers are getting away from dedicated sections and incorporating specialty products with their mainstream counterparts so customers see a greater variety, said Bill Bishop.

But ethnic foods still tend to be grouped together in the grocery aisles in Hispanic, Italian, Asian and other ethnic sections, and sometimes, as at Wegmans stores, in large international-foods sections.

Rosengarten is somewhat critical of retailers who limit their ethnic selection to packaged products.

"People in urban centers know what ethnic food is about, and I'm not sure that's been translated in the supermarket. You need to involve the whole store. You need to have the meats and produce items to create an Asian meal," not just the sauces, he noted.

J.B. Pratt, CEO of Pratt Foods in Shawnee, Okla., who has been selling organic products for 10 years, opts for an organic section that is clearly identified within the mainstream product area, rather than a separate organic department. Pratt feels that approach has more impact and creates awareness in the consumer's mind.

Porter noted stores frequently take a different approach to different specialty categories. Integrated sections are popular, he said, in such categories as cereals, snacks and pasta, while separate store-within-a-store sections may be used for health and beauty products and vitamins.

"Retailers who have been in these categories for a long time tend to have true total integration throughout the sets, because they have a more educated consumer," he added, citing Busch's in the university town of Ann Arbor, Mich., as an example. Schnuck's, in St. Louis, he said, has just remodeled a store with total integration of specialty and international foods -- "a true destination store for the specialty shopper."

Jewel Food Stores is testing a labeling program in the vitamins and supplements section of its Evanston, Ill., store and extending that signage with its nutritional information to the food aisles as well. King's and Edwards stores in New Jersey are also said to do a good job of labeling specialty merchandise and educating their customers.