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Treading Water: SN's Annual Category Review

Treading Water: SN's Annual Category Review

The slow economic recovery projected at the beginning of 2011 has been even slower than many expected, and the impact has been felt at the food-retail shelf. Inflation, higher gas prices and economic uncertainty have all contributed to changes in consumer buying behavior, while retailers and suppliers have exerted their own impact through pricing and promotional activity. When you couple stronger


Introduction and overview of category trends
SymphonyIRI Group data on 260 supermarket categories
Unit sales
Dollar sales
Profiles of 50 Key Categories
Nonfood: Sales Migration
Fresh Market: Heading Up
Center Store: Let's Make a Deal

The slow economic recovery projected at the beginning of 2011 has been even slower than many expected, and the impact has been felt at the food-retail shelf.

Inflation, higher gas prices and economic uncertainty have all contributed to changes in consumer buying behavior, while retailers and suppliers have exerted their own impact through pricing and promotional activity.

“When you couple stronger inflation with the fact that fuel retails are up considerably over last year — those two things in combination, we believe, have a dampening effect on demand,” said Steve Burd, chairman, president and chief executive officer at Pleasanton, Calif.-based Safeway, in a conference call last month discussing second-quarter earnings. “That's particularly true for that segment of our shoppers that believe we're still in a recession, which is the largest segment, I might add.”

Retailers on the whole say they have been passing along much of the product-cost inflation they are experiencing, but efforts to improve or maintain their price images have made them wary. CPG companies, meanwhile, have been fighting back against private-label share growth with more promotions and temporary price reductions.

Retailers report that they have experienced product-cost inflation in the low single digits overall, although some fresh categories have been more volatile. Supermarket operators maintain that their competition for the most part, including price-oriented retailers, have been passing along their cost increases as well.

“The overall retail environment is generally rational, but strong competition for customers' limited dollars remains,” said David Dillon, chairman and chief executive officer, Kroger Co., in the company's most recent conference call with analysts. “Our price checks show that most competitors are passing higher costs on to customers.”

Rodney McMullen, president and chief operating officer, Kroger, said the company estimated that product cost inflation, excluding fuel, was approximately 3.5% in the most recent period.

“We saw inflation in all categories, including grocery,” he said. “While that continues, inflation is disproportionately affecting our perishable departments, especially seafood. We expect this trend to continue as well.

“Our customers continue to seek value in this economy. With inflation and rising gas prices, customers' budgets are stretched. The value we offer them through lower everyday prices, weekly features and personalized rewards to our loyal customers continue to resonate with them.”

While some retailers reported that some customers have begun purchasing more higher-ticket and discretionary items, they also continue to see many consumers trading down to lower-priced offerings amid inflation and increasing uncertainty around the economy.

“Manufacturers and retailers have struggled against rising commodity costs throughout the course of the economic downturn,” Chicago-based SymphonyIRI Group said in a recent Times & Trends report, noting that the U.S. Department of Agriculture is projecting retail food prices to climb 3.5% to 4.5% for the year.

“Inflation anywhere in the projected range is significant,” the report said. “With 20% of consumers already experiencing difficulty affording weekly groceries, this type of a jump will be difficult to absorb. CPG marketers must be very aware of the sensitive nature of today's CPG marketplace.

CPG shopping behaviors will continue to be characterized by “caution and frugality,” SymphonyIRI said.
Mark Hamstra

Nonfood Loses Share to Drug Channel

Supermarkets have established a bunker on health and wellness when it comes to nutritional education and providing nutritious food offerings. While food retailers have succeeded on integrating health and wellness as it relates to food into their retail proposition, they haven't scored as well when it comes to over-the-counter and personal care products.

Drug stores have claimed this turf, and are more naturally suited to do so. This is borne out from an analysis of the sales figures in 15 selected nonfood categories that SymphonyIRI tracks for the 52-week period ending June 12, 2011.

Of the seven health-related nonfood categories and seven personal care categories examined, drug stores appeared to pick up the largest percentage of dollar sales increases in 11 categories. Three categories — weight control, skincare and hair coloring — were just slightly below increases posted for all combined mass-market channels. (It's important to note that SymphonyIRI does not include figures from Wal-Mart Stores or warehouse clubs and gas/convenience stores.)

Battery sales, the one general merchandise category tracked, dipped across all channels due to the economy's squeeze on consumer demand for electronic devises, shoppers gravitating to the lowest price, large package sizes and the strength that private label demonstrates in the category.

Meanwhile, food stores posted dollar sales increases in 11 categories but sales flagged in analgesics, sanitary napkins/tampons and shampoo.

The nonfood categories totaled $24.4 billion for the year. Of that total, supermarkets represented just over a third of sales and drug stores posted nearly half.

This slow erosion of nonfood sales to drug stores and other channels has been taking place for many years, noted Jim Wisner, president of Wisner Marketing Group, Libertyville, Ill.

“Few food retailers have make a concerted effort to break out of the mold they have been in for the past 15 years [when it comes to merchandising nonfood categories],” said Wisner. Supermarket pricing of nonfood categories has also driven customers to other channels — mass merchandisers, club stores, dollar stores and drug stores, he said.

While supermarkets have positioned nonfood categories as a convenience for food shoppers, unlike the major drug chains, food retailers don't merchandise beyond convenience and integrate nonfood into the total store proposition, as do drug stores, which position health and beauty care products as lifestyle essentials.

Now major drug chains, which expanded access by putting a store on every corner, have upped the ante and added fresh food and perishables to their mix. They have crossed over into supermarkets' turf in providing healthy foods prominently positioned as a convenience.

Walgreens has been very aggressive on the food side of late, said Wisner. The drug chain is using food to solve a social problem of access to fresh foods in urban areas. “They are attempting to create an oasis in food deserts,” he explained.

The drug chains are using food as traffic drivers. Wisner sees the new drug store formats designed similar to a Tesco Express in the United Kingdom, with the addition of a pharmacy and large HBC offering. “It fills the gap between a pure convenience store and a pure supermarket,” he added.

Safety and quality issues surrounding Johnson & Johnson's McNeil Consumer Healthcare business again impacted performance of several categories — analgesics, cold/allergy/sinus and gastrointestinal. Johnson & Johnson still reeled well into 2011 from product recalls due to lingering musty odors from products. Expect the company to get products back on shelf with major confidence-building campaigns next year.

However, Wisner says it won't be easy to build back confidence or retailer support with those lost sales going into private label. Tracking dollar sales in core OTC categories between 2009 and June 2011, Wiser said private label has picked up five share points. “It's going to be a ratcheting up game. A lot of consumers will remember why they couldn't find their favorite brands on the shelf, and will have found that what [store brands] they are using now works as well and is cheaper. McNeil will try to buy it back,” he said.

Even though the economy continued to squeeze consumers' discretionary spending, they did spend money on nonfood products that they felt satisfied a need and were effective. The leading CPG companies were able to bolster category sales with innovative new formulations that improved product efficacy or satisfied a specific need. While consumers continued to seek value, product performance seemed to prevail over price this year.
Christina Veiders

Inflation Offsets Volume Decline in Fresh Market

For many fresh food categories, 2011 has been playing out like a slightly less difficult version of 2008. Prices are rising and shoppers are squeezed, looking for value and bargains wherever they can find them.

In a few cases, rising prices and declining volume resulted in a wash, with minimal dollar sales growth. Small, single-digit dollar sales gains offset by small, single-digit volume sales declines have been a trend for years in the packaged lunchmeat category, for example. And, during the latest 52 weeks, orange juice sales units were down 3%, but higher prices helped keep dollar sales declines below 1%.

In other categories, trading behavior appeared evident. The rising price of animal feed and other input costs has pushed prices higher for most items in supermarket meat departments, but the beef category seems to be bearing the brunt. Most beef cuts tend to be pricier than pork or chicken, and when prices are rising for all three, pork and chicken look like relative bargains for cash-crunched consumers. As a result, beef sales are up only 1.7% on higher pricing, while poultry and pork have risen 22% and 14%, respectively, during the latest 52 weeks.

The Fresh Market section of this year's category guide features a more complete look at perishables departments, including several categories that SymphonyIRI does not cover.

For the first time, SN has partnered with The Perishables Group, West Dundee, Ill., to offer recent national sales data on several fresh food categories that have not been represented in prior category guide issues. All deli, fruit, vegetable, beef, pork, poultry, in-store bakery and seafood data in this year's issue were provided by the consultancy's FreshFacts database, powered by Nielsen. Data for the milk, natural cheese, yogurt, refrigerated juices and beverages, lunchmeats, breakfast meats and egg categories continue to be provided by Chicago-based SymphonyIRI Group.
Matthew Enis

Center Store Gets Even More Promotional

After two years of trolling circulars, building home-based meal repertoires and squeezing waste from household budgets, Center Store shoppers are pretty well entrenched in frugality. So it's not surprising that sales in many high-volume grocery categories were flat during the 52 weeks ending June 12, 2011, when compared with the prior year, with the exception of energy drinks (up 14.5%), granola bars, chocolate candy (both up 5.7%) and wine (4%).

Though commodity-fueled price increases put a dent in Americans' budgets, 69% minimized the impact by shopping with lists and 61% sought promotions in store fliers, according to SymphonyIRI Group.

There was no shortage of deals as consumer packaged goods marketers precluded permanent price hikes with temporary price reductions, feature ads and displays.

“It's the one tool that manufacturers and retailers are using to have some modicum of control over their pricing,” Susan Viamari, editor of SymphonyIRI's Times & Trends report, told SN. “There is a big dance going on.”

In fact, an analysis of the 20 high-volume and/or high-growth Center Store categories featured in SN (see Page 58) reveals that half of volume was sold with merchandising support, said Viamari. Of those categories, carbonated soft drinks, chocolate candy, salty snacks, crackers and bottled water got the most promotional play. But even taking temporary price reductions into account, 75% of categories saw price increases vs. the prior year. The most substantial was a 15% spike in coffee's retail price.

Gas prices, up 30% this year vs. last, also influenced spending as shoppers scaled back pantry-stocking missions, sticking instead to more consistent spending during quick trips for depleted recipe ingredients.

The drug channel benefited as 13% of consumers polled by SymphonyIRI reported shopping these stores more frequently since the most recent gas price increase. Perhaps to change their price image, drug stores also got on the promotions bandwagon. Nearly seven in 10 drug store categories (68%) saw increased promotional support vs. 56% of supermarket categories.
Julie Gallagher