2008 was a year of ups and downs for nonfood in supermarkets. But, like many other segments of the nation's downtrodden economy, there were mostly downs.
With business generally declining, the supermarket industry could take some solace in grocery traffic and sales being down less than other channels, excepting Wal-Mart, which defied economic gravity with its low-price image.
Referring to opportunities to gain ground in nonfood categories, consultant Neil Stern, partner, McMillan Doolittle, Chicago, said: “This is a pretty good time to press the advantage, because you have the customer still coming in to your doors. Other retailers don't necessarily have that luxury.”
Earlier in the year, nonfood and pharmacy executives expressed optimism that things would pick up in the second half. But as is now obvious, the economy entered an even more perilous phase, and an official recession was declared to have been in effect for a year.
There were some bright spots in nonfood. For example, cookware showed strength as consumers cooked more meals at home; following the same stay-at-home trend, low-cost home entertainment products, such as budget DVDs and 99-cent-a-night automated DVD rentals, continued to attract customers; and of course private label gained across the store. Store brands may be a trade-down in price point and top-line sales numbers, but they are a boost to retail bottom lines.
However, downturns and question marks abound as the industry closes the books on a calendar year many would prefer to forget.
Pharmacy: Promotional generics programs expanded across the industry. While this was good for customers and in general a boost to overall store business, it was also a drain on pharmacy profits as cash-strapped patients were forced to cut back on other medications.
Clinics: With their long path to profitability and their dependence, in many cases, on credit that was in short supply, many in-store clinics closed, and fewer opened in supermarkets than had been initially projected.
Fuel: Promotional programs sprung up around the industry as fuel prices dropped along with the stock market. Few held the view that the cost of oil would stay down for long, and with the pain of $4 gas a stinging recent memory, fuel remains a hot button with consumers at any price.
Health and wellness: Interest remains high, but the business side of this trend was a question mark at year's end. Could consumers pony up for the relatively expensive products and services? The industry will know more in the months to come.
Generic discount programs spread widely across the supermarket trade in 2008. Offers of 30-day supplies of selected drugs for $4 and 90-day supplies for $10 were commonplace. Several retailers, such as Giant Eagle, Pittsburgh, indicated that these were not temporary price reductions, but a permanent part of pharmacy services. Some retailers offered free generic antibiotics and prenatal vitamins.
The exceptions to this trend were more notable. For example, seeing the long lines and waiting times at retailers offering the discount programs, Save Mart Supermarkets, Modesto, Calif., rolled out an 18-minute prescription-fill guarantee. Customers waiting longer were offered a “dinner and a movie” — a $10 gift card for the store and a free movie coupon for the redbox rental machine. Building off technology investments and promoting the speed of Save Mart's pharmacies, the program also “is a good way to promote cross-shopping between the departments,” said Michele Snider, senior director of pharmacy.
In another development reflecting the difficult economics of prescriptions, Bruno's Supermarkets, Birmingham, Ala., closed 22 of its 40 in-store pharmacies. “Many factors contributed to our decision to close these pharmacies, including the changing landscape of pharmacy services,” said Kent Moore, president and chief executive officer.
A number of other chains, including Meijer, Grand Rapids, Mich., and A&P, Montvale, N.J., began offering prescription benefits management services to companies and small groups. Meijer and A&P did this in partnership with a third party, 4D Pharmacy Management Systems, Troy, Mich.
Last year, the in-store clinic business seemed to offer bright promise to supermarkets. At the end of 2008, there are big questions.
Supermarkets had partnered with third-party service providers, who were dependent on outside financing and credit to fund expansion and operations in a business requiring about two years to reach profitability. Many of these providers lost their backing, and supermarkets were left without clinics, although they had already created space for them in their stores.
Size has its advantages when it comes to clinics. CVS/pharmacy, Woonsocket, R.I., and Walgreens, Deerfield, Ill., had bought out clinic operators and were funding expansion themselves. In 2008, Kroger Co., Cincinnati, made an investment in the Little Clinic, Louisville, Ky., which allowed continued operations and rollout in its stores, as well as those of Publix Super Markets, Lakeland, Fla., which had previously contracted with the Little Clinic. However, all such expansion was expected to slow because of the economic situation.
Meanwhile, other supermarkets, as well as Wal-Mart Stores, Bentonville, Ark., were looking to hospitals and local health care systems to help establish in-store clinics.
In spite of declining fuel prices, retailers continued to roll out promotions tied to gas, whether at their own pumps or in partnership with other fuel dealers. Several prominent retailers, including Giant Eagle, Kroger, and Safeway, Pleasanton, Calif., tied gift card sales to fuel discounts.
In the fall, Giant Eagle added a new wrinkle to its successful fuelperks! program by layering a foodperks! component on top of the fuel discounts. In the new program, which is initially being tested in the Columbus, Ohio, market, customers are offered discounts in the main supermarket based on fuel purchases at the company's GetGo gas locations.
Higher-priced items in the health and wellness and natural and organic areas were once thought to be immune to economic slowdowns, but the continuing and severe downturn toward the end of the year brought this into question. A recent study by NPD Group, Port Washington, N.Y., indicated continuing growth potential for “eco-beauty” products, but time will tell if mass market consumers can afford them.
Another question mark going into the holiday season was gift cards. Gift cards were regarded as a growth area earlier in the year by many supermarket chains, but now uncertainty over the viability of some card-issuing partners may give consumers pause. The strongest segment of retailing is the food channel, while other gift card stalwarts, including retailers and restaurants, were suffering widely publicized difficulties. A bogus email warning against purchasing gift cards because of retailers supposedly going out of business didn't help.
A study issued last month by the National Retail Federation, Washington, conducted by BIGresearch, Worthington, Ohio, forecast that gift card sales would fall nearly 6% this holiday season to $24.9 billion, from $26.3 billion last year. “Since gift cards never go on sale, some price-conscious shoppers will be passing up gift cards in favor of holiday bargains,” said NRF President and CEO Tracy Mullin.
CHINESE GOODS TARNISHED
Although transportation costs are in flux along with oil prices, retailers will continue to look abroad for seasonal and other goods. Some reported that because they'd had to place orders for holiday goods far in advance, they may have to heavily discount these products this year.
Meanwhile, the “Made in China” label became an issue in 2008.
Retailers had already started to look away from China to other manufacturing countries because of higher energy costs, rising wages, a strong currency, and — most importantly — safety concerns that eroded consumer confidence.
Generic drug cost-reduction programs are good for the customer, but sap pharmacy profits.