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Buckling In

While a new year can mean a new start, few grocery industry leaders are anticipating much will change in 2010. They expect the new year will be a continuation of a difficult 2009, which challenged operators to compete amid price deflation, tight credit markets and a heavy new emphasis on value to meet a U.S. shopper base beset by financial uncertainty and high unemployment. Optimism for 2010 centers

While a new year can mean a new start, few grocery industry leaders are anticipating much will change in 2010.

They expect the new year will be a continuation of a difficult 2009, which challenged operators to compete amid price deflation, tight credit markets and a heavy new emphasis on value to meet a U.S. shopper base beset by financial uncertainty and high unemployment.

Optimism for 2010 centers on retailers being able to keep their own costs down, and for deflation to reverse itself. Retailers are also anxious to apply the lessons that operating in 2009's difficult environment provided, including the ability to remerchandise on the fly. Many were reluctant to predict a reversal of fortunes in the grocery business until job growth perks up again, perhaps late in the year.

Mike Gilliland, chief executive officer of Sunflower Farmers Market, the Boulder, Colo., natural and organic food chain, spoke for many in the supermarket industry when he predicted a dour business outlook.

“I'm not too optimistic about 2010,” he told SN. “I think we're still going to be fighting it out for the customer. Consumers are still going to be fairly traumatized, and will be through the end of the year. We're not counting on a huge change in behavior next year. Hopefully, we're wrong, but I don't think so.”


As 2009 came to a close, independent grocers were feeling the pinch of a newfound emphasis on value by some of the industry's largest players.

“If I had to put a word on it, ‘difficult’ is the one I would use, inasmuch as the markets have heated up so much, with competitors — especially Wal-Mart, Kroger and Safeway — taking a much more aggressive stance toward maintaining volume,” said Dennis Butler, executive vice president and chief operations officer, Laurel Grocery Co., a voluntary wholesaler based in Loudon, Ky. “That's going to make it difficult for the independents and smaller groups out there. That said, I think they're up to the task.”

Butler said Laurel's independent customers can succeed by being more nimble than the larger players. Price and promotional pressure from the giants in the industry heated up toward the end of 2009, and he expects it will continue into the new year, even as some take hits on their profits.

“Wal-Mart didn't come close to running the kinds of hot ads and promos we've seen on grocery items until about four to six weeks until Thanksgiving. But I think they will continue that,” he said. “The sales atmosphere will remain difficult for anybody to make huge moves in any direction. At some point in time, as Kroger found out in their third quarter, there's a cost to maintaining volume. So finding that fine-line balance is going to be difficult for everybody.”

In 2009, Butler said, “We learned some old lessons all over again: Deflation is never fun. We started seeing pricing drop by early summer, and it was like crazy: We saw meat really drop, milk, eggs — you name it. Those were key categories taking significant hits, that makes the sales look worse than they really are.

“The other thing we learned when things get tough is that we haven't been watching expenses as close as we should, need to, and have to,” he continued. “Whether it's labor or rent negotiations or operating expenses, we need to find a way to drive them down and keep them down for a long time to come.”

Laurel is also working to better align its interests with those of suppliers in an effort to get better pricing, stronger promotions and more effective retail operations, he said.

“We're taking a real hard look at how we work with the vendor community, how our selling matches up with how they are selling and how they want to work,” he explained. “And we will take that to retail. We're doing a great deal of work with the formats we offer to retailers, making sure they are aligned with the way vendors are going to market, so we can intensify and increase our promotional activity.”

Martin Arter, president and CEO of Affiliated Foods Midwest, Norfolk, Neb., said he believes consumer patterns will be similar in 2010 to what the industry saw in 2009. “We've obviously seen private brands on the rise, and I think that will continue,” he told SN. “However, the national brands are becoming more aggressive, so it's possible there could be some movement back to brands, but right now the increase in private brands seems to be holding.”

For some of Affiliated's customers, deflation blunted gains in volume and subsequently pressured the bottom line, Arter said.

“We definitely anticipated deflation, with tonnage up and dollars down, but some of our members did not accommodate to the changes that caused, but most of them have learned that lesson going forward.

“We're also aware that, with a smaller ring, even if there are more items in the basket, there is more pressure on labor costs, and both we and our retail members have been finding ways to cut costs,” he said. “Most of the labor cost-cutting has come from attrition, plus promoting private label to maintain some margins, and those lessons will determine how we operate in 2010.”

Regarding how the economy is affecting promotional strategies, Arter said, “Allowances have definitely gotten deeper. The manufacturers didn't take their prices down but they offered additional promotional funds throughout the year — and the way we go to market, we pass all allowances straight through to the members, so it's impacted the ability to get money into national brands.”

The opportunity for additional national-brand promotions is a positive trend for 2010, Arter noted. He's also counting on some inflation to return and for the difficult job market to provide opportunity to improve the depth of Affiliated's talent.

“We expect a super year, with dollars increasing, though tonnage will still go up more than dollars. But we do anticipate a return of inflation, and that will mean the members and the warehouse should be in a good position because we've done what we've needed to do up till now, and as long as we keep our belt tight, it will be a good year.

“In the 15-state Midwest area, the economic impact of the last six months of 2009 has been tougher than ever, but we feel positive about our prospects,” he added. “With the industry consolidating or the economy forcing some companies out of business, we believe there will be a lot of very talented people looking for jobs, which could be a big positive for us.”

Arter also said he expected social media to continue to change the way people shop, “and that will change the way we operate. We are moving in that direction as print ads become a smaller part of our business, and we're doing what we can — with text-blasting on the Web, for example — to make sure we are part of the transition that we anticipate over the next three to five years.”


Roger Collins, CEO of Harps Foods, Springdale, Ark., said he expects 2010 will provide a continuation of the trends that made 2009 a difficult year. But being quick to recognize those trends, and adjust to them, helped Harps manage those challenges well.

“I think it's going to continue to be tough. People will continue to trade down and watch their dollars, and I think we'll see more of the same,” he said.

“I think 2009 showed us that we needed to be on top of our games when it came to marketing. People stopped eating out so much, and they started focusing on eating at home. But they also started buying down and looked for ways to save money in the grocery store,” Collins continued. “The combination of those two things sort of offset one another. The [retailers] who were nimble and saw these changes taking place in their markets are the ones who did well in 2009. Taking advantage of it meant seeing it early and trying to respond to it.”

Harps started communicating a stronger price message a little more than a year ago when the economic downturn became more intense, Collins said. “We started running more specials — recession-busters to try to get people to see the special pricing you have,” he explained. “I don't think you can just be solid on price, because people understand that Wal-Mart has strong prices. It's important to say something about the price of your groceries, and what makes that special.”

Fundamental changes in the economy that might help food retailers are still months away, Collins predicted.

“The question I have is when are jobs going to turn around and when will banks start lending money again, and when will small businesses start gaining ground,” he said. “I think it will be late in 2010 before we see any of that happening.”

In the meantime, the slow economy — particularly its effects on lending — could get in the way of businesses like Harps that intend to continue their growth.

“One of our strategies has been to grow as fast as we can. And with the situation with banks today, navigating the financial side of the business is a challenge,” he said. “Even for those companies that have done very well, the ability to borrow money and the ability to make changes in loan agreements and covenants has been difficult, and I'm concerned that it will continue to be difficult. Refinancing right now is very expensive.”

Doug Nidiffer, chairman, president and CEO of C&K Markets, Brookings, Ore., said he believes consumers “will remain a little bit constrained” in 2010, “particularly in our region, which has been affected by high unemployment and mill and plant closures.

“We do see the economy kind of bottoming out, though, but it may not be clear till 2011. We're cautiously optimistic that things will get better, but it will be a very slow recovery and we think 2010 will be a slow, choppy year.

“As a result, shoppers will be looking for bargains and low-end pricing, and private label will continue to do better as people look for good deals.”

Nidiffer said flexibility will be key. “We can go upscale or downscale as needed, and we can change our offerings fairly quickly,” he said. “Our program throughout 2009 has been to offer more values and lower-priced items to respond to consumer desires, and we'll use that lesson as we move through 2010.”

He said C&K, most of whose 59 stores operate under the Ray's Food Place banner, plans “aggressive promotions,” including a first-ever game in the spring to drive traffic. “Whatever consumer dollars are out there, we will be going after it this spring,” Nidiffer said.

Gilliland of Sunflower said his chain experienced a difficult 2009 when pressure on shoppers showed up primarily in the basket size, as customers cut back on discretionary purchases.

“The biggest statistic in our particular business is that our comp-store customer count has increased quite a bit — close to 7% year over year — but the average basket has gone down, unfortunately.”

Sunflower targets a value-seeking shopper, using the tag line “Serious Food — Silly Prices,” a message that resonated with customers in the past year, Gilliland explained. The company was able to meet its financial targets despite the reduced spending by customers.

Sales totaled just over $300 million for the year, and the company hopes to approach $400 million in 2010 with the addition of another seven to nine stores. Last month, the company, which now operates 27 stores in six states, obtained $35 million in financing to help fuel that expansion.

To meet profit projections in 2009, the company cut costs and delayed hiring some support staff “that we would have liked to have hired,” Gilliland said.

“We have had to dig deeper than we ever have before — we had to dig into the margin line to maintain our sales.

“We just have to figure out how to balance our mix to get a bigger basket size,” he added. “The challenge is how do you remerchandise to go after that value shopper.”

Darden Heritage, president of Star Markets, a three-store food and pharmacy chain in Huntsville, Ala., said his company was fortunate to be located in an area where the economy has spared its worst. But he noted that consumer trends changed in 2009, and that Star Markets kept busy adjusting.

“In 2009, we still did good business but people were more selective in what they were buying. We saw a lot more private-label buying from people looking for more bang for their buck,” he told SN. “We did some remerchandising of stores to make the private label more attractive. We put it where people could easily find it.”

He is preparing for additional competition from supercenters in 2010, which he noted have been more aggressive in price and, in Alabama, have benefited from the demise of traditional competitors including Bruno's in 2009.

However, he thinks Star Markets can grow in 2010 for the same reason. “We see some opportunity for growth as the result of [store closures]. One of our challenges in 2010 will be to handle that growth, financially and personnel-wise.”


Jack Brown, chairman and CEO of Stater Bros. Markets, San Bernardino, Calif., is expecting 2010 to resemble 2009 — including challenges Stater Bros. faced with slow new home growth and high unemployment throughout its geographic markets. He was optimistic that some relief could come late in the year.

“I expect consumer patterns will be pretty consistent for the full year — 2010 will be a mirror image of 2009, with price continuing to be more important.

“In January 2009, price was coming on strong, but by the second half, price was really a compelling issue. Most of the industry had built itself on other accolades, such as quality and service, but consumers today only have so much money to spend and they have to make it go the farthest possible, and many are turning to box stores.

“So price will remain No. 1 for consumers, and while we've seen some full-service chains trying to adapt to a low-price image, many haven't been successful, whereas that's been Stater's position for years.

“Possibly by the fourth quarter of 2010, things might start turning, but it all depends on the job market. In the Inland Empire of Southern California where our stores operate and where construction is the No. 1 industry, we get double-whipped, with fewer new homes being built and fewer new families coming into the area.”

Brown switched to naval terminology to indicate what Stater learned in 2009 that it can apply in 2010. “We've put our operations into dry-dock to scrape the hulls — to look for every barnacle that we can remove to reduce our costs in areas that don't affect customers, such as reducing the use of cell phones, beepers and [BlackBerry devices,] for example, and eliminating email storage to boost systems capacity.”

Regarding promotions, Brown said, “Stater has always been price-oriented, and we've renewed our commitment to customers to deliver the lowest prices year-round, and when others have tried to copy our EDLP program, they've gotten in trouble because it's not something they've grown up with.”

Regarding opportunities for 2010, Brown said, “We're trying to retrench and remodel stores to strengthen ourselves in our primary marketing areas.”

The biggest challenge for Stater Bros., he said, will be to maintain its low-price leadership. “We're the market-share leader in our primary area, and everyone shoots at the leader, so we do battle every day, and we remain ready to battle anyone who chooses to go up against us.”

Aldi, the Batavia, Ill.-based value retailer, said it would continue to grow in 2010, opening 80 to 100 stores for the year, including its first units in Texas and New York City. But even with the economic trends favoring it, the retailer is busy at work on changes to its assortment and to its marketing, said Joan Kavanaugh, Aldi's vice president of corporate purchasing.

“We're definitely working to be more aggressive with brand improvements,” Kavanugh told SN. “We want to be right in step with what the national brands are doing — not behind.”

Aldi plans to launch about 100 new private-label items in 2010, many with a better-for-you positioning. For instance, it will now use natural sugar in its Nature's Nectar juices as opposed to high fructose corn syrup. Likewise, it is reformulating its children's juice pouches with 25% less sugar.

The retailer in the meantime has cut back on print advertising and used the savings to start television and radio advertising. It plans to run TV ads throughout 2010, continue select radio ads and explore digital marketing, Kavanaugh said. “We're being more conscious about how we reach customers.”

Reporting by Mark Hamstra, Jon Springer and Elliot Zwiebach

TAGS: Marketing