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Center Store Survey 2008

Center Store Survey 2008

S upermarkets are adjusting prices and catering to budget-minded shoppers with better meal solutions and enhanced private-label lines

The majority of retailers (55.1%) polled as part of SN’s fifth annual survey of Center Store performance reported that higher commodity costs have had a fairly significant effect on the retail cost of groceries in their stores. More than one-quarter (26.1%) said food price inflation is impacting shelf prices significantly, 11.6% described the consequence as very significant, and 5.8% categorized it as not significant.

"Margins are getting tighter, with the numerous cost increases from product suppliers," one anonymous respondent told SN. "The cost of fuel has a big impact on operating and distributing costs. Competition is keen, so the costs don’t immediately reach the consumer segment. But the increasing costs are impacting all retailers."

Indeed, one participant described input cost pressures as "dramatic. Costs have increased 3% to 8% depending on items. The cost of some [commodities] like grain have increased 16%."

Some are working to stave off retail price increases, while others place greater importance on maintaining profit margins.

"We are very competitive and do not pass on price increases unless we absolutely have to," noted one respondent. Another reported, "We are directly passing on all cost increases to the consumer and protecting our margins. We will adjust to competition down the road when the cost increases slow."

In the meantime, retailers must grapple with tough decisions.
"It hurts my gut each time we have to raise prices," said one retailer polled by SN. "Not necessarily from a financial standpoint, but from a human standpoint. Some people cannot afford to shop here."

Higher prices coupled with recessionary spending are having either a fairly significant (50.7%) or significant (26.1%) effect on the purchasing habits of shoppers, said more than three-fourths of participants (76.8%). More than one in 10 retailers (11.6%) reported that the factors have affected shopping behavior
very significantly, and 10.1% said the result has not been significant.

Many noted the emergence of consumer savvy.

“Shoppers are very keen when it comes to rising food prices,” said one retailer. “They simply cut back on amounts purchased, as well as move to smaller sizes and less pricey substitutes.” Another reported “customers are cherry-picking featured items which are loss leaders.” Yet another said, “An increase in consumer traffic
is seen when we advertise lower retails on price-sensitive items. More consumers are now attracted to private-label alternatives.”

Retailers stand to benefit from this trade-down phenomenon, since corporate brands draw 12% higher profit margins than those realized on a national-brand item’s sale, according to Willard Bishop’s 2007 Total Store Grocery SuperStudy. Industry observers also note that cost-conscious shoppers are eating out less frequently and turning to the Center Store aisles for ingredients, rather than the ready-made meals that are merchandised around the store’s perimeter.

Sales Outlook

Both factors may contribute to retailers’ optimistic sales projections in the face of higher costs and strained consumer budgets.

More than one-quarter of retailers (26.1%) polled by SN expect Center Store sales to increase between 2% and 3.9% this year vs. last.

An increase of between 0.1% and 1.9%, and a rise of between 4% and 9.9%, tied as the second most popular responses;
both were chosen by 17.4% of retailer respondents. More than one in 10 retailers (11.6%) expect sales to remain the same.

Manufacturers are less optimistic.

More than one in five (23.8%) forecast that Center Store sales in supermarkets will drop between 2% and 3.9% in 2008 compared with 2007. The same percentage (23.8%) believe that sales will remain the same, while 14.3% estimate sales will increase to between 0.1% and 1.9%, and 14.3% project that the increase will fall between 2% and 3.9%.

Both retailers and manufacturers
agree that alternative
channels (drug stores, c-stores, club formats, natural
retailers) pose the biggest threat to future Center Store sales in supermarkets.

More than one-third of retailers (37.7%) chose members
of the channel, followed by Wal-Mart (33.3%), other (13%), perimeter departments (7.3%) and dining out (4.3%). Respondents who chose “other”
noted the economic crisis and the higher cost of goods.

“There are so many options for the consumer, and they’re exploring all of them, particularly
considering the current economic environment,” said one retailer.

“Six to eight Wal-Mart supercenters
are set to open in our marketplace this year,” said another respondent. “The biggest erosion is taking place in the following departments: baby, pet food, paper, household
and HBC/GM.”

Close to four in 10 manufacturers
(38.1%) consider alternative channels the biggest
threat to future Center Store sales, followed by Wal-Mart (33.3%), perimeter departments
(19%) and other (4.8%). No manufacturer respondents
chose dining out, and those who chose other also mentioned the economy and the cost of goods.

When it comes to the most effective ways of fighting
those competitors for Center Store sales, 27.5% of retailer respondents chose value-added offerings (clubs, loyalty cards, targeted offers, educational programs), 26.1% picked private label, 21.7% said assortment, 17.4% said price and 2.9% chose other. Respondents who chose other
mentioned reduced out-of-stocks and greater variety.

“Everybody sells beans, but the secret is in the immediate gratification of the customer,” said one respondent. “What will I offer that the store across the road doesn’t, for the same price?”

Their trading partners, meanwhile, placed the greatest
emphasis on assortment (28.6%), followed by private label (23.8%), value-added offerings
(19%), price (14.3%) and other (9.5%).

Loyalty Builders

The presentation of meal solutions was the most frequent choice of both retailers (26.1%) and manufacturers (38.1%) when they were asked about the services that can best build loyalty in Center Store. The response was followed by loyalty clubs/targeted offers, which were chosen by 24.6% of retailers and 23.8% of manufacturers, and in-store cooking demonstrations/recipe distribution, which were chosen by 17.4% of retailers and 14.3% of manufacturers.

“Meal solutions resonate with customers,” noted one retailer. “Suggested product tie-ins to build meals and create value are growing.”

Catering to ethnic shoppers is another priority.

About four in five retailers plan to improve their ethnic marketing reach in the coming 12 months. More than half (52.2%) of retailers polled will increase their ethnic product assortment, 29% will participate in community events, 23.2% will add bilingual in-store communications/employees, 13% will launch private-label items and 20.3% don’t plan on enhancing their ethnic marketing reach. Respondents could choose more than one response.

The survey also revealed that although green packaging has become more mainstream, thanks to directives like the one handed down by Wal-Mart, ecologically sound packaging innovations have yet to become a significant source of shelf-level efficiencies.

More than half (53.6%) of the retailers polled by SN said the effect of environmentally friendly packaging is not significant, 33.3% said fairly significant, 7.2% deemed it significant and 2.9% said very significant. “We’re in the beginning stages of environmentally friendly packaging conversions,” said one respondent. “I foresee a larger impact in the next 12 to 18 months.”

The health and wellness trend will also continue to gain momentum.

More than four in 10 retailers (46.4%) said that natural and organic items will be the focus of the top Center Store trend during the next 12 months. Convenience was the second most popular choice (26.1%), followed by sustainability, both environmental and social (10.1%), ethnic flavors (4.3%), low-calorie/low-fat/low-sodium offerings (1.4%) and other (8.7%). Retailer respondents who chose other noted quality, convenience and product-to-packaging ratios that facilitate shelf-level efficiencies.

Manufacturers have different trends in mind. Almost two-fifths of suppliers chose sustainability (38.1%), followed by natural and organic (19%), other (19%), ethnic flavors (9.5%) and convenience (4.8%). Manufacturer respondents who chose other mentioned SKU rationalization, product promotions and the reduction of out-of-stocks.

Supermarkets will also continue to cater to the health and wellness needs of consumers in the coming year.

Nearly half (49.3%) will bolster their health and wellness positioning in the next 12 months with nutrition shelf tags/signage, 44.9% will grow/update their assortment, 36.2% will distribute newsletter/online information, 15.9% will host nutrition and exercise programs, 4.3% will hold in-store lectures, and 15.9% of respondents don’t plan on enhancing their health and wellness positioning. Percentages reflect multiple answers.

Retailers will also improve the accessibility of premium fare by offering it as part of their store-brand lines.

More than half (52%) report plans to add to/update their private-label offerings in the next 12 months with natural/organic, 33.3% with specialty; 23.2% will add an additional tier of products, 21.7% with ethnic, and 14.5% of respondents will make no new additions.

When There's Smoke

Some retailers have also reconsidered their tobacco sales policy.

About one in 10 supermarkets (10.1%) plan to phase out their sale within the next year, the survey indicates. More than three out of four respondents (75.4%) will not adopt a tobacco-free policy, and 8.7% do not sell tobacco products.

“It appears that anything associated with smoking is a negative these days,” said one respondent. “We can ill afford a negative staring consumers in the face. It’s the same as placing a sign over the front entrance stating, ‘We have high prices.’”

Another said, “We provide a convenience for our consumers. It is a legal product and we will continue to sell tobacco.”

The majority of respondents (52.5%) who merchandise tobacco products said that the contribution of these items to Center Store profits is not significant, followed by fairly significant (39%), significant (3.4%) and very significant (3.4%).

“The negatives are high inventory costs, high theft risk, low profit return, and they’re not popular,” said one participant. “Positives are that they meet customers’ needs, though they’re doing so less and less.” Another said, “About half the smoking crowd are still pantry loaders that spend a significant portion of their income in-store.”