Crunching The Numbers

Debra Chanil, EnsembleIQ

4/1/2011

The retail food landscape has undergone fundamental changes, but discernable gains are evident in the camps of the retailers that are best prepared to withstand the restructured retailing world order.

ANALYSIS BY MEG MAJOR ■ RESEARCH BY DEBRA CHANIL

The economizing behaviors and guarded economic attitudes adopted by the majority of consumers during the past two years promise to define the tempo of the rugged food retailing terrain for the indefinite future, but the majority of the nation's supermarket retailers — particularly chain stores and wholesalers — have become more adept at dealing with the tumultuous climate, and thus are slightly more optimistic that better days are in store, according to findings revealed in this year's 78th Annual Report of the Grocery Industry.

While this relative optimism paints a slightly brighter picture of the industry's overall outlook for the coming year vs. the sentiments expressed in the same benchmark studies in the two preceding years, the most revealing takeaway contained within the following pages of Progressive Grocer's 2011 “State of the U.S. Supermarket Industry” is that the most productive retailers are now armed with a level of immunity and trench-warfare mentality to help them scale the recurrent peaks and valleys of the restructured economic order.

Methodology

Progressive Grocer's 78th Annual Report of the Grocery Industry is based primarily on an exclusive survey conducted among headquarters executives and store managers at supermarket chains, independents and wholesalers. A total of 302 responses are included in the final results. Among these respondents, 53.7 percent classify themselves as independent operators; that is, they use a wholesaler. A total of 24.2 percent represent chains that selfdistribute, while 22.1 percent are from wholesalers or wholesale-owned stores. A total of 50.7 percent of respondents operate one to 10 stores, 17.4 percent have 11 to 99 stores and 31.9 percent operate 100 stores or more. Regionally, 29.9 percent are based in the Midwest, 23.9 percent are from the West, 26.6 percent are from the Northeast and 19.6 percent are from the South.

Additional store account and sales data was provided by TDLinx, a Nielsen company, which maintains a national database of supermarket and other retail format locations. Consumer behavior data was provided by Nielsen from its Homescan panel of more than 125,000 households.

A highlight of Stagnito Media's exclusive, retailer-driven custom research projects, our Annual Report exemplifies PG's 80-year heritage of providing one of the industry's most reliable barometers of intelligence for supermarket executives. As in years past, information gathered for the annual supermarket benchmarking study is gleaned primarily from a survey fielded to headquarters executives and store managers at supermarket chains, independents and wholesalers across the country. A total of 302 responses are included in this year's final results, comprising 53.7 percent who classify themselves as independent operators, 24.2 percent representing self-distributing chains and 22.1 percent from the wholesale distributor sector. Additional store and sales data was provided by TDLinx, a Nielsen company that maintains a national database of supermarket and other retail format locations; consumer behavior data was provided by Nielsen's Homescan panel of more than 125,000 households. (Additional information about the methodology for the Annual Report of the Grocery Industry can be found on this page.)

As illustrated by responses to the survey fielded early in 2011, the more hopeful outlook retail survey participants forecasted for the year ahead aligns with figures released at presstime by the Department of Commerce showing that the U.S. economy performed somewhat better by the end of 2010 than had previously been estimated.

However, the positive sentiments of improving consumer confidence at the outset of 2011 migrated rapidly into a “valley” in the weeks leading up to the present, in the wake of skyrocketing gas prices in tandem with the ongoing political unrest in the oil-rich Middle East — circumstances that will likely take a toll on consumer spending power, shifting shoppers directly back to a good-news/bad-news scenario of more at-home eating, consolidating shopping trips and an increased use of coupons until prices subside. Catastrophic world events and spiraling commodity prices across the globe are also now top of mind for shoppers, whose retrenched buying habits will once again embrace “value” as a fundamental necessity in terms of both price and perceived quality of products with an enduring benefit and important lifestyle offering.

In the recent “Future of Food Retailing in the U.S., 3rd Edition” by market research firm Packaged Facts, released in February 2011, “The value focus remains tied to the nation's economic fortunes,” explains Don Montuori, Packaged Facts publisher. As long as unemployment remains high, he continues, “the likeliest scenario for the retail industry — and indeed the U.S. economy as a whole — will be slow growth, and value will continue to be a prime motivator behind consumers' food and beverage purchases.”

To keep pace with consumers' price-value demands, U.S. food retailers, which comprise the single largest sector of the total retail channel, soldier on, admirably working overtime to adjust their strategies to survive all of the above in the face of the continual onslaught of competition within the industry. Experiments and companion success stories with Internet marketing and digital technologies, SKU reduction, price wars, tweaking private label offerings, and maneuvers to position themselves as arbiters of wellness and nutrition management are all emerging as the pivotal trends supermarket operators are heeding as they angle to reshape the future of the industry.

It thus goes without saying that such key consumer trends as eating more meals at home; shopping more at known value-centric retailers like limited-assortment and smaller-footprint stores, dollar stores, and other alternative outlets; deferring discretionary purchases; and trading down and stocking up on essentials will likely persist, in varying degrees, throughout 2011.

Now it's time to turn our attention to the nuts and bolts of PG's 78th Annual Report of the Grocery Industry. Our analysis of this year's survey data unfolds on the following pages in numerical sequence, with 16 corresponding charts that will feature general synopses of the most influential trends reported by retail survey panelists for each.

RETAIL CLIMATE: SUBDUED OPTIMISM

Compared with a year ago, are you more or less optimistic about the retailing climate for supermarkets?

While the economizing behaviors and guarded attitudes adopted by the majority of consumers during the past two years promise to shape the retail food scene for the indefinite future, the majority of the nation's supermarket retailers — particularly chains and wholesalers — have become more adept at dealing with the tumultuous climate, and thus are slightly more optimistic that better days are in store.

When they were asked to compare their outlook on the retail climate with a year ago, optimism was found to be a rising commodity among supermarket operators responding to this year's Annual Report survey; in fact, 54 percent of total participants anticipate brighter days ahead. Wholesalers, at 65.5 percent, forecasted the strongest optimistic stance, followed by chain operators, at 61.2 percent. Independents, however, with 45.2 percent of the vote, were far less hopeful in their outlook for the coming year.

SUPERMARKET SALES BY FORMAT: TAKE IT TO THE LIMIT

Total supermarket sales increased to $562.7 billion in 2010 from $557 billion in 2009, good for an additional $5.7 billion for the year, up ever so slightly by 1.04 percent. The majority of sales growth appears to have been driven primarily by a net increase in store count, which increased by 537 total supermarket-format outlets over the past year, to 36,149 more than the 35,612 reported in 2010.

As a composite, conventional supermarkets, whose overall store count increased by 2 percent during the past year, far and away continue to serve as the primary outlet with 65.6 percent of total retail food sales and three-quarters (74 percent) of all retail formats. The rate of expansion in the past year for supercenters, which amassed 9.6 percent of total retail food outlets and 26.4 percent of overall sales, for the first time in recent memory experienced a 3.6 percent decline, largely to the benefit of limited-assortment and natural/gourmet-positioned supermarkets, which each gained an impressive 7.3 percent additional stores and a respective 8.1 percent and 10.7 percent uptick in total food sales volume during the past year.

To be sure, smaller-footprint, value-focused limited-assortment food stores are making solid inroads with an increasing base of budget-conscious shoppers, many of whom live in geographic pockets that are ripe for discount chains such as Aldi and Save-A-Lot, both of which have opened dozens of stores in the past few years. Food Lion's low-cost Bottom Dollar Food concept is also eyeing new markets for expansion, and other conventional retailers are getting into the bare-bones store-format act, including Pittsburgh-based Giant Eagle with its five Valu King stores in Pennsylvania and Ohio.

Gains were also tabbed in the warehouse grocery store sector, which grabbed 1.3 percent of the total retail food universe with less than 1 percent of the total supermarket dollars. However, these stores also added 3 percent to their store count alongside a 4.7 percent change in total food sales.

PER-STORE AVERAGES: PARING AND SLICING

In a year when smaller stores made bigger waves and potentially better use of their pared-down selling space, the average supermarket volume declined approximately $70,000 in sales in 2010, good for an equivalent 0.5 percent loss per store. The average store's selling area edged up ever so slightly to 33,300 square feet, while the number of checkouts remained on par with previous years' studies, at 9.7 per store. The low- to no-growth story remains the same with the number of full-time equivalent employees, which grew by an indistinguishable 0.1 percent in the last year.

On a weekly basis,

the average store rang up $1,396 less, or a 0.46 percent decline, in sales in 2010 vs. the previous year, as sales per square foot for the average store dipped 0.66 percent, or an average $6 per unit. The decreases were also evident across other categories in the adjacent chart, all of which are self-explanatory.

THE BOTTOM LINE: FORWARD PROGRESS

While the U.S. economy of early 2011 was in a better place than its early 2010 counterpart, a sluggish recovery is still a step in the right direction, although hardly a recipe for rapid, robust growth.

When respondents were asked to rank their views of 2011 vs. 2010 on a scale of one to 100, with zero being awful and 100 being sensational, the total assessment landed at 66.5, which is up five points from last year's ranking. The total 7 percent higher favorable forecast for the year ahead stands out as upbeat news, particularly when reviewing the views of chain store operators (8.2) and wholesaler participants (7.9) in this year's Annual Report, which signaled higher levels of optimism than their independent peers (5.6).

Whether run by pessimists or optimists, supermarkets are contending with a mixed bag of factors, as illustrated by the recent overall economic forecasts that offer something for everyone.

Among the positives:

■ Economic growth is occurring in the United States (GDP 3 percent est.) and many major countries

■ Retail sales up 0.6 percent in December (sixth straight monthly increase)

■ Industrial output increased 0.8 percent in December(largest increase since July 2010)

■ S&P 500 Stock Index was up 11 percent for year through mid-December

Among the negatives:

■ First-time unemployment filings in the United States continue to climb

■ Retail sales increases are occurring at a slower rate than anticipated

■ Increasing gasoline and commodity prices

SUPERMARKET SALES BY STORE COUNT

The numbers have been crunched, and average total supermarket store sales posted a slight decline, particularly among total chains, which, for the first time in recent memory, did not post sales or share gains. The faltering economy is once again at play, keeping industry sales and profits at bay as a result of rising commodity, utility and transportation costs.

ECONOMIC IMPACT OF SHOPPER BEHAVIOR: CONTROLLING IMPULSES

The impact of the economy on consumers' wallets during the past year continued to put the full-court press on households struggling to keep pace with inflation, which, as always, requires them to dig that much deeper to pay for everyday necessities. As revealed in the corresponding chart, the most marked characteristic of shopper behavior noted by retailers in this year's Annual Report is a prevailing resistance to impulse/discretionary spending and flat-to-decreasing market-basket order sizes, which were respectively cited by 46.6 percent and 41.9 percent of overall survey participants.

As a result, the foremost coping mechanism consumers became fluently versed in during the peak of the recession — trading down, eating in and eliminating nonessentials — will likely persist as we head into the summer. To offset further sales erosion, Nielsen analysts urge retailers and manufacturers to enhance the “trip capture” as a paramount strategy to convert out-of-home eating and entertainment into at-home spending while actively engaging shoppers to think about the emotional connection, through messaging that reflects the fun and enjoyment to be had with family members and friends.

On the flip side, however, 37.6 percent of survey respondents said discretionary expenditures are actually increasing in certain categories across the store, such as organic and natural products, private label, and value-positioned store brands. The average market-basket size, meanwhile, is also on the rise for 30 percent of study participants, some of whom also cited more food stamp/EBT use for higher percentages of unemployed Americans, more coupon use, increased volume of sale items, and a noticeable drop-off in weekly store visits among certain customer groups.

SHOPPER TRAFFIC: PRIVATE LABEL, PRODUCE IN THE FAST LANE

While private label has commanded the highest shopper traffic gains in recent years' Annual Reports, and once again repeated this feat in 2010 as the top-ranked candidate, the retailers surveyed in this year's study seem to favor produce as the likely big winner in 2011. The recently released 2010 Dietary Guidelines for Americans (DGA), highlights of which recommend that Americans increase their intake of fruits and vegetables, provide ample opportunities to make that happen. Recent fourth-quarter 2010 data from the United Fresh Produce Association also bodes well for higher produce rings: Weekly dollar sales for fruit increased 3.1 percent, value-added fruit sales increased 8.4 percent, and sales in the value-added vegetables category were up 4.1 percent in Q4 vs. the same period in 2009.

Other fresh food departments — namely, meat/seafood, dairy, and deli/prepared foods — are also expected to see larger increases through the balance of 2011, as shoppers make more purchases for more economical yet healthy eating at home, on par with last year's Annual Report data.

In 2010, declines were reported by the largest percent of respondents in general merchandise, center store and gourmet/ specialty, largely at the expense of other competing retail channels that offer the same items at perceived lower prices and wider selections. Looking ahead, general merchandise and organic and gourmet/specialty are the most likely candidates to suffer declines in traffic in 2011, according to survey participants. And, as always, time will tell.

How was shopper traffic affected in each of the following departments by economic conditions in 2010? What do you expect for 2011?

IMPORTANCE OF MERCHANDISING/MARKETING STRATEGIES: FRESH AND INVOLVED

When respondents were asked to rate the importance of a variety of merchandising and marketing strategies to their overall brand and image on a scale of one to six, where one is most important and six is least important, fresh food topped the list of attributes deemed important to capture the highest percentage of food shoppers. Indeed, fresh food will continue to grow in importance as a key deciding factor on where to shop for groceries. Risk-conscious consumers see a retailer's fresh food as an avenue to safer and healthier food consumption, and it's perceived as far healthier and tastier than other options around the store.

Fresh-prepared and locally grown, raised and sourced products will continue to grow as an added dimension to the freshness argument. Thus, the pressure is on grocers like never before to deliver on the promise of prepared offerings and meals to ratchet up freshness and healthy ingredients.

Pacing fresh food as a crucial marketing strategy is community involvement, which is something that grocers have long excelled at, but that continues to be on the rise as more companies recognize the many benefits of giving back, not only for the communities they serve, but also for their associates. Many retailers now have staff teams devoted to coordinating their community involvement efforts, and encourage associate involvement while keeping requests and resources to manageable levels.

Private label brands continue to capture a leading role as a primary strategic differentiator, from both a marketing and a merchandising standpoint, while customer relationship marketing/management continues to escalate as a fundamental approach in maintaining and creating relationships with customers to help drive the business to new levels of success.

An adjunct role of customer relationship management is retailers' increasing penetration and sophistication in the health-and-wellness domain. Indeed, many of the most aggressive retailers are also fully embracing their role to help consumers demystify confusion and turn to their companies as the primary go-to source for health-and-wellness needs and know-how. In-store pharmacies are playing an increasingly important role in disease management and immunizations, as a natural extension of their personal service and one-on-one customer interaction. Associate health-and-wellness programs are also factoring heavily in many retailers' strategies, not only to impart more knowledge and support, but to also enable associates to get a better handle on the positive impact of diet, exercise and healthy habits.

A number of other noteworthy merchandising and marketing strategies were also cited by this year's Annual Report participants, including demos and sampling, new retail technology, national brands (surprise!), category management, enhanced customer services, natural/organics, online content, digital marketing, and, of course, the stalwart BOGOs.

% of Respondents Rating Strategy as Extremely or Very Important

CHANGE IN PROMOTIONAL ACTIVITY

With consumers looking to stretch their budgets as far as possible, it's no surprise that they're increasingly attracted by promotions and sales at their local grocery stores. While promotions have long been the lifeblood of capturing traffic in retail stores, the past year has brought forth a renewed energy in targeted, high-visibility promotions for food retailers, which are adding new twists to their strategies with sales and activities linked to displays and/or features.

Further, with the majority of purchase decisions now being carefully planned and impulse purchases ever trickier to come by, promotions tend to play the largest role in the process of getting shoppers to stray from their lists and make spontaneous purchases.

Thus, for allied retail trading partners, “It's all about getting on the list,” says Ann Hanson, executive director of product development at the NPD Group. “With so many purchasing decisions being made at home where meals are being planned and shopping lists assembled, it's important to focus on the consumer at home before they leave for the store.

” In the past year, retailers surveyed in this year's annual report “Liked” social media as their top-growing choice of methods to tout promotions, with a score of 78.2. However, it seems likely that the majority of participants voted socio media as their first choice because of the novelty of the platform that has found its way into so many homes, lives and business circles. While there's no denying its pervasive reach, other forms of digital customer outreach are becoming particularly popular and highly effective, including in-store and digital coupon promotional events, which were cited as the second top-ranked growing promotional tactic for retailers in the past year, scoring 74.3 with supermarket execs.

There's ample research to back up the rampant reach of digital coupon events in particular, which increased by 59.9 percent for the period ending Sept. 30, 2010, vs. the same period in 2009 across key websites tracked by Marx, a Kantar Media solutions provider group.

Additionally, 267 manufacturers distributed digital coupon offers, an increase of 23 percent vs. the 217 manufacturers that were active in 2009 across these key websites. “Digital coupons are becoming a core component within the overall promotion mix for CPG manufacturers,” according to Mark Nesbitt, president of Kantar Media Intelligence. “As with traditional FSI coupons, consumers actively engage with digital coupon websites in the home to make purchase decisions.”

Digital promotion tactics continue to evolve as manufacturers gain experience and fine-tune best practices related to key websites, face value, expiration, timing and other factors to deliver the right offer to the right consumer.

Most Influential Departments

When respondents were asked to rank the most influential store departments driving the most traffic with targeted promotions, meat/seafood, produce and center store/grocery were given the overwhelming nod, as the list indicates below:

Among the other top-ranked customer promotional vehicles retailers count on to drive traffic, sales and loyalty, on-ad deals, scoring 70.7, were not surprisingly cited by respondents as their third most popular pick.

Loyalty and volume discount promotions, garnering scores of 66 and 65.6, respectively, remain critical in the promotions strategic arsenal, while mobile marketing is coming on strong, receiving a score of 63 from PC's Annual Report panelists. Stalwart sales circulars are also being widely used as a key promotional resource, while fuel discount rewards are gaining clout as a highly effective promotional tool among of panelists, followed by BOGOs.

All told, the biggest growth platforms for promotions that retailers expect to pursue most vigorously throughout 2011 is BOGOs (up 8.9 points), mobile marketing (up 8.2 points) and social media outreach (up 7.9).

To what degree did your promotional activity change in 2010? What do you expect for 2011?

(Score: 100=increase, 50=stay the same, 0=decrease)

SKU ACTIVITY: RATIONED, FRESH AND READY

Today's grocers have a lot on their plates, so any help that comes from their suppliers in the form of shelf management strategies is most definitely appreciated. When that help consists of customized solutions involving the latest in technology to help grow profitability and win new customers, that's all the better.

As revealed in the feedback of retail panelists responding to PG's 78th Annual Report of the Grocery Industry, a growing number are taking steps to better optimize their product portfolios, weeding out redundant and/or laggard SKUs and taking private label into account more frequently.

Yet no matter how smart technological applications become, at the end of the day, product innovation will remain paramount in the supermarket industry. As a growing number of trading partners are looking for ways to fine-tune their mix while maintaining proper variety and differentiation objectives, they also recognize the convergent need to keep up with new trends and consumer needs, namely, making way for more prepared food and organic items across the store, both of which were ranked as being of increasing importance among foremost SKU needs in the coming year.

In particular, one of the biggest growth areas is expected to be prepared food offerings, which are a rapidly growing segment for retailers as consumers continue to seek out affordable, healthy and convenient meals, most often at the expense of restaurants.

An interesting finding was revealed in the survey data pertaining to increasing store brand penetration, which, while still topping the list of SKU-centered strategies, is expected to post the biggest decline in the coming year.

Which of the following actions did you take in 2010? Which do you plan to take in 2011?

Walmart once again tops the list of competitive threats — and with a lead close to 20 percentage points over the next competitor, it's likely to stay on top for some time to come. Aside from Walmart, we see that chain operators consider other chains to be their toughest competition, while independents appear more scared than chains by the predatory pricing of dollar/discount stores. Regionally, organic/natural food stores aren't seen as much of a threat in the South, while clubs rank third as a threat among retailers in the West (compared with sixth overall).

EFFECTIVENESS OF STRATEGIES USED TO TAP CONSUMER INSIGHTS

While more retailers are turning to new and emerging electronic and digital platforms to get into consumers' minds and hearts in search of insights and feedback to better perfect their retail mousetraps, the tried-and-true methods continue to command a strong following for many of this year's Annual Report participants.

Associate feedback, cited by 71 percent of respondents, was deemed to be the most important way to check the pulse of consumer perceptions and insights, well ahead by some 20 points of the next most useful tool — social media — which ranked second, with a 49.5 percent score.

Customer service hotlines, electronic communications/digital surveys, and focus groups/shopper intercept projects are also critical for helping retailers stay on top of customers' ever-changing wants and needs.

OPERATIONAL TRENDS FORECAST

When respondents were asked to rate a variety of top-of-mind operations factors that are expected to present the biggest challenge and greatest opportunities on bottom-line returns on a scale of zero to 100, with 50 indicating no change and zero an anticipated decrease, energy/fuel costs paced the list with 93 points. The No. 2 operational issue cited in last year's Annual Report, energy/fuel costs, this year nabbed the top score across the board.

The always vexing quad — retail prices (86.6), employee benefit costs (86.4), wage costs (77) and competition (75) — rounded out the top five operations issues, followed by technology and capital expenditures, net profits and margins, and employee turnover, the last of which appears to be less crucial than the other capital-intense issues. Retail prices, which last year were ranked sixth, jumped to No. 2, followed closely by benefit costs, up one slot from last year's survey.

How do you expect the following operational factors to change at your company in 2011?

Score: 100=increase, 50=no change, 0=decrease

COMPETITIVE CHANNELS: FAMILIAR FOES

Although Walmart again remains the overall biggest competitive threat for supermarket retailers, and ditto for the second-, third- and fourth-ranked challengers — including chain supermarkets, competitors with 11 or more stores, other su-percenter operators excluding Walmart, and wholesale membership clubs — dollar stores gained as the fifth-leading competitive force, switching places with mass merchandisers.

By segment, it's no surprise that independents and companies operating one to 10 stores see their mirror image as more of a threat — these segments rank independent supermarkets in fourth place as a competitive threat, compared with a ranking of seventh by total respondents. Likewise, wholesalers see wholesaler membership clubs as a bigger threat than retailer respondents do.

Other contenders factoring into the competitive mix include drug stores, organic/natural food stores, convenience stores, sandwich shops/pizzerias, and online retailers.

Meat/Seafood, Produce Gain Discretionary Rings

In a rating of the primary store categories/departments where discretionary expenditures are showing the strongest gains, fresh food departments ruled the roost, as evidenced by the rankings below:

How much of a competitive threat is each of the following retail formats? (% of respondents rating retail format as extremely or very threatening)

PRIMARY FOCUS OF SUSTAINABILITY EFFORTS

The universe of retailers working toward a cleaner, greener world has dramatically expanded in recent years as they strive improve their sustainability scorecards through a variety of initiatives.

Not surprisingly, energy/utilities efficiency/conservation tops the list of the most important efforts, far ahead of the other items cited, which include locally sourced products (18 percent), recycling initiatives (14 percent), green packaging (5 percent), and sustainable building materials and practices (4 percent).