US supermarkets successfully changing product mix and enhancing loyalty

Posted by Daniel Palmer on 18th May 2009

New research carried out with the assistance of supermarket operators has shone a light on the changes the sector has made in the United States in response to a more financially stricken consumer.

The 2009 Food Retailing Industry Speaks: Annual State of the Industry Review released by the Food Marketing Institute (FMI) found that supermarkets were one of the better performed industry groups last year with sales growth of 5.2% last year. This was, however, offset by a 5.7 per cent rate of inflation.

“The industry showed its resilience in the most challenging economy in modern history,” FMI President and CEO, Leslie Sarasin, said. “Retailers aggressively discounted products and increased their lines of private brands to help American families lower their grocery bills. At the same time, they continued to control costs by improving efficiency and productivity, a hallmark of this industry.”

Concern Increasing Over Strategic Issues, Led by the Economy
Looking at the future, retailers reported increasing concern over the impact of numerous issues – especially the economy, which is having a pervasive impact on the industry. The impact of issues, measured on a 1-to-10 scale with 10 being the highest, increased for nearly every issue, comparing the rating in 2008 with the expected impact in 2009-2010. The economy rated as the major concern, while competition, food safety and new regulations were all considered to be increasing worries for the sector.

Food Retailers Increase Emphasis on Low Prices, Private Brand Growth Surges
Supermarkets are responding strongly to consumer demand for lower-cost foods in three ways. First, the study found a significant rise in companies emphasising low prices as a competitive strategy – from 69.9 per cent in 2008 to 78.4 per cent this year. They now rate the success of this strategy at 7.3, up from 6.9 (on 1-to-10 scale).

Secondly, retailers are featuring private labels more prominently, demonstrated by the growth of such products in-store. Private label products now comprise 9.7% of the items carried in a typical store – up from 8.1% in 2008 and 7.5% in 2007 – and represent about 15% of sales (up from just 11.5% in 2007). Private label in the US, like Australia, is at a reasonably low level compared to a number of other ‘Western’ countries, with branded manufacturers like Heinz, Kraft, Coca-Cola and PepsiCo remaining strong.

Private brand sales soared by 10.8 per cent in the most recent fiscal year – more than twice the industry’s overall growth rate and well above the 2.5 growth rate for ‘national brands’. As such, more than nine in 10 retailers (93.3 percent) plan to increase the number of private label products in the coming year, with a similar number promoting private brands as a core competitive strategy.

Supermarkets have also looked to boost loyalty with improved rewards programs. Over half (50.7 per cent) now offer savings through frequent shopper or loyalty card programs, and rate their success at 7.3, up sharply from 6.4 last year.

Retailers Realign Assortment to Meet Changing Customer Demands
Food retailers made significant adjustments to their product mix in 2008 in an effort to keep pace with changing customer demands in a recessionary economy.

The typical supermarket added 2,000 new products to store shelves and removed the same number. One-quarter of food retailers added and removed at least twice as many items, changing the mix of more than 20 per cent of the products in their stores.

These efforts were reflected in improvements in key productivity and efficiency measures as product assortment was better aligned with consumer needs. For example:

* Inventory turns for the total store increased to 16.43, above the 15.6 registered in 2007 and 13.50 in 2006.
* Sales per hour increased to $145.51, from $138.90 and $133.31.
* Sales per square foot rose to $8.32, from $8.01 and $7.32.

Focus on Perishables, Health and Wellness
Supermarkets continue to pursue strategies other than discounting prices. Nearly all (97.3 percent) emphasise perishables to gain a competitive advantage and give it the highest success rating at 8.1, although this figure is down from 8.4 in 2008.

In addition, 68.4% are focussing on consumer wellness and family health as a competitive strategy, rating its effectiveness at 5.6, although these figures decreased from 84.9 per cent and 6.5, respectively.

Ad Spending Stable
The recession did not lead to a reduction in advertising as spending remained at a median of 1 per cent of sales. Retailers continued efforts to spend their ad dollars more effectively, relying less on the mass media and more on targeted campaigns. In fact, newspaper advertising fell below half of ad spending to 48.6 per cent, from 52.2 per cent the previous year. Radio and television advertising also declined.

In their place, supermarkets increased direct-mail campaigns, including mailbox-delivered circulars, to 18.9 per cent of ad sales, from 16.7 per cent the previous year. Companies are targeting delivery to specific zip codes to allocate ad dollars to high-potential customers.

Retailers are also devoting more ad dollars to community donations, which increased to 5.8 per cent of their advertising budgets, up from 3.9 per cent.