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Bargain hunters

Value-conscious retailers, seafood specialists pull ahead of traditional supermarkets

By Steven Hedlund
September 01, 2008

Retailers are constantly strategizing to meet consumers' ever-changing palates, dietary requirements and convenience needs. But this year a lagging economy and soaring fuel prices are forcing consumers to reassess the way they buy food. Shoppers are dining out less, trimming expenses, purchasing fewer and less expensive items, and are becoming more likely to visit supercenters, club stores and deep discounters.

Separating themselves from the competition are value-conscious retailers, such as Wal-Mart and Costco, and independent retailers that specialize in perishables like seafood. Left in a quandary are conventional supermarkets, which are increasingly at risk of becoming irrelevant to today's consumer, and natural foods retailers like Whole Foods Market, which is struggling to shed its "whole paycheck" moniker.

Americans are still eating seafood at home - they're just changing where they buy it, the species and the amount. The ailing economy is largely to blame. Rising unemployment, a lackluster housing market and the credit crunch are forcing consumers to tighten their purse strings. Additionally, high gasoline prices, which averaged $4.05 a gallon in June, up nearly $1 from June 2007, are not only inflating the cost of getting to the store but also the cost of producing and distributing food.

Seafood is especially vulnerable to escalating fuel prices. It's the only protein that's still hunted and 85 percent of the U.S. seafood supply is imported, making prices susceptible to increased transportation costs.

SeaFood Business' biennial retail survey [see charts beginning on p. 23] clearly indicates that the economic downturn is taking a toll on seafood retailers: 47 percent of survey respondents said it has cut into their seafood sales this year. Retailers were also asked to com-
pare their 2008 sales to 2007, and 37 percent said sales are down so far this year, compared to only 12 percent in 2006. Profit margins are also narrowing: 38 percent of respondents said margins are down this year, compared to just 22 percent in 2006.

In addition to the SFB retail survey, research suggests that the economic slump is affecting the entire retail food industry. According to a TNS Retail Forward study, "Economic Woes Alter Food Shopping Behavior," 43 percent of consumers were spending less on food overall in May, up from 38 percent in February, and 20 percent of consumers had switched store banners.

The Food Marketing Institute's "U.S. Grocery Shopper Trends 2008" study also confirms that consumers are watching what they spend by shifting from conventional supermarkets to supercenters, which they perceive as more value-conscious: 45 percent of consumers bought groceries at a supercenter in the past 30 days, up from 35 percent in 2005, while 86 percent of consumers purchased groceries at a supermarket, down from 93 percent in 2005.

What's more, nearly three-quarters of consumers said price is "very important" in determining where they buy food, up from 62 percent in 2007.

Despite the economic slump and high food and fuel prices, TNS Retail Forward projects nominal supermarket sales, which totaled $501 billion in 2007, to grow at an average annual rate of 3.7 percent over the next five years, up from 3.6 percent over the last five years. Discounting inflation, the Columbus, Ohio-based companmy forecasts real supermarket sales to rise at an annual average rate of 0.8 percent over the next five years, reaching $442 billion by 2012.

Winners and losers

"The two biggest winners in the food business right now are Wal-Mart and Costco. Both feature price. It's all about price," says Howard Davidowitz, chairman of retail consulting and investment banking firm Davidowitz & Associates in New York.

"Consumers are simply responding to value and price, looking for cheaper cuts [of meat], using coupons more [frequently] and responding more to promotions and private labels," he explains. "They're in a terrible place. And if you're in the food business, you better listen to whispers before they become roars."

The losers, says Davidowitz, are conventional supermarkets that are failing to evolve with consumers' food-purchasing behaviors: 34 percent of consumers polled in May by TNS Retail Forward were visiting conventional supermarkets less frequently than a year ago.

David Livingston, a principal at retail consulting firm DJL Research in Pewaukee, Wis., agrees with Davidowitz.

"It's a shrinking market," Livingston says. "The [retail food] market is growing, [but] it tends to favor deep discounters and supercenters and specialty stores. But the square footage of conventional supermarkets continues to drop."

The lone standout among conventional food retailers, says Davidowitz, is Kroger, the 
country's No. 2 food retailer behind Wal-Mart.

"Wal-Mart is winning. Costco is winning. Trader Joe's is winning. But Kroger has done the best job in balancing service, quality and price," notes Davidowitz. "They've done a masterful job of running their business and, at the same time, being price competitive. If you don't have a value image, you've got a real problem."

The Cincinnati-based retailer exceeded Wall Street expectations by posting first-quarter sales of $23 billion, up 11.5 percent from 2007, and earnings of $386 million, up 15 percent.

Kroger Chairman and CEO David Dillon acknowledged during a June 24 conference call with retail analysts that climbing food and fuel prices are consumers' two biggest concerns right now. "These two factors are driving some of the behavior changes we are seeing lately, such as shoppers combining trips and actively pursuing gas discount offers," said Dillon.

While Kroger is thriving, most conventional food retailers are struggling. In July, Safeway, Supervalu and Delhaize - three of the nation's 10 largest food retailers - reduced their sales outlooks, citing the economy. Since 2005, Safeway has remodeled its format to give its stores a more upscale ambiance to emulate Whole Foods. Now the Pleasanton, Calif.-based retailer and its competitors are scrambling to retain frugal consumers by emphasizing value.

"They're advertising that they're discounting, but in reality they're not," says Livingston. "Retailers that are true discounters like Wal-Mart, Costco and ALDI, they're seeing additional customers. With conventional retailers, it's mostly talk and lateral moves. For example, if something sells for 29 cents, they're selling it for three for 
$1, trying to make customers think they're getting a discount. But a lot of consumers see through that."

Another way conventional food retailers are emphasizing value is by promoting private-label products and fuel reward programs. Private-label products typically cost 30 percent less than national brand products, and supermarkets with an established private-label program are positioned to drive traffic during an economic downturn, reports TNS Retail Forward. Supermarkets are also driving traffic by cross-merchandising gas 
discounts and in-store purchases, either by forming partnerships with gas companies or by investing in new company-run gas stations.

"I don't think any of us feel the economy is going to improve anytime soon, at least not consumer confidence," said Steve Burd, chairman, president and CEO of Safeway, during a July 17 conference call with retail analysts. "But we're responsible for our own destiny here."

To combat its "whole paycheck" stigma, Whole Foods in July launched a "Real Deal" marketing campaign nationwide, highlighting deeply discounted "Real Steals," such as Patagonian scallops for $6.99 a pound, and offering tours throughout its 180-plus stores to show customers how to shop economically.

(By month's end, Stop & Shop and Giant-Landover had filed a trademark infringement lawsuit in U.S. District Court in Boston alleging that Whole Foods swiped their "Real Deal" campaign, introduced three weeks earlier. The Ahold-operated banners asked the court to quash Whole Foods' campaign because it is "likely to cause confusion, to cause mistake and to deceive consumers." Settlement talks were ongoing at press time in mid-August.)

Last month, the Austin, Texas-based retailer's third-quarter earnings dropped 31 percent, to $34 million, on sales of $1.84 billion, falling far shy of Wall Street expectations. It also reduced its 2009 same-store sales forecast from 7.5 to 9.5 percent to 1 to 5 percent and cut the number of stores previously slated to open next year.

Last year's acquisition of Wild Oats Markets is partly responsible for the retailer's third-quarter woes. But the economy is mostly to blame: 26 percent of consumers surveyed in May by TNS Retail Forward were visiting natural foods supermarkets less frequently than a year ago, and only 4 percent were visiting more often than a year ago.

"Whole Foods," says Davidowitz, "is in [trouble]."

Independents thrive

Somewhat insulated from the economic downturn are specialty seafood retailers that underline customer service and product quality and cater to higher-income consumers.

That's not to say independents haven't adjusted their seafood-procuring behaviors to entice thrifty consumers: 45 percent of respondents to SeaFood Business' retail survey said their customers are switching to less expensive seafood species.

"What you tend to see now is people go for [less expensive] species like cod, tilapia, trout or shrimp. King salmon has been extremely pricey this year, so we're selling more sockeye and coho," says Phil Nekic, manager of Bob's Seafood in St. Louis' University City neighborhood. "We were selling Copper River king salmon fillets in the high $30s [at the onset of the season], then backed off into the $20s. Last year, we never broke $30 a pound for Copper River king salmon. Prices of all wild fish are going up, and it has hurt sales a bit."

Though his sales are up this year, Nekic estimates that he's paying 25 to 30 percent more for wild seafood and about 12 percent more for farmed seafood than he was a year ago.

"We're not the type of place that usually carries tilapia. But this winter, we wanted to offer something at a low price point," says Charlotte Sasso, co-owner of Stuart's Seafood Market in Amagansett, N.Y., on eastern Long Island. "Although we are a specialty retailer, we try to price ourselves very competitively to appeal to the broadest range [of consumers] possible. We're very conscious of that."

Sasso's sales were down this winter. This summer, however, sales are up, although she's cautiously optimistic about the remainder of 2008 and next year.

"Now that it's summer, people want lobster, swordfish, tuna, jumbo shrimp - now is the time to splurge," she says. "We're in a seasonal area, so our big time is Memorial Day to Labor Day. But with gas prices the way they are, people think twice about taking that extra trip out here. It's a one- to three-hour drive to get here for most of our customers. Let's say they used to come out here every weekend. Maybe now they're coming every other weekend. That has definitely affected us. Even people with summer homes, maybe they're in industries where their futures are a little dicey. [The economic downturn] is affecting everybody.

"But we're having a good summer, all things considered. We have nothing to complain about," adds Sasso. "Our retail sales luckily have been up this season, which we didn't expect. We were hoping to just hold our own, and surprisingly enough we've been up."

Likewise, sales at Tim's Seafood in Kirkland, Wash., are up this year, says co-owner Tim Caluya. Of course, it helps 
tremendously that the store is located in an area full of seafood-savvy consumers with plenty of disposable income. But Caluya acknowledges that consumers aren't spending as freely as they were a year ago, and he's watching his volume, product mix and shrink more carefully as a result.

"That's the scary thing right now - people are watching their pocketbooks," he says. "So we make sure we don't buy too much, and our shrink is less than 1 percent."

Caluya minimizes shrink by using trim to make a variety of value-added products such as Dungeness crab, halibut and salmon cakes, as well as dips, soups and chowders.

SFB's retail survey results verify that retailers are watching their product mix and shrink more thoroughly. Only 23 percent of respondents are carrying more species in their full-service seafood case than a year ago, compared to 34 percent in 2006, while 56 percent carry 20 species or less, compared to 45 percent in 2006.

Just over 78 percent of respondents maintain shrink of 7 percent or less, a slight improvement from less than 77 percent in 2006.

Retailers in this year's survey were also asked to identify their customers' No. 1 concern, and, surprisingly, only 4 percent of respondents named sustainability, and a meager 1 percent listed food safety. Both food safety and sustainability are subjects the consumer media has covered 
extensively in the past year.

However, an overwhelming 73 percent of respondents cited freshness and quality as their customers' No. 1 concern, compared to 61 percent in 2006.

"That doesn't surprise me," says Caluya, a native of Hawaii, whose store is nextdoor to a QFC supermarket.

"Our business has been successful because [consumers value quality and freshness]. 'Akamai' is the word we use in Hawaii - consumers are more educated and sophisticated than ever. It makes our job a heck of a lot easier."

"You could sell sustainable fish, but if it's rotten it's not 
going to do you any good," quips Dirk Fucik, owner of Dirk's Fish & Gourmet Shop in Chicago's Lincoln Park neighborhood.

Like Nekic of Bob's Seafood, Fucik's No. 1 challenge is managing increasing costs, from seafood to energy to labor.

Retailers were asked to name the three biggest challenges they face, and the top three answers encompassed surging costs. Just over half (51 percent) of respondents cited rising wholesale prices as their No. 1 concern, followed by rising energy costs (47 percent) and consumer price resistance (43 percent). Two years ago, rising wholesale prices was the only cost-related concern among the top three answers.

"We've had to raise prices on a few items. You have to do it," says Fucik. "But I try to keep prices down as much as possible.

"I do weekly specials. I talk to our suppliers and say, 'Hey, I want to feature this. Can you give me a little break on it?'" 
he explains.

"We've been successful with kampachi, for instance. Kona Blue [Water Farms] gives us a break on it and sends us promotional materials, and The Seafood Merchants, my supplier, will knock a buck or two off the price. And we pass that along to our customers.

"It's kind of a good time to raise prices, because everybody's talking about it," adds Fucik. "People are pretty understanding."

High food and fuel prices represent a permanent change - it's the new norm. As a result, consumers are changing the way they buy food, and if seafood retailers and traditional supermarkets don't keep up, they'll be left in the dust.

Associate Editor Steven Hedlund can be e-mailed at shedlund@divcom.com

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