« September 2008 Table of Contents
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"
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
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
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
"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
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
The lone standout among conventional food retailers, says
Davidowitz, is Kroger, the
country's No. 2 food retailer
"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
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
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
(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
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]."
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
"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
"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
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
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
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
going to do you any good," quips Dirk Fucik, owner of
Dirk's Fish & Gourmet Shop in Chicago's Lincoln Park
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
"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
"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
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