Migratory patterns

by Keith Nunes
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Ten months ago, during the Consumer Analyst Group of New York’s annual meeting in Boca Raton, Fla., food industry executives who made presentations at the meeting were asked if they were seeing any changes in consumer purchasing patterns. The standard reply was a little weakness at food service, but consumers were not trading down to "value" products or store brands. As the year comes to a close the situation has changed, with value becoming a key consumer trend heading into 2009.

"It would be an understatement to say that the world has changed …," said William R. Johnson, chairman and chief executive officer of the H.J. Heinz Co., Pittsburgh, in a conference call with financial analysts on Nov. 21. "What started as a Wall Street financial crisis has quickly turned into a global recession with increasing levels of uncertainty and angst."

In the wake of the bad economic news, Heinz has taken steps to highlight the value of its products and brands. For example, the company has started an in-store display program to communicate how its brands may be combined to create a $10 family meal solution.

Heinz also has introduced its Ore-Ida Steam n’ Mash product that Mr. Johnson called one of the company’s most successful product launches in recent years.

"Its success demonstrates how consumers will balance innovation news and value whatever the state of the economy may be," he said.

Consumers are being squeezed by higher food prices as pricing actions implemented during the past few years by food manufacturers have taken effect, and an economic downturn has led to a decline in the average consumer’s net worth. Shoppers have limited spending in an effort to either prevent or reduce debt. The situation has prompted consumers to alter some of their shopping patterns and companies are responding.

The power of private label

An analysis conducted in November by The Nielsen Co., New York, showed that an increase in private label dollar sales has been driven primarily by rising commodity and food prices, particularly in staple categories that are dominated by private label brands. However, an uptick in private label unit sales suggested to the researchers that budget-conscious consumers may be starting to shift away from some established brands in search of better deals.

Private label represents 16% of dollar sales and 21% of unit sales, according to the research firm, indicating that branded products still capture the largest share of product category sales.

"While private label products continue to follow the success of consumer packaged goods manufacturers’ name brand introductions, more C.P.G. retailers are making private label a priority with messages on quality as strong as messages on value," said Todd Hale, senior vice-president of consumer and shopper insights for Nielsen.

Retailers have put an emphasis on promoting their store brands as a way of differentiating themselves in the marketplace and in an effort to increase customer loyalty.

"For the second quarter in a row we saw accelerated growth in our corporate brand penetration, both in terms of grocery sales dollars and units," said David Dillon, chairman and c.e.o. of The Kroger Co., Cincinnati, during a conference call with analysts on Dec. 9. "During the quarter corporate brands represented almost 27% of Kroger’s grocery sales, and 34% of grocery units.

"And our proprietary loyalty card data indicates approximately 14% of our customers are trading over in the purest sense, by simply buying the same for less by switching to one of our corporate brands in any of the three tiers we offer. Our robust corporate brands program is a fundamental part of our customer-first strategy. Our quality products are strengthening our connection with our customers as we work to earn their lifelong loyalty."

Kroger’s corporate brands are produced and sold across three tiers, including Private Selection, store banner brands like Kroger, Frys, King Soopers or Ralph’s, and the Value brand.

"We continue to expand our private label offering across all three tiers," Mr. Dillon said. "While our entire private label portfolio is winning over customers, we’re seeing particularly strong growth in both our Private Selections and Value tiers. In fact, as we outlined earlier this year, our premium tier, Private Selections … is enjoying significant growth and on track to reach $1 billion in sales in 2008.

"We expect to continue to see solid growth in this important area, even after the economy recovers, and we will continue to invest in Kroger’s private label program. One other advantage of our strong corporate brands program that it offers … is as leverage when we have a supplier that approaches us with a product cost increase. This advantage has become even more important in an inflationary economy…"

Other retailers that have put an emphasis on developing store brands include 7-Eleven, Inc., Dallas, that launched its new private label line under the 7-Select brand earlier this month. The initiative, according to the company, is to strengthen the company’s presence in store-brand packaged foods and offer consumers a line of products that will retail at a 10% to 20% discount compared to national brands.

Once considered a lower-price, lower-quality substitute for name brands, private label products, or store brands, are viewed positively by the majority of U.S. consumers, according to the Nielsen survey. Seventy-two per cent of consumers believe store brands are good alternatives to name brands and 62% of consumers said they consider store brands to be as good as name brands, up three points since 2005. Private label products account for more than $81 billion in the United States, up 10.2% over the past year.

"In today’s economy, consumers are looking for ways to save money and for many of them, that means taking a new look at private label products," Mr. Hale said. "With more retailers offering satisfaction guarantees on private label purchases and even serving up blind taste testing and trial programs, consumers’ exposure to private label products has never been greater,"

The focus on value has not been all bad news for branded food manufacturers. While Hormel Foods Corp., Austin, Minn., for example, has seen a decline in the sales of some of its higher-priced, value-added products, its value-oriented products, such as Spam, have seen an improvement in performance.

"Without question, we are in a unique and challenging economic environment," said Jeff Ettinger, chairman, president and c.e.o. of Hormel Foods, during a conference call on Nov. 25. "Demand has been impacted by the trend to more at-home dining and through changing consumer preferences at retail.

"As has been widely reported in the media, sales of the Spam family of products were up solidly during the quarter. I am also pleased to report that other core items such as Hormel Chili, Dinty Moore Stew and Mary Kitchen Hash also experienced strong dollar sales and volume growth."

On the other side of the equation, Mr. Ettinger said Hormel’s Compleats line of microwavable meals saw sales slow during the quarter. He attributed the decline to higher pricing and "changes in consumer buying preferences."

Food service faces challenges

The food service market also has felt the effects of changing consumer purchasing patterns. A survey conducted by Technomic, Inc., Chicago, this past October found the recession is likely to cause a number of consumers to visit both quick- and full-service restaurants less often. Technomic also found that more than 50% of consumers — and more than 70% of higher-income consumers — plan to spend less when they do visit either type of restaurant.

Both Mr. Johnson of Heinz and Mr. Ettinger referenced the weakness they have seen in the food service market as consumers continue to tighten their belts.

"In U.S. food service we saw some sequential improvement in the quarter but it is clear that the industry has not turned the corner and consequently we expect our food service business to continue to lag the rest of our portfolio," Mr. Johnson said. "Food service is very sensitive to economic conditions and as you have seen from recent reports, industry traffic is soft and may take some time to improve."

Mr. Dillon of Kroger views the slowdown within the food service sector as positive.

"Our sushi bars, hot soups, sandwich counters, and refrigerated soups and entrees are all doing well as a result of this shift in consumer behavior," he said.

The challenge facing food manufacturers in 2009 is to ascertain how long the economic recession will last and, more importantly, whether consumer purchasing habits will return to their previous patterns.

To get an idea of how one company may view the future, it is helpful to consider Hormel’s recent decision to shift the majority of the production at a new facility in Dubuque, Iowa, from the manufacture of its higher value microwavable meals to value-oriented canned items.

"…We think we’ll have several options of different product lines we could put into that facility that would be on the canned side of the business that would benefit us over a long period of time," Mr. Ettinger said.

This article can also be found in the digital edition of Food Business News, December 23, 2008, starting on Page 33. Click here to search that archive.

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