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With prices forced to rise and profits at risk, dairy and frozen category managers have faced some truly challenging times of late. Repeated retail price increases have taken the shine off margins in many cases.
With gas prices volatile at best, inflation at a 17-year high, commodity prices soaring, and consumers seeking bargains, grocers are reacting in a variety of ways in frozen and dairy to keep from losing ground to supercenters and limited-assortment stores.
For sure, profitable private label and value-brand products are now in high demand as consumers readily seek the savings in these segments.
The price isn't right
Retail dairy executives have faced tough decisions as commodity prices have risen, but, for the most part, they've kept their sales up.
"We continue to see sizeable commodity-driven sales increases in the dairy department in particular," says Chris Banta, v.p., grocery merchandising for Indianapolis-based Marsh Supermarkets, LLC. Sales in dairy at Marsh have been up and down as milk costs continue to rise and fall each month, he observes. "The cheese market has been very high, but we have seen some recent declines on the weekly market, which may be a sign of a weakening in prices soon." The 98-store Marsh operates in Indiana and Ohio.
Greg Jezowski, dairy category manager for Grand Rapids, Mich.-based Spartan Stores, says it's difficult to gauge changes in dairy department sales at this point, due to increased retail prices of products sold.
"I have not seen a decrease in unit sales across most categories in dairy," notes Jezowski. Since Spartan is also a wholesaler that acquired additional business within the last year, Jezowski says it's difficult to compare against year-ago numbers. "Our trends seem to be keeping pace or outperforming the market we compete in."
"Milk and eggs have had the highest cost increase vs. other dairy categories," says Jezowski. "It was only a matter of time before these two categories impacted others that used milk and eggs as ingredients such as cheese and culture-based categories. Even with these cost and retail increases, the categories still performed very well."
Jezowski says Spartan runs a dairy item on the front of its weekly ad most weeks, and is testing a promotion to draw in shoppers, tied to its gas stations. "If you purchase 'x' item in the store, you get five cents off per gallon at our stations. The idea is we can sell the items at regular retails to offset the reduction in gas expense and sell as much as if we ran an ad on the item."
Dairy sales are flat at Tyler, Texas-based Brookshire Grocery Co., according to Mike Malone, category manager. "The cheese category has been impacted most by rising costs, although this appears to be coming back slowly," he notes.
Frozen food departments have felt the pinch of rising prices in different ways from dairy departments. Brookshire Grocery's Malone says total frozen sales are up and growing faster than last year. The grocer has used frozen and dairy products as draw items and sold them below cost as overall prices have risen.
As is typical for most grocers, higher prices have slowed frozen unit increases somewhat at Giant Eagle. "As prices have risen, we have been seeing some slowing in overall unit growth vs. a year ago,” notes Diane Roberts, senior director of frozen foods for the Pittsburgh-based grocer. She says it's too early to tell if any specific frozen categories have taken a bigger hit in sales than others. "In the pizza category, for example, where we've seen several cost increases over the past year, we're seeing some softness among the higher-priced branded items."
Frozen sales at Marsh Supermarkets have been steady, but with no particular lift driven by higher costs, notes Banta. The recent cost increases in frozen offerings have had some negative effects on the items Marsh was promoting at 10-for-$10 price points. "The margin squeeze has made it difficult to continue that practice," he says.
Mark Stewart, business manager, frozen for Lubbock, Texas-based United Supermarkets, thinks the biggest issue grocers currently face in the frozen department today is the same as other departments: Cost. "Cost increases by manufacturers are causing an increase in retail prices, and in doing so it changes the price point we've used to drive sales. The manufacturers are cutting their promotions at the same time, making it even more difficult to promote."
Some supermarket chain dairy and frozen departments are using self-examination to search for internal savings to offset higher prices. "The biggest issue facing the dairy department today is the commodity market and the cost increases brought on by high feed and transportation costs," says Anthea Jones, group v.p., center store for Mauldin, S.C.-based Bi-Lo. "We are continually looking for internal efficiencies to remain competitive on retail pricing and preserve dairy profitability."
One grocer thinks there's been a lag in the timing of cost increases. "Transportation increased more over the summer than in spring. I think it's a natural progression as fuel goes up, but there's not always a direct correlation," says Scott Miller, assistant to company managing partner Donald Rouse, of Rouse's Supermarkets, based in Thibodaux, Miss. "I think that as gas prices stabilize, the same will be true for grocery. If gas prices remain fairly stable, I don't think there will be any dramatic increases for the next two quarters."
Taking sales private
The Food Marketing Institute, an Arlington, Va.-based industry trade group, found this year that the number of shoppers who say they're buying more store-brand items has been steadily rising: It's now up to some 60 percent, which comes as no surprise to grocers. For example, Giant Eagle is attempting to recognize customers' desire to economize, says Roberts, and is making sure it places proper emphasis on its own brands and value brands in promotion and display plans.
Store-brand frozen item sales have increased at Giant Eagle in spite of rising prices. "Rather than entire categories being positively impacted, what we're seeing is a shift to value brands," says Roberts. “Our own-brand items are growing, and we're seeing solid performance in other value or opening-price point brands." Roberts notes that the frozen vegetable category and good-for-you foods have been growing, and continue to do so.
"At Brookshire Grocery Co. we're moving toward a multitiered store-brand solution in both frozen and dairy," says Chris Hardin, director of store brands. "We believe that consumers deserve products that meet their needs at a consistent savings. Valu-Time, our value offering, is gaining ground in the dairy and frozen departments with consumers as the trusted lowest-price and competitive brand in the market." He says he's seeing a shift toward store brands, especially in the national brand equivalent (NBE) segment of his company's business.
Supply of private label and value brand product can become an issue as shoppers trim their budgets. "The less expensive frozen pizza brands are growing rapidly, and supply has become an issue," explains Brookshire Grocery's Malone.
Private label dairy sales have increased recently, notes Spartan Stores' Jezowski. "It could be the spreads have widened between branded and private label, so consumers are looking for a lower-cost brand to help with their budgets. I think they're also purchasing more when products are on deals."
Another grocer sees changes in customer purchases. "Buying habits are changing. Customers are going cheaper up and down the aisles," observes Charles Willson, category manager, frozen and dairy for Lufkin, Texas-based Brookshire Brothers Food & Pharmacy. "Indulgent items are slowing, and cheaper items are booming for us."
United Supermarkets has added a "monthly specials" ad dominated by store-brand products, including frozen and dairy, to its promotions. "We're using the circular to drive sales in all departments," says Eddie Owens, director, corporate communications for the company. The eight-page circular drops the first Sunday of each month in newspapers in the chain's major markets, with additional distribution by direct mail.
Eating out becomes buying in
More than 30 percent of consumers are eating at home more and eating out less, while 40 percent feel worse off than a year ago, according to a recent study released by Unilever. Restaurant sales have posted dramatic decreases as the cost of gas has soared, affecting both meal prices and patron trip costs. Many industry observers predict that supermarkets will benefit as consumers decide to eat at home, with frozen dinners and entrees a key component.
Customers are buying more frozen entrees and meal solution items, according to Brookshire Grocery's Malone. "Sales of quick-to-fix family meals are trending upward." He notes that 28- ounce entrees are selling better than family-size dishes at his company's stores.
"Single-serve dinners are becoming more expensive, and it is expected that this will slow sales," he says. Brookshire Grocery has developed several meal solution promotions. "We've run meal solution ads such as 'Buy one 96-ounce lasagna and get a Dole salad and garlic toast for free.'" These types of promotions are well received, as customers like the retailer to provide the meal solution for them, he says.
Roberts of Giant Eagle thinks it's too early to definitively tell whether frozen will reap some of the lost restaurant sales. "There may be some shifting within the dinners/entrees category to value items, or we may see a shift to frozen dinner components rather than an increase in prepared dinners or entrees," she observes.
"I think we're seeing some benefit overall from more meals being purchased in our stores vs. eating out, but I would not say we have seen a specific lift, as sales remain relatively flat," observes Marsh Supermarkets' Banta.
Brookshire Brothers is offering "Dine-In" meals in frozen and dairy, according to Willson. "The offer might be 'Dine in for $9.99,' and include a good mix of items for a quick meal."
Are price increases here to stay for a while? Grocers gave a less-than-positive forecast for the near term. "I have been in the grocery/food business for over 30 years and have never experienced the type of rapid price advances we've seen," Marsh's Banta observes. "Unless some sort of relief occurs in fuel and grain costs, I see manufacturers continuing to raise costs, with supply and demand coming into play eventually, particularly in dairy."
"In the immediate future, there doesn't appear to be any end in sight on cost increases from manufacturers," says Giant Eagle's Roberts. "We're making sure we remain competitive."
Mike Malone of Brookshire Grocery Co. concurs. "We expect the prices to increase as costs increase for both transportation and utilities. Dairy will likely level off as the price of commodities may go down; however, any decline will likely be offset by fuel increases."
An expert in the field gives his forecast: "Pricing will continue to go higher for several months, even though it appears the commodity price bubble is leaking," says Donald J. Stuart, managing director for Cannondale Associates, Inc., a sales and marketing consulting firm in Wilton, Conn. "There is a considerable lag in response when costs go down. Prices are sticky on the downside."
Stuart notes that his company's analysis indicates that many frozen categories, such as dinners/entrees, pizza and novelties, are more recession-resistant than the average grocery food category. "Overall, we think grocers will drive higher sales dollars with their ability to pass through cost increases."