Thursday, March 27, 2008

Food & Grocery Trends Memo: The 99-Cent Store Gourmets

As we've recently written here, retail food and grocery prices are going up through the roof at supermarkets in the U.S. as one element of the nation's serious economic downturn, which some experts say is already in recession. As Steve Burd, the longtime CEO of Safeway Stores, Inc. the third-largest grocery chain in the U.S., recently told a group of industry analysts: "Food inflation is the highest I've seen in my 15 years as (Safeway) CEO."

For example, wheat, which is used in everything from bread to cereals, is up at least 20% over last year, according to the U.S. Department of Food and Agriculture's Economic Research Service.

Further, it's the same case with corn, the commodity price of which has increased by double-digits in just the last year alone, do in large part to the fact an increasing amount of corn crops are being planted for ethanol fuel rather than for foodstuffs. Wheat and corn are used in such a wide-variety of foods, this has meant near or actual double-digit price increases on nearly every packaged and prepared foods item in the last 12 months.

Dairy product prices also are soaring. Milk is up over 10% from last year, as is butter, yogurt and cottage cheese. The price of eggs has soared by nearly 20%, compared to the same time last year.

Specialty, premium, natural and organic food and grocery products are increasing at an even higher rate do to a number of factors, including higher commodity costs for premium and organic food ingredients, the poor dollar, soaring costs of gasoline and energy, and in the case of organic, the fact that high demand for the pesticide, synthetic fertilizer and fungicide-free foods has been so strong the last few years it's created a supply and demand imbalance in the market. (Increased demand but not enough organic crops to meet it.)

At retail, grocery chain product category buyers have been telling us they can't remember getting so many (and so frequent) price changes in categories across the board--from dairy and bread to gourmet and organic grocery products and fresh foods.

The major decision in buying offices today is how much of the penny value (and how often) of these frequent price changes can the retailers pass along in the form of higher prices (retail price increases) on grocery items in their respective stores.

For example, grocers have been getting price increases for fresh eggs every two -to- three weeks since January, 2008. These changes range anywhere from five -to- ten cents a dozen each time. Despite asking their suppliers to change the wholesale prices less frequently, even if the price increases have to be higher, the changes keep coming at these frequent intervals.

The problem is, eggs are a commodity item subject to increasing feed (corn and grain), transportation (gas) and energy (natural gas, electricity) costs, which have been rising so frequently egg farmers have had to increase their wholesale prices in some cases bi-weekly, which in turn means wholesale suppliers have to raise there's as well at the same frequency.

The rapidly escalating cost of food and grocery products at retail is beginning to cause some shifts in consumer shopping behavior. For example, recently released sales numbers show Wal-Mart (its Supercenters primarily) substantially increasing its same-store sales for the last quarter, in addition to increasing its national grocery sales market share in the U.S.

Further, discount warehouse chains like Costco Wholesale, BJ's and Wal-Mart's Sam's Club had excellent same-store sales numbers overall last quarter. Retail analysts attribute the positive results primarily to more consumers shopping the club stores for food and grocery items.

Another class of trade experiencing increased shopping traffic in its food aisles are the dollar, or 99-cent stores. These include chains like 99-Cent Only, Dollar Tree, Dollar General and others, along with the tens of thousands of independent dollar or 99-cent stores located in the U.S. For example, in New York City alone, there are hundreds of the independent dollar stores, ranging from tiny mom and pop shops, to large 99-cent discount marts like Jack's

Jack's has three 99-cent stores in New York City. It's flagship discount mart is at 110 West 32nd Street, near Herald Square. The other two Jack's stores are located at 16 East 40th Street and 45 West 44th Street in the Big Apple.

Jack's three-store, independent 99-cent store mini-chain puts a major emphasis on food and grocery products, along with the huge variety of general merchandise items it sells just like every other dollar store does.

For example, the Herald Square flagship Jack's has five full aisles of food and grocery products, many of them specialty, gourmet and organic, all priced at 99-cents. It also has refrigerated and freezer cases where it sells discounted fresh, perishable and frozen foods. Jack's even has an upstairs "gourmet loft" where it merchandises domestic and imported specialty and gourmet food and grocery products, priced in many cases at 50-75% less than the same items found in upscale supermarkets.

Of course, like all dollar stores, Jack's inventory depends on what it can buy for a song at a particular point in time. the discount marts might have Lindt premium chocolate bars one week for 75% less than normal retail, then not have them again for months. Jack's also might have a few hundred cases of imported Italian pasta at two 16oz boxes for 99 cents this week, and be out completely for weeks after it sells that inventory out. Shoppers buy what's there for cheap. It's not "buy what you want" name brand grocery list shopping like at an upscale supermarket or specialty store.

The three Jack's discount stores are seeing more and more shoppers, especially those buying upscale specialty and gourmet foods offerings, as well as natural and organic products. A regular Jack's shopper told us last week, "it's like New York suddenly discovered my discount oasis."

The New York Times has even discovered Jack's. Yesterday, Times food writer Henry Alford published an article in the paper titled: "How to survive in New York on 99 cents." In his piece, Alford chronicles how he successfully made a high-quality dinner every night for a week using ingredients and grocery products he bought at 99-cent stores, including Jack's.

Alford used the flagship Jack's 99-cent store as his shopping base of operations, eventually visiting 21 different 99-cent stores in New York City over the course of his week of 99-cent store cuisine dinners. At the end of the week, the writer even prepared a gourmet dinner for friends, using ingredients and items bought primarily from the New York City 99-cent stores.

Specialty and gourmet foods' fans in Los Angeles also are discovering that 99-cent stores can be a good source of upscale food ingredients and products. On the food bulletin board Chowhound, for example, a number of posters are discussing their 99-cent store finds. In particular are the food and grocery items--both basic and upscale, including wines--they are finding at the various 99-Cent Only chain's discount stores in the region.

Among their finds are upscale Australian wines for 99 cents a bottle, fresh herbs for a buck a bunch, a bunch of fresh white Asparagus for 99 cents (that poster says he later saw the same white asparagus at upscale Bristol Farms for $5.99 bunch), fresh salami chubs and gourmet cheeses, and even that all-American spread, number-one selling Best Foods mayonnaise.

As consumers search out 99-cent stores as a way to save on their grocery bills, they also need a guide to this 99-cent store upscale cuisine. Not to worry, on April 5 a new cookbook by food writer Christine Jory, titled, "99-Cent Stores Only Cookbook: Gourmet Recipes at Discount Prices," hits the bookstore shelves just in time for the 99-cent gourmet trend.

Jory calls herself a 99-cent store evangelist, and shows in her new book how consumers can prepare gourmet meals with products bought on the cheap at the discount stores. Many of the recipes in her book are even variations on recipes from such famous cook books as the Joy of Cooking and the Moosewood (famous restaurant) Cookbook, using 99-cent store ingredients and food products.

National Public Radio (NPR) recently aired an interview with 99-cent cuisine evangelist and cook book writer Jory about the growing (which she hopes grows further) trend towards consumers shopping 99-cent stores for everyday and more upscale groceries. The idea for doing the segment was NPR producer Martina Castro's. Ms. Castro got the idea because a friend of hers, Sheila Dvorak, is a 99-cent store convert who insists on buying all of her food from the dollar-discount stores.

The New York Times recently tested the theory and claim that consumers can cook upscale or gourmet meals using ingredients and grocery product purchases at 99-cent stores. The paper's food section gave multi-star professional chef Eric Ripert $40, with instructions to make five gourmet meals and three desserts using ingredients and food products purchased only at 99-cent stores such as Jack's in New York City. Ripert's results are rather impressive

We're smelling--and tasting--a new consumer shopping trend here. We call it (and those doing it) the 99-cent store gourmets.

Remember, middle income consumers who currently are stretched economically, are still used to eating quality foods in most cases. Indulgence has become the norm rather than the exception. Therefore, even though they're seriously pinched in their wallets and purses by the credit crisis, rapidly-rising cost of gasoline at the pump, soaring food prices and other economic negatives, these middle income (and in many cases pinched upper income) consumers are finding ways to keep indulging.

Our analysis is that many of these economically-stressed consumers are discovering the 99-cent stores for premium specialty and natural foods and groceries, along with basic grocery items and non-foods products.

We think this is primarily an economic-driven trend, and that its just beginning. However, we do know based on studies of consumer shopping behavior, that when shoppers do try a new class of trade and like it, they return again and again even when the economy improves.

Further, since many shoppers from all income levels have been shopping dollar stores for non-foods bargains for years, buying food and grocery products at the stores becomes a logical extension, especially during an economic downturn like the one currently going on in the U.S. Lastly, in the U.S. where shopping is a social event, consumers are having fun shopping the 99-cent stores to see how much of a bargain they can get.

The recent spate of publicity--the New York Times articles, online discussions on Chowhound, the NPR feature and many other mentions--also will serve to encourage consumers who haven't already done so to try 99-cent stores for food and grocery purchases.

In today's food and grocery retailing landscape we all know its all about getting a "share of the stomach" for retailers rather than one-stop shopping.

For example, in a place like the Los Angeles Metropolitan region, consumers can not only buy food and grocery products (including specialty and natural foods) at the regions thousands of supermarkets, natural and specialty stores, they also can buy the goods at Wal-Mart, Target and K-Mart; drug chains like Rite-Aid, Long's, CVS and others; as well as at convenience stores, farmers' markets, public markets, thousands of independent mom and pop stores and even online, through internet grocery delivery sites and's online grocery store.

All of these different classes of trade also have been increasing the variety of premium specialty, natural and organic food and grocery products they sell, as well as basic category items. The drug chains sell bread, eggs and dairy products, limited assortments of refrigerated and frozen foods, and even premium and organic confections, canned and packaged goods and other items.

As we wrote in this piece on March 20, our analysis suggests upscale supermarket chains and independents could be the retail operators most hurt by the current economic slowdown or possibly even recession in the U.S.

The empirical evidence for this argument includes the following: increased same-store sales and foot traffic in discount (Wal-Mart) food retailing stores and club stores (Costco); reports from numerous upscale food companies that they are seeing a drop in product orders by distributors who's highest percentage sales volume is to the upscale grocer segment; and a dramatic upsurge in sales and foot traffic at "salvage" grocers who sell near out-of-code and slightly-blemished grocery products.

Further, we've recently had conversations with a number of store managers at various upscale supermarkets who've told us sales are down, especially on higher-ticket gourmet and prepared foods items. Couple the above facts with this surge of consumer interest in finding upscale food and grocery product bargains by shopping the 99-cent or dollar stores, and we believe there's ample evidence for upscale grocers, including higher-end natural foods retailers, to be concerned.

Representatives for both Jack's 99-Cent store in New York City and a 99-Cents Only outlet in Southern California, told us in phone conversations they are seeing many new faces daily in their respective stores. Further, they said food items, including specialty and natural products, have recently been flying off the shelves, along with wines.

These direct store-level reports are similar to many we've been hearing from others throughout the U.S., including food company managers who are involved in selling surplus (or selling at a discount because they need the cash-flow), near out-of-code or slightly blemished grocery products to discount stores like 99-cent and salvage grocers. They tell us they're getting more frequent calls from the 99-cent retailers looking for deals on food and grocery products across the board, including gourmet and natural foods category items.

Good upscale and natural foods grocers have much to offer; items and services shoppers can't get at 99-cent stores or at other classes of trade. These include extensive selections of specialty, gourmet, ethnic, natural and organic foods and groceries that are always in stock. These grocers also offer extensive selections of fresh produce and meats (including hard to find specialty items), in-store prepared foods and many other offerings which make them special.

As such,, we aren't suggesting extinction for the upscale retail class of trade anytime soon. Rather, we suggest the opposite: that good, innovative and adaptive upscale grocery retailers can thrive in bad economic times, despite the discount bargain hunters and 99-cent store gourmets. To do so, however, these upscale grocers must continue to add and create value, including looking at their everyday pricing and margin structure, and when needed adjust it downward during these tough economic times.

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