Retail Memo: What's Next For U.S. Retailers if the Economy Picks Up in 2010?

Retailing in trying economic times

The Kiplinger Business Resource Center, which has been forecasting business, economic and consumer behaviors and trends in the fields of agriculture, retailing, finance and other sectors for many decades in the U.S., and writing about these forecasts and trends in its popular Kiplinger Letter newsletters, is out today with a retail forecast for the U.S. for 2010. The premise of Kiplinger's forecast is what retailers in the U.S. can expect if and when (as optimists we say when) the economy picks up in 2010.

Among the trends Kiplinger suggests could stick after the current severe economic recession include consumers sticking to value and continuing to trade down to discount retailers like Wal-Mart Stores, Inc., a current phenomenon we wrote about earlier today in this piece: "Consumer Behavior Memo USA: 'Life, Liberty and the Pursuit of Frugality' - America's New Consumer Frugality."

Additionally, Kiplinger sees quality making a comeback -- but it must come with value. Again this is something we've been saying in regards to upscale, specialty and natural foods stores in terms of the need to offer a value proposition even on organic, higher-end and premium food and grocery products. For example, Whole Foods Market, Inc. has learned that lesson and is trying to do just that -- create and communicate a value proposition for its stores.

The Kiplinger 2010 forecast also suggests consumers will do much less frivolous buying than they did before the current recession (American consumers have been buying frivolously from about the mid-1980's to 2007 in fact, with the exception of a couple years during the recession of the early 1990's), even if the U.S. economy comes roaring back strong in 2010.

This consumer behavior change (less frivolous buying, trading down, searching for value) which is happening right now is something we've suggested could last after the recession is over. We see a deep recession all through 2009. Consumers will trade down even more because they have to all of next year, we believe, and once the economy improves (hopefully by 2010) will have developed some learned behavior in this regard, which we think will prevent them from going right back to the old shopping patterns.

However, we also think there is going to be some pent-up buying desire among consumers once the recession is over. We think that will be good for upscale-oriented food retailers because it's our analysis the first things consumers will start buying again in significant volume are affordable luxuries like organic, specialty and premium food products. They won't be able to buy a new car perhaps, and certainly not a new house, but can afford to spend a little extra at the grocery store, and receive the gratification doing so brings, once the recession ends and things look more optimistic.

Additionally, as we've suggested previously, if the recession lasts all of next year, which we believe it will, consumers will have had nearly two years worth of trading-down and penny-pinching retail shopping behavior. They likely are going to expect value even when the economy improves. After all, the loss in home values and retirement savings, for example, will still be there in 2010. Much of the meager wealth, which was mostly in housing equity, of the middle and upper-middle classes in the U.S. has been wiped out already.

Other 2010 forecasts from Kiplinger include a continuation of retailers building smaller stores -- what we call the "small-format food and grocery retailing revolution" in the U.S -- a beefing up of customer service by retailers of all formats, and retailers developing a whole new set of coping strategies in order to deal with the challenges ahead.

On the small-format store front, Kiplinger agrees with Natural~Specialty Foods Memo that retailers like Wal-Mart who build and operate huge stores won't stop doing so. Rather, as we often write, they will continue what's already been started, which is building smaller-format, sibling formats and stores to go with the mega-stores like Supercenters and Sam's Club formats. We think other chains will join the small-format sibling store club as well in 2009-2010, despite the recession.

Read the latest retailing forecast, written by Laura Kennedy, from Kiplinger: "What’s Next for Retailers? What can retailers expect when the economy finally picks up in 2010? here.

The Kiplinger forecast in our analysis is a good snapshot of some likely consumer and retailer behavioral trends come 2010, assuming the U.S. economy improves by then. If it doesn't improve though, all bets are off, as a recession still strong in 2010 is going to result in some serious changes not only in consumer and retailer behavior, but in the entire structure of the U.S. economy, we believe.

And the government, corporate and individual debt load by 2010, even if the economy comes roaring back by then, still is going to alter retailing as usual for some time, in our analysis.

Just look at what's happening across the board already in terms of consumer debt and lack of credit. Now unemployment and job insecurity has been added to those negatives. In just two months many middle class consumers have gone from cutting back to not knowing if they can even afford the basics in food and groceries each week or month.

For these reasons we believe all food and grocery retailers, regardless of format, must develop and communicate their own unique value proposition now. We strongly believe doing so is a matter of survival as things continue to first get worse then shake out in 2009 and beyond.

We even believe high-end specialty-gourmet food retailers like Dean & DeLuca, which tend to cater to upper middle-class and wealthy consumers, need their own unique value propositions. As an example, in the quarter just ended Wal-Mart Stores, Inc. reported the average income of the shoppers in its stores has increased considerably in the last six months. That's because higher income consumers are trading down to the retailer.

Retailers must remember the upper middle-class and even many of the wealthy are hit hard by dramatic losses in the value of their homes and retirement savings. Housing values are down by 25-50% in many parts of the U.S. And down by at least 10-15% even in the best regions. Retirement accounts are down for many people by as much as 40-50% because of the poor performance of the stock market.

As a result, the upper middle class and even many of the wealthy (or we should say the recently former wealthy) are in growing numbers looking for value, even at Dean & DeLuca and other upscale and specialty food and grocery retailers.

Retail Memo: Wal-Mart, Target, Drug Chains Further Blur the Natural~Specialty Foods' Retail Class of Trade Lines

Stuffed into yesterday's Sunday newspaper editions in newspapers located throughout the U.S. were the weekly advertising circulars from major mass merchandisers Wal-Mart and Target, and national drug chains Walgreens and Longs.

The advertising circulars from these retailers were chalk-full of natural, specialty and premium food and grocery products offered at promotional prices, which demonstrates how these retailers are continuing to blur the class of trade distinctions between retail format sellers of products in these categories.

The nature of these advertising circulars (they are far from the first ones we've seen by the way) also further demonstrates what we've written about before in Natural~Specialty Foods Memo (NSFM), and observed continually over the last couple years, which is that these "alternative format" retailers continue to add a more extensive assortment and wider variety of natural, specialty and premium food and grocery brands and items to there store product mixes, along with figuring out promoting the category items is good for their business.

below is an overview of the natural, specialty and premium food and grocery products each of these four retailers are promoting in this week's advertising circulars, which were to distributed to millions of American consumers yesterday in their Sunday newspapers, as well as been direct mailed to many homes:

Wal-Mart

Wal-Mart's weekly advertising circular is one of the biggest (24 pages) we've seen the retailer distribute in years. Being "the peoples retailer" the brawny big box retailer from Bentonville's promotional circular for this week includes everything from basic grocery products like toiler paper, laundry detergent and Hamburger Helper, to television sets, patio furniture and kids toys.

The 24-page advertising peice is part of Wal-Mart's month-long April Earth Month campaign. You can read more about it here and here.

However, the retailer devotes at least one-fourth of its 24 page advertising circular (the most we have every seen it do) to natural, organic, sustainable "green" products--including food, groceries, beverages and even clothing. Here's a look:

The Wal-Mart weekly advertising flier devotes almost an entire page to promoting Clorox Co.'s new line of Green Works all-natural cleaning products, which include bathroom cleaners, toilet bowl cleaner, window cleaner and other cleaning items. The entire "green" cleaning products line, which Wal-Mart was the first U.S. retailer to merchandise and sell per an agreement with Clorox, is promotionally-priced at 2 for $5, which is about 25% off the items in the line's everyday prices.

Additionally, Wal-Mart is introducing its new line of Sam's Choice brand of Fair Trade, organic, premium whole bean coffee in this weeks advertising circular. The line, which has has six varieties, is USDA certified organic, Fair Trade certified and endorsed by the Rainforest Alliance environmental group.

The 10-12oz whole bean coffee items are being promoted at a price of $5.88 for a 10-12oz bag. The graphics on the package connote both sustainability and premium quality, with a background of a lush green coffee field, the certified organic and Fair Trade organization logos on the front of the package, and text which evokes premium quality.

In its current 24 page advertising flier, Wal-Mart also is promoting its own reusable shopping bags at $1 each, PUR brand home water filters as an alternative to bottled water (and reusable metal water bottles as well), and a limited addition offering (at 60 cents each) of "Earth Day," green and white labeled (instead of the traditional red and white) Campbell's condensed soup.

The "Earth Day" Campbell's soup is touted as "green" for two reasons: the cans are 100% recyclable and source reduction, do to the fact that condensed soup which must be mixed with water results in much smaller cans than ready-to-heat canned soup. As a result, far less tin is used per-can than is the case with ready-to-heat canned soups, which Campbell's also sells by the way.

There are additional "green" food and grocery items promoted in the advertising circular. Further, Wal-Mart devotes nearly an entire page in the thick promotional flier to "transitional organic cotton T-shirts for men, woman and boys and girls. Transitional organic cotton that comes from fields in which farmers are just beginning to transition from conventional production to organic methods.

In the ad circular Wal-Mart says its buying products produced with transitional cotton as a way to encourage further transformation by farmers to organic growing methods for their cotton production Further, it suggests in the promotion that by buying the "transitional organic cotton-produced" T-shirts, consumers can join in with Wal-Mart to encourage farmers to make the transition from tradition to organic cotton production.

Lastly, the Wal-Mart advertising circular devotes a half-page to two natural, new-age beverage lines: the Vitamin Water line (now owned by beverage giant Coca-Cola) at $1 a bottle, and a new line of cranberry juice and green tea drinks called Cranergy from cranberry juice-maker Ocean Spray. The Ocean Spray line looks like it comes from a small, natural beverage company.

Finally, Wal-Mart sets off all the natural, organic and sustainable products in its weekly promotional circular using its green "Save Money Live Better" logo, which has become its trade mark for "green" or sustainable marketing.

Target

This week's Target advertising promotional circular, which just happens to be 24 pages like Wal-Mart's, features a mix of its Archer Farms corporate brand natural, specialty and premium food and grocery products on the front of the circular, setting the tone for the promotional publication, which is health and wellness.

On the front cover, with full-sized color pictures of each item, Target is promoting a variety of Archer Farms' brand natural and premium products.

For example, there's Archer Farms' brand premium whole bean coffee in numerous varieties. The coffee is promotionally-priced at two 12oz packages for $11.00. The front page of the circular also features Archer Farms' all-natural, premium frozen pizza's at 2 for $7, Archer Farms' baked natural potato snack crisps priced at $1.88 per bag, Archer Farms' yogurt-drizzled all-natural Fruit & Oat snack bars (2 for $5), and a line of Archer Farms' brand premium, all natural ready-to-drink flavored green tea in flavors like Pomegranate.

This week Target also is promoting its entire line of Archer Farms' brand natural, organic and premium/specialty food and grocery products in all its stores for 15% off, which it flags in a circle on the advertising circular's front cover.

Inside the 24 page circular, Target also is promoting Vitamin Water at $1 each, as well as a number of other natural and specialty items. And, being a "peoples retailer" as well, albeit a more upscale one, the 24 page target circular also promotes everything from Nabisco Ritz Crackers and Coca-Cola, to computer printers, inexpensive upscale furniture, trendy Dyson brand vacuum cleaners, cell phones and more.

Perhaps most interesting in terms of natural and specialty products' retail channel blurring has been what drug chains like Walgreens, Longs and others have been doing recently. These retailers have been increasing the variety and quantity of natural, organic, specialty and premium food and grocery products (as well as natural cosmetics and garden supplies) in their stores for the past few years. It's been in just the last year though that we've seen these drug chains increase their offerings in these categories substantially, along with promoting the items regularly in their weekly advertising circulars.

Let's take a look at Long's advertising circular for this week, which came out yesterday in most of the U.S.:

Longs Drugs

Longs' 16 page advertising circular for this week has numerous natural, specialty and premium food, grocery and beverage items in it at promotional prices. For example, there's Starbuck's Frappucino iced coffee drinks at $5.49 per four-pack, Dannon Frusion Yogurt drinks at 2 for $3 and a number of promotionally-priced premium wines.

In the specialty and gourmet products' category, Longs' is promoted imported Nutella Hazelnut Spread, extra virgin olive oils, Ghirardelli premium dark chocolates, Bigelow, Stash and Lipton specialty teas, and a number of natural and organic grocery items and beverages under its own Walnut Grove label, which is a private label the drug chain created about two years ago--and has been expanded--devoted to natural, organic and specialty products.

Not to be left out among the natural and specialty foods category class of trade blurring party is mega-drug chain Walgreen's. While Longs' has long sold a strong selection of basic grocery products in its drug stores, and started adding natural and specialty foods in a small way nearly 10 years ago, Walgreen's came a bit later to the party--but that's changing.

Even though Walgreens' operates fairly small-format drug stores, the retailer has been increasing the quantity and variety of food and grocery products it stocks in its stores, including adding natural and specialty items, and promoting them in its weekly advertising circular on a near-weekly basis.

Let's take a look at Walgreens' weekly advertising circular for this week:

Walgreens

While not quite a extensive and broad-based in natural and specialty category items it's promoting in its circular this week compared to competitor Long's, Walgreen's still offers numerous items, especially for a mainline drug chain.

Among these natural, specialty and premium food, grocery and beverage items include: ZeroCalorie brand Vitamin-Enhanced Water, which looks much like the Vitamin Water brand which Coca-Cola acquired from Glaceau for billions last year. Walgreens' promotional price on the product is a buck-a-bottle, the same as Wal-Mart and Target are selling the "big brand" for this week

Walgreens' also gets into the premium coffee promotional game, advertising Starbucks premium whole bean and ground coffee at $7 per 12 oz package.

The national drug chain also is promoting Dreyer's most-premium variety of ice cream, Lindt and Ghirardelli premium quality milk and dark chocolate items, and a new line of its own Walgreeng brand premium nuts (cashews, pistachios, almonds) packaged in very upscale-looking stand-up-style packages.

The drug chain also has Blue Diamond brand's line of premium nuts in this weeks advertising circular, along with a number of natural nutritional supplement items and vitamins. There's also organic potting soil and garden mulch advertised in the promotional flier.

The natural~specialty channel blurring continues

As we've discussed in NSFM before, there's been a continual blurring in the natural, organic, specialty and premium foods categories in the U.S. over the last ten years, with the class of trade blurring trend being particularly strong in just the last three years.

This isn't to say mass merchandisers like Wal-Mart (in its discount stores not Supercenters) and target (its regular Target stores not SuperTarget which have full supermarkets in them like Wal-Mart Supercenters) and drug chains like Long's and Walgreens' are going to compete head-to-head with such natural and specialty foods grocers like Whole Foods Market, Safeway Lifestyle and the numerous regional chain's and multi-store independent supermarkets and natural foods stores in the U.S. that specialize in natural, specialty and premium food and beverage sales. That's not the case--or the issue.

Rather, the point is these "alternative format" retailers are doing two things: First, by expanding their store selection in the respective categories they are broadening the popularity of natural, organic, specialty and premium products. This is a good thing for the industries. They also are exerting more price competition in the categories by promoting the items, which results in upscale supermarkets and supernatural and natural foods retailers having to get more price competitive in their retail pricing strategies.

However, on the retail side of the ledger, it's a fact these alternative retail channels are taking away some sales from the above mentioned format grocers. After all, every jar of gourmet or imported jam, each bag of organic coffee, each quart of organic milk, and every bar of premium dark chocolate that's purchased by consumers at a mass merchandiser or drug chain, means these items aren't being purchased at Whole Foods, SuperValu's upscale Bristol Farms in Southern California, Wegmans in New York and scores of other specialty and natural products merchandising-oriented and positioned grocery chains located throughout the U.S.

The retail class of trade blurring in these respective categories is an interesting phenomenon to observe and analyze. It also should be of particular interest to natural and specialty food and grocery manufacturers and marketers. Many of these folks know little about what's going on in these alternative channels. Those manufacturer's and marketers who are participating and selling to many of these retailers are seeing benefits and added sales.

We suggest those marketers and sellers who aren't involved in selling to mass merchandisers, drug chains, online retailers and others, check it out. Done properly, selling to these channels can increase top line sales without hurting bottom-line profits considerably. It also can be a great way for national and regional sales managers to make bonus towards the end of the year. But that's a completely different story, right?

Retail Trends Memo: UK's Asda Pioneering the 'Store-Grown' and 'Store-Raised' Niche: Will Raise its Own Kobe-Style Beef and Grow its Own Truffles

A new trend is emerging among food retailing chains. We call it "store-grown" and "store-raised". It's a phenomenon in which a handful of grocers are taking the store-branded or private-label products' process to the next level. "Store-raised" refers to a retailer raising animals to store-brand and sell as fresh steaks, poultry and the like. "Store-grown" is the same process but involving exclusively growing fresh produce and related products for store-branding and sales. UK retailer Asda is taking the lead in these two areas, which we see emerging as a niche trend.

Wal-Mart, Inc.-owned United Kingdom (UK) supermarket chain Asda plc. is taking the concept of store brands to a entirerly new level. Asda CEO Andy Bond tells us the UK's number-two largest retail chain, which heretofore has positioned itself primarily as a discount food retailer, will take a decidely upscale approach and start breeding Japanese Wagyu cattle in England and undercut the prices gourmet department store food purveyers Harrods, Selfriges and others charge for the super-fat-marbled steaks, commonly called Kobe-Style beef.

Kobe beef steaks from Japanese-bred Wagyu cattle are considered the best beef in the world, as well as the most expensive. The beef is so completely marbled with fat that it is graded as beyond prime in terms of its quality. The beef is so expensive that it's generally only offered for sale in gourmet food boutiques, super high-end butcher shops, and the very most upscale of upscale supermarkets.

In order to sell the super-prime beef at more competitive prices, Asda plans to raise its first herd of beef a bit differently than is commonly done in Japan. That first herd, which will be raised for the grocery chain in Yorkshire, England will be a cross between the Wagyu breed and Holstein dairy cattle. The crossed-breed will produce beef with slightly less marbled fat than pure-bred wagyu, but will still be graded above prime, and full of the fat which makes it tender.

Because the Wagyu cattle are being cross-bred with the Holstein cows, Asda can't officially call the beef it sells wagyu. However, it can use the term "Kobe-style" beef, which is the brand name most consumers are familar with anyway. Wagyu cattle also are being raised in the U.S. However, no U.S. supermarket chain is having the cattle raised for it on an exclusive basis like Asda will be doing in England. In the U.S., the beef is generally called "U.S. Kobe-style" beef.

Asda, which currently operates 340 stores and five different retail formats in the UK, isn't only taking the concept of store brands to the next level by initiating what we call "store-raised" with its wagyu beef venture. Bond also says the grocery chain will soon start planting truffle forests in Yorkshire as well, near where the wagyu cattle are going to be raised.

Like Kobe beef, truffles are a delicacy, and generally reserved for the wealthy, or those who don't might spending more than they can afford for the treats which grow beneath the ground. In fact, super high-end restaurants often pair a fat-marbled Kobe steak along with a side-dish of truffles for indulgent--and cash-laden--diners. Lower-end truffles can sell for about $150 pound. Higher-end truffles, like the black truffle, sell for $350 -to- $500, depending on the quality, availability and other variables.

By eliminating the middle-man and growing its own truffles, Asda plans to be able to service the higher-end consumer market while at the same time selling the delicacies for far less than gourmet grocery stores in the UK currently do. Perhaps the retailer can expand the market for both items as well?

Asda's "store-raised" (Wagyu beef) and "store-grown" (truffles) approach is an interesting one as it retains the chain's discount positioning in that it plans to undercut the gourmet retailers' on price, but also demonstrates a new direction the retailer is moving in. That direction is to upscale its product offerings and merchandising--while still retaining its discount positioning--so as to go after Tesco plc., the UK's number one retailer.

Tesco, like Asda, operates numerous formats, ranging from hypermarkets that sell everything from groceries, to electronics and clothing, to Tesco Express stores, small-format, limited assortment convenient grocery market. Tesco also is a leader in the UK in upscale retailing, which is a niche it has been growing into for a few years now.

Asda has a major new store expansion program in progress, backed by its Wal-Mart parent's deep pockets. Wal-Mart is the largest retailer in the world. Tesco is the world's number three retailer.

We see what we term "store-raised" and store-grown" as an emerging trend in the food retailing industry. Whole Foods Market, Inc. has had organic produce grown specifically for the grocer in a limited experiment, and plans to do more. UK upscale grocer Waitrose has also done so. However, other than Asda, we know of no other food retailer who is specifically raising (or having raised) a special breed of animal for its stores. Nor do we know of a retailer who is growing a regular super high-end item like truffles on a regular basis as Asda will soon start doing.

Both of these proprietary concepts, "store-raised" and "store-grown," also have the added benefit of allowing the retailer to tap into the fast-growing "locally-grown" consumer market, if they choose like Asda is doing to have the animals and truffles raised and grown locally. We see this phenomenon then as a double marketing threat: the high-quality control and proprietary marketing benefits of controlling the products, and the advantages of tapping into the local consumer movement.

Look for other retailers to get involved with the "store-raised" and store-grown" concepts as an extension of their store product brands' programs and positioning. There is an "exclusiveness cachet" to doing so, as well as competitive and economic benefits which can be harnassed as a way to differentiate a retailer from all others.