Retail Memo: Soaring Gas Prices Leading to Increased Grocery Category sales At U.S. Convenience and Drug Stores; Good For Small-Format Grocers Too

Guest Retail Memo From the Washington Post

From Soda and Chips To Grocery Staples
Shoppers Turn to 7-Eleven, CVS to Beat High Gas Prices

By Ylan Q. Mui
Washington Post Staff Writer
Saturday, August 9, 2008

Walk into Zulfiqar Ali's 7-Eleven in Arlington and you'll find the standard stack of newspapers, rack of magazines and ATM in the front of the store. And, lately, two red grocery baskets.

Ali added them a few months ago after he noticed shoppers making multiple trips between the grocery shelves and the checkout counter, carrying cans of Goya black beans, Aunt Jemima pancake syrup and fresh fruit. On a recent evening, two elderly women who live nearby spent $150 on groceries. Ali has even expanded his stock of sugar, salt and cooking oil due to popular demand.

"It was not like that before," said Ali, who has worked at the store for six years and owned it for the past two. "Before, people just buy a couple of things and pay and leave."

Once primarily the province of Big Gulps and beef jerky, convenience and drug stores are siphoning away sales from traditional supermarkets as the weak economy and high gas prices force consumers to save more by driving less. They are stopping by not only for the quickie quart of milk, but also for pantry items normally bought at the supermarket -- and even for dinner. Some are using the stores to stretch their paychecks, buying what they need when they need it instead of stocking up.

At 7-Eleven stores in the Washington region, grocery sales were up 2 to 3 percent last month compared with last year, said Tom Gerrity, director for processed foods. Frozen food sales grew 7 percent, and ready-to-eat meals jumped 9 percent. Other regions across the country are seeing similar growth, with weekly spikes following paycheck cycles.

"Some of the products that would typically be purchased at a supermarket or club store in bulk quantities, we're seeing more customers buy those products throughout the month at a 7-Eleven," he said.

According to local trade publication Food World, 7-Eleven is among the top 10 grocery destinations in the Washington area, ranking ninth with annual sales of $469 million and 3.3 percent market share -- ahead of chains such as Harris Teeter (10th) and Whole Foods (11th). CVS ranked fourth with $941 million in sales, excluding prescriptions, and 6.5 percent of the market. Giant dominates the region with $3.3 billion in sales and 23.2 percent market share. Safeway follows with $2.6 billion in sales and 18.3 percent of the market.

Part of the strong rankings are due to the sheer number of convenience and drug stores in the region: 7-Eleven has 416 and CVS has 190. Whole Foods and Harris Teeter together have just 32 stores. But as gas prices continue to nibble away at consumers' wallets, many are finding that they can get what they need closer to home.

"It's a big number because convenience stores are everywhere," said Jeff Metzger, publisher of Food World. "They're trying to use the edge that they inherently have."

Convenience and drug stores have been ratcheting up the competition with traditional grocers over the past three years with expanded food offerings, Metzger said. CVS does not break out sales numbers for grocery, but general merchandise accounts for 15 percent of revenue, according to the company's latest annual report. CVS spokesman Mike DeAngelis said the retailer does not position itself as a grocery destination but does tailor merchandise to neighborhoods.

"Where we see a need in a particular community, we make efforts to expand our selection of staple food items (bread, milk) as well as our convenience food assortments," he wrote in an e-mail.

At Ali's store, grocery sales are up 6 percent, while chips grew 16 percent and take-home cookies and crackers skyrocketed 39 percent. Budget beers rose 15 percent. Yesterday morning, one customer bought toilet paper, napkins, Ritz crackers and Sunkist soda. Two boys walked in for a gallon of milk.

Mustafa Abdellatif, 68, stopped by for the newspaper and a Perrier mineral water. He lives nearby and shops at 7-Eleven when he doesn't feel like driving to the supermarket.

Lately, he has tried to cut back on his time behind the wheel because of gas prices. When he does drive, he said, he finds himself glancing at the fuel gauge more often. The 10-minute walk to the 7-Eleven qualifies as his exercise for the day.

"When I have a small list of groceries," he said, "then that's when I come here."

Food is an important profit-driver at convenience stores, particularly service items such as fountain drinks and on-the-go meals. Consulting firm Technomics estimates that profit margins on such items can easily hit 40 percent and may exceed 60 percent.

"A trip to the gas station may be unavoidable, but now consumers are more likely to also pick up a quick meal or a snack at a [convenience store] and avoid another stop," he said.

Pennsylvania-based Wawa, which has 30 locations in the area, recently began offering a six-item dinner menu at its convenience stores for $3.99 each or three for $9.99. Lisa Wollan, head of consumer insights and brand strategy, said the program has been a success and helped showcase the brand as a one-stop shopping destination.

"We were trying to give our customers maximum value," she said.

Still, a recent report by consumer behavior research firm TNS Retail Forward showed that the primary reason shoppers visited convenience stores was to fill up their gas tanks. Grocery shopping ranked last. Among store merchandise, cigarettes and other tobacco products make up the bulk of sales, followed by bottled beverages and alcoholic drinks.

"It's important to add destination appeal so that shoppers think of them not only as convenience," said Jennifer Halterman, Retail Forward senior consultant. "Adding that second layer can help them in the future."

Marketing Memo: Is the Branding of Agriculture Products A Way For Developing Nations to Better Participate in the Global Food Marketing Economy?

Guest Marketing Memo From Brandchannel.com

Emerging Nations Cultivate Agricultural Brands
by Randall Frost August 11, 2008 issue

“There may be an inherent perceptual bias against developing countries’ products, serving as an entry barrier to industrialized markets," write Professor Eugene D. Jaffe and Israel D. Nebenzahl in National Image & Competitive Advantage (2006). "In general, American consumers are more receptive to products from developed countries and less so from developing countries.”

But not everyone agrees with this statement. Thomas Cromwell, president of East West Communications in Washington, DC, questions the conclusion relative to agricultural imports.
“Because agricultural products are natural, and people associate quality with natural factors, such as climate, soil quality, and organic growing methods, the positive association with agricultural products has little if anything to do with the overall level of development of the country from which they come,” he told brandchannel.

Professor Nicolas Papadopoulos of Carleton University in Ottawa, Canada, disagreed. “All the research to date shows that products from developing countries are viewed with greater ‘suspicion’ and a higher discount is expected, by consumers in developed and developing nations.” An exception occurs, he says, when the developing-to-developing country exchange occurs between nations that are geographically close, culturally similar, or at least not at odds with one another.

Professor Jaffe, co-author of the above-mentioned book and head of the MBA programs at Israel’s Ruppin Academic Center, says that although agricultural commodities are harder to brand than manufactured products, there are nevertheless success stories for developing-country-based agricultural brands. As an example, he cited Brazilian coffee and that country’s advertisements for wine. Jaffe added that there is no doubt these brands have contributed positively to the nation’s image.

Of the developing countries, Brazil has one of the most advanced agricultural branding programs. Alexandre Rocha of the Brazil-Arab News Agency in Sao Paulo told us that in addition to the country’s promotions for Brazilian coffee, there are also branding programs for Brazilian beef, Brazilian fruit, Brazilian chicken, and wines from Brazil.

Brazil exports many of its agricultural products to other developing countries. Says Rocha, “Russia is the main buyer of Brazilian pork meat, Egypt is the main importer of Brazilian fresh beef, the Middle East in general is the biggest market for Brazilian poultry and sugar, Algeria is the main buyer of Brazilian dairy products, China is the biggest importer of Brazilian soy beans, and Iran is the main market for the Brazilian corn.”

According to Rocha, expanded trade with the developed nations has not been an option. “Many developed countries, such as the US, Australia, and nations of the EU, are our competitors, and impose barriers to the imports of Brazilian products. This is one of the more difficult problems for the WTO Doha Round.”

Several years ago, a Hindu Business Line (India) editorial considered the role of regional trade blocs in the global economy. The editorial went on to recommend that developing countries preferentially export branded agricultural produce to regional trade partners, rather than focusing on major importers like the US and EU.

Brazil’s successes notwithstanding, this strategy may not be feasible for all developing countries. Although the greatest potential for growth in food and agricultural trade is among developing countries due to higher population and income growth rates, Professor David Blandford of Pennsylvania State University notes, “Barriers to South-South agricultural and food trade tend to be high, due to high transactions costs and tariff protection.”

Still it can be quite expensive to build a brand in the US and EU. “There may be some cost savings in staying regional. And building brands up slowly from the local to the global is an old strategy for many firms,” says Professor Keith Maskus of the University of Colorado.

Christa Lachenmayr, an agricultural economist with Nathan Associates in Arlington, Virginia, works with clients in developing countries, helping them acquire intellectual property rights for agricultural brands. She says, “One of the limiting factors in developing countries is whether or not they have the appropriate regulatory regime to recognize and for companies to register a national identity.”

In a project designed to create a regional brand for Mongolian cashmere, Nathan Associates began by helping Mongolia draft a law that allows companies to register a geographic indicator. Lachenmayr explains, “Then we assisted them with the testing to document the unique properties of Mongolian cashmere. We registered the mark first in Mongolia—you have to register it worldwide. Then we helped them develop a branding campaign around that mark. It wasn’t cheap but it wasn’t prohibitively expensive.”

East West Communications’ Thomas Cromwell believes country-based agricultural brands can help build affinity between nations. Citing examples like Egyptian cotton, Sri Lankan tea, tilapia from Honduras, and cut flowers from Central and Latin America, he says, “A well-known, well-branded agricultural product can do a great deal to help build a nation's brand.”

“Perhaps the best [example of this] is Colombian coffee and the famous Juan Valdez marketing campaign,” he told us. “If you think about it, Colombian coffee has long been just about the only positive thing most people in the world have been able to associate with Colombia, against a background identity of narco-terrorism and crime.”

Cromwell added, “Sudan is the largest country in Africa, with its vast fertile regions fed by the White and Blue branches of the Nile. It is located near the arid lands of the Arabian Gulf, where oil-fueled economies are strong and most food is imported. Yet the country is only known for its sugar and gum arabic. With good planning and incentives, Sudan could begin to change its image from sponsor of terror to bread basket or market garden, beginning on a regional level.”

But, alas, every silver lining has a cloud. Cromwell notes that if a developing country becomes too closely identified with an agricultural brand, the association might make it difficult later for the country to upgrade its identity from being agrarian to being technologically advanced.

Randall Frost is a freelance writer based in Pleasanton, California. He is the author of The Globalization of Trade. His work has appeared in Worth, The New England Financial Journal, CBSHealthWatch, and a variety of educational publications.

Wine, Spirits & Craft Beer Memo: Northern California Craft Brewer Wins Right to Tout 'Legal Weed' On Beer Bottles

Guest Memo From the Associated Press

By Juliet Williams
Thursday, August 7, 2008

Sacramento, CA -- A Northern California USA brewer who tangled with federal regulators over the caps on his beer bottles said Tuesday that officials have given him permission to keep the message "Try Legal Weed."

The Alcohol and Tobacco Tax and Trade Bureau had ordered Vaune Dillmann to stop using the caps, which are a play on the name of the Siskiyou County town where he brews his beer: Weed. The bureau said the message amounts to a reference to illegal drugs.

Dillmann appealed and was preparing for a legal fight when he received a registered letter this week saying he can continue using the bottle caps. He shared a copy of the letter Tuesday with the Associated Press.

"Based on the context of the entire label, we agree that the phrase in question refers to the brand name of the product and does not mislead consumers," said the letter, dated Thursday.

A message left after hours for alcohol bureau spokesman Art Resnick in Washington was not immediately returned Tuesday.

The dispute started last winter after Dillmann sent the agency Mt. Shasta Brewing Co.'s proposed label for its latest beer, Lemurian Lager.

He included the same bottle cap he'd been using on his other five brews. This time, the branch of the U.S. Treasury rejected it because of federal laws that strictly prohibit drug references on alcoholic beverages.

Since the dispute was publicized in April, Dillmann said he has received letters, phone calls and messages from more than 1,200 people around the world - including old friends and his high school football coach in his hometown of Milwaukee.

"We have not had one even remotely negative comment," Dillmann said.

Dillmann started his brewery in 2004 and named the company's first official brew for the town's founder, Abner Weed, a timber baron who eventually was elected to the state Senate. He was only the latest resident to exploit the name of the town of 3,000.

All the attention has led to booming sales, but it's also been stressful, Dillmann said.

He plans to resume using the now-infamous bottle caps, which had been replaced with blanks while the dispute was pending.

Dillmann also drafted a letter thanking supporters. His message: "Weed fought the law and Weed won!"

Small-Format Food Retailing Memo: Does Wal-Mart Plan to Build A $10 Billion A Year 'Small-Mart' Empire?

The Financial Times is reporting today that Wal-Mart, Inc. had an advertisement it later pulled on its Marketside.com website that described the small-format Marketside combination fresh, specialty, natural foods and basic grocery stores to eventually be a chain of over 1,000 stores doing about $10 billion in annual sales.

Below is today's report from the Financial Times:

Wal-Mart sees Marketside as $10bn chain

From the: Financial Times
By Jonathan Birchall in New York
August 7, 2008

Wal-Mart, the world’s largest retailer, says the new small Marketside grocery stores it is to launch this autumn could expand to a chain of more than 1,000 stores, delivering $10bn-plus in annual sales.

The retailer plans to open 10 of the 15,000 sq ft Marketside stores initially, including four in the Phoenix area, where they will be competing directly with Tesco’s recently launched US Fresh & Easy store concept. Wal-Mart’s executives have described the Marketside stores as a pilot project, although it is the first new store format to be launched by the company in a decade. But a job advertisement for the retailer indicates the scale of its ambitions for Marketside, saying the format “is expected to start with 10 stores and evolve to between 1,000-1,500 stores with over $10bn annual sales."

At less than a 10th of the size of the average Wal-Mart superstore, Wal-Mart said the new stores would be aimed at “the needs of a time-starved, higher-income consumer that is interested in convenience and premium fresh, natural and organic offerings.”

The approach contrasts with Wal-Mart’s experience with the Wal-Mart Neighborhood Market stores it launched 10 years ago, which are about the size of a traditional US supermarket.

In response to an inquiry from the Financial Times, Wal-Mart stressed the Arizona stores were a pilot project. The retailer subsequently removed from its website the job advert that included the more ambitious targets.

Wal-Mart’s superstores are built around high volume and low cost, and the group has faced challenges in adapting to the supermarket-sized Neighborhood Market stores it launched in 1998, opening more than 140 outlets. The Marketside stores will require a fast turnover of stock, which could be a difficult fit with Wal-Mart’s distribution system.

Tesco has opened more than 60 Fresh & Easy stores in California, Arizona and Nevada since November and plans to have several hundred operating during the next two years.

Wal-Mart, the largest US grocer with more than 20 per cent of the market, is developing the Marketside format as growth slows at its 2,500-plus superstores.

The Marketside format is also expected to spearhead a broader drive by the retailer to improve its overall grocery offering.

Safeway and SuperValu, two of the largest US supermarket chains, are also experimenting with small, local formats.

Natural~Specialty Foods Memo Analysis

As our readers know, we've been covering Wal-Mart's Marketside format development closely as part of our extensive coverage of what we termed the small-format food and grocery retailing revolution in the U.S.

The Marketside stores, which will feature in-store, fresh prepared foods (and in-store seating for about 9-10 customers along with take out), specialty and natural foods and groceries, fresh meats and produce, along with a limited selection of basic grocery items, will average about 15,000 -to- 20,000 square feet--which is a fraction of the size of its Supercenters, which are about 180,000 square feet on average, and less than half the size of its 45,000 square foot Wal-Mart Neighborhood Market supermarkets.

The format's focus will be on consumers who desire quality foods at reasonable prices. The first four Marketside stores are scheduled to open in the phoenix, Arizona Metropolitan region this fall.

We started covering the Marketside format development last year, and have broken numerous stories about its progress. During this more than one year coverage of the story, we've developed some very good sources.

We talked to a couple of our Wal-Mart sources today about the Financial Times report. One of those sources, who has been very good thus far, told us the mention of an eventual 1,000 store, $10 billion a year Marketside chain was on the job advertisement online board. However, the source says not to take it too seriously, not to think it means plans call for such a chain in the near future.

Rather, the source says its an internal long range goal number, and it didn't belong on the job board website, which is why it was taken down after the Financial Times reporter contacted the company about it.

This doesn't mean Wal-Mart doesn't plan to be aggressive with its Marketside format--just not 1,000 stores, $10 billion a year aggressive in the short to medium term.

As we've reported, Wal-Mart is looking for additional Marketside sights in Arizona, in addition to the four set to open this fall. The retailer also is looking throughout California and Nevada (Tesco Fresh & Easy country along with Arizona), as well as in other U.S. states.

Thus far we've reported for example that Wal-Mart is considering signing a lease for site in Reno, Nevada, along with in various particular California locations for the stores.

The current poor U.S. economy also has factored into Wal-Mart's planning for its Marketside small-format fresh food and grocery stores, according to our source. That source says because the stores will be more upscale in design and positioning--along with putting an emphasis on fresh, prepared foods--the retailer is exercising caution as it is well aware of the current consumer trend in the U.S. to trade down to discount food stores like its Wal-Mart Supercenters.

This fact isn't putting the brakes on Marketside. Rather, its providing a moderating theme to how fast the retailers grows the stores.

After all, there is no need to open Marketside stores in the way for example that Tesco is opening new Fresh & Easy Neighborhood Market stores--about at a pace of one new store every three or four days on average--since Wal-Mart's strategy with Marketside is part of a multi format strategy while Tesco is engaged in a single format--Fresh & Easy--U.S. food and grocery retailing strategy.

Having said that, we are currently working on reporting about a couple possible Marketside store sites in California. We hope to write about just where those locations are soon. Like we said, Wal-Mart is taking a moderate, but still plenty aggressive, approach with its new, small-format Marketside retail development and format.

Marketing Memo: Safeway's Challenge: Going From Store Brand Marketer to Consumer Brand Marketer With its O' Organics and Eating Right Brands

Pleasanton, California USA-based Safeway Stores, Inc. is preparing to roll out its popular O' Organics organic foods and Eating Right healthy foods store brands to a wider audience-- competing food retailers in the U.S.--along with to grocers globally, as we reported and wrote about in this April 28 piece: Marketing Memo: Safeway Stores, Inc. to Market its 'O' Organics' and 'Eating Right' Organic and Healthy Brands to Other Retailers in U.S. and Globally.

The supermarket retailer's target date to begin selling the brands (they won't be store brands anymore) to other U.S. food retailers and wholesalers is sometime this fall, just a few short months away.

Natural~Specialty Foods Memo was the first publication of any kind to report in this piece in December, 2007 and in others that Safeway Stores, Inc. was already selling some items in its O' Organics organic food and grocery product brand in Asia and South America through a distribution deal with the giant French supermarket chain Carrefour, which is the second largest retailer in the world after Wal-Mart, Inc.

Safeway plans to extend international sales of both its O' Organics and Eating Right brands to other international retailers and to other parts of the world. Plans call for the increased international marketing also to begin this fall in conjunction with the launch to various U.S. supermarket chains and wholesalers at home.

Today's Advertising Age, the trade publication for the marketing and advertising industry in the U.S., has a story about Safeway's plans to launch the two brands into the stores of many of its competitors this fall, as we've previously detailed in Natural~Specialty Foods Memo.

Safeway's O' Organics brand--which currently consists of an impressive 300 items in over 30 product categories, including dry grocery, perishables, fresh meats, dairy and fresh produce--did about $150 million in gross sales in its first year, 2005. Last year the brand did about $300 million in annual sales. Safeway is projecting sales of $400 million for the brand this year in its 1,750 stores in the U.S. and Canada. That's impressive by any score card.

Safeway CEO Steve Burd told Natural~Specialty Foods Memo earlier this year that the Eating Right healthy foods brand was on track to do even more the O' Organics' $150 million in its first year, which won't be until a bit later this year. Safeway is projecting annual sales of about $200 million for Eating Right this year. That would surpass first year sales of the O' Organics brand by about $50 million. Even more impressive.

In our earlier pieces we've projected that with the rollout to competing retailers in the U.S. beginning this fall, along with the expanded international marketing program, O' Organics and Eating Right have the potential to become the leading brands/product lines in their respective categories--organics and healthy foods--in the U.S. By this we mean not the leading store brands--but the leading brands period in those respective categories.

Safeway is banking on this as well, as it makes its unique for a U.S. supermarket chain transition from store brand marketer to consumer brand marketer.

In fact, in today's Ad Age article, James White, president of Safeway's Lucerne Foods division, which is handling the marketing for the two brands, and Safeway corporate vice president for consumer brands, says he believes the organic food and grocery market particularly is strong enough in the U.S. and internationally that Safeway will neither see a drop in sales in its own stores, or have a problem gaining distribution and sales to its competitors, with the O' Organics brand.

The O' Organics brand is "democratizing the organics market by making organics available for everyone." He (James White) said both lines represent a "great-tasting, highest-quality, more-affordable option [than established organic brands], which allows for the mainstreaming of market," White is quoted as saying in the Ad Age story.

Further, the Ad Age piece quotes Mr. White as saying: "The economy isn't affecting the organic segment's pricing power. "There is a significant consumer market for organics, and I don't think that will slow down."

We disagree with Mr. White on these two counts, despite being fans of both O' Organics and Eating Right, as well as being very impressed with the two brands' performance.

First, in terms of O' Organics' democratizing the organics category, we think that's yet to be seen. In fact, when it comes to price, O' Organics products are far from being all that reasonably priced. For example, in its current weekly advertising circular, Safeway is promoting O' Organics Boneless,-Skinless Chicken Breasts for $8.99 pound in its California, Nevada and Arizona stores. Natural~Specialty Foods Memo has seen independent natural foods stores selling organic boneless-skinless chicken breasts for $2 less per pound everyday.

This pricing scenario plays itself out on many of the O' Organics brand products vis-a-vis other supermarkets' and natural and specialty foods retailer's house brands. For example, overall Trader Joe's, Kroger divisions, Costco and Tesco's new Fresh & Easy Neighborhood Market stores in California and elsewhere in the Western USA have considerably lower everyday and promoted prices on organics than Safeway offers with its O' Organics brand.

Safeway does offer some good deals on a variety of O' Organics brand items--but its far from a pricing policy one could call a democratizing of the organics category in our analysis. The Safeway O' Organics' marketers' pricing pencils need to be sharpened a bit to achieve that.

It will be very interesting to see the retails on the O' Organics brand items in competing retailers' stores, since they should be higher priced than what they currently are selling for in Safeway stores since the company has to take a margin on the items as a brand marketer and distributor, along with building some margin into the cost of goods to retailers and wholesalers for marketing and promotional brand building expenses.

Further, if Safeway doesn't sell the O' Organics brand items for less than competitors' stores do, it could lose substantial sales in the brand. Conversely, if Safeway sells the brand's items for too much less than its competitor's are, it will create a disincentive for those retailers to carry the brand. A fine balancing act it will be indeed.

We happen to know Safeway makes a very healthy gross margin, based on its current retails, on the O' Organics brand items. Therefore, it has some room to get more value-centered with the brand in its stores if it wants to--and might have to because of the current poor U.S. economy--and lower the retail prices across the brand.

Safeway itself is seeing its customers move from higher priced national brands to value-based store brands like its Safeway, Lucerne and other economy branded food and grocery product lines, as company CEO Steve Burd himself said in this April 28 story in the blog. Within the store brand organics category this has helped O' Organics in part since Safeway makes sure the items in the brand are about 10 -to-15% cheaper overall than similar national and regional organic branded items in its stores, thus tapping into the consumer store brand trend within the organic category to take sales away from those national and regional brands and drive shoppers to buy O' Organics over the national and regional brands.

But in this poor U.S. economy, average consumers just can't afford $8.99 per-pound organic chicken breasts or $7 per gallon organic milk. Not when they can buy conventionally-raised boneless-skinless chicken breasts at the very same Safeway store on sale for $2.19 pound; or Lucerne non-organic milk for less than half the price of the O' Organics organic milk next to it in the dairy case. For most shoppers the discretionary money for organics just isn't there right now.

Whole Foods Market, Inc's poor quarterly sales performance this week demonstrates how even organic-loving shoppers are trading down in the poor U.S. economy out of need rather than choice.

Safeway shoppers are no different, nor are customers of those competitor stores Safeway plans to sell O' Organics to. We are going to see organics take a considerable sales hit until the U.S. economy turns around. Retailer scan data already is showing lower organic category sales across the U.S. Sales numbers for 2008 category sales don't come out until next year--and we bet they show a drop in overall category sales.

It's also important to note that once O' Organics is marketed by Safeway to competing retailers, it no longer becomes a store brand. This means no favored shelf placement, no special treatment by those retailers in terms of end-cap display space, no "free" weekly ad circular feature ad placement, and the like. The brand will have to be marketed as and compete equally without the advantages Safeway is able to give it as a store brand. Those home court advantages after all are part of the reasons we call them store brands.

As a result, Safeway will have to compete with its organics brand just like all of the national and regional organic products' brand marketers are in this down economy--along with suffering the lower sales fate most category marketers are currently suffering ,which has as a key feature soaring food price inflation--because the average (and many above average) U.S. consumers just can't afford to buy that $8.99 pound organic chicken, even if the breasts are boneless and skinless. Just ask the Whole Foods guys. They are seeing organic category sales dropping across the board--from fresh produce and meats to dry grocery.

However, while we disagree with Mr. White regarding his view that the poor U.S. economy won't hurt organic sales in general and O' Organics' sales specifically, we understand and appreciate his marketers' optimism. We also think the O' Organics and Eating Right brands have the potential to do very well at competing supermarkets, as well as continue to sell well and grow in Safeway's stores.

One important note is that sales of the O' Organics brand in Asia have been at best mediocre. A regular reader who lives on the island of Taiwan has reported to use that since our piece about the brand being sold in Carrefour stores there, she has seen many of the O' Organics brand items discontinued in the Carrefour hypermarts on the island. She has been told by store managers it is for lack of sales performance. (Well, that's what happens to non store brands.)

Of course that's Taiwan, not the U.S. or Western Europe. But it does illustrate that Safeway will need to market the brand in ways other than just using price promotions--which has been the case in the Carrefour stores--if it hopes to build the brand in stores other than those owned by Safeway.

Food and grocery retailers can use push marketing to build a store brand and grow sales in their own stores, using the techniques we mentioned above, but it's much more difficult to do so in competitor's stores when its just a brand and not that particular retailer's store brand.

Despite these concerns, we see a bright future inside of and outside Safeway stores for O' Organics and Eating Right. Of course, in the competitors' stores it will all come down to distribution, marketing, merchandising and promotion, along with allocating the budget to achieve all four.

And, of course, Safeway will get a taste of being on the other end of those slotting fee, ad space and display space fees in its role as a consumer brands marketer. Our advice: Better build in plenty of extra margin on the O' Organics items as brand marketers have learned to do with the brands they sell to Safeway Stores, Inc.

Small-Format Food Retailing Memo: Independents Help Fuel Small-Format Food Retailing Revolution in the U.S. By Reinventing the 'Corner Grocery Store'

A 1920's corner grocery store in the United States.

The Return of the corner grocery store

As regular Natural~Specialty Foods Memo readers are aware, a year ago we started writing extensively about what we've deemed to be a revolution in small-format grocery store retailing internationally and in the United States.

[Click here to read a sampling of some of our stories on the topic. Also do a search in the box at the top of the blog. Search terms: small-format food retailing, small-format food retailing special report, small-format grocery stores, international small-format food retailing revolution, small-format food retailing memo, independent grocer memo.]

In the U.S., this small-format food retailing revolution continues to grow. In fact, in just the last year hundreds of new small-format food and grocery stores have opened throughout the U.S., despite the poor state of the economy.

That's evidence--along with a few other criteria like the fact giant retailers like Wal-Mart, Tesco, Aldi, Safeway and SuperValu all are committed to small-format store development-- to us it's a trend, rather than a mere fad.

SuperValu, Inc. is even extending its involvement in small-format food and grocery retailing beyond its discount Sav-a-Lot chain, into its Jewel supermarkets division. This fall it will open the first store of what are likely to be many "Urban Fresh by Jewel" stores, which are 15,000 square foot specialty food and grocery stores with an emphasis on fresh and specialty products. The first "Urban Fresh by Jewel" small-format market will be in Chicago.

We've identified the food retailing chain leaders in this revolution as no frills discount grocer Aldi USA (with around 900 stores), the U.S. division of Germany-based Aldi International; Supervalu, Inc.'s no frills, discount Sav-A-Lot chain (about 1,600 stores); specialty grocery chain Trader Joe's (300 stores) Tesco's Fresh & Easy Neighborhood Market (currently 67 stores and growing fast) Safeway Stores, Inc., with its new small-format "The Market" stores; Wal-Mart with its soon to open first four Marketside stores; and numerous others.

Independent grocers, America's original small-format grocers, also are putting a renewed focus on opening small-format grocery stores, especially in urban neighborhoods and in the down towns of suburban and small cities. We call this phenomenon the "new corner grocery store." The phrase is more metaphorical to describe the phenomenon rather than literal to mean a small grocery store right on the corner, although that applies as well.

And it's not just experienced and independents currently operating supermarkets and grocery stores that are opening these new small-format "new corner grocery stores." For the first time in decades, we are seeing numerous entrepreneurs, some with food retailing backgrounds, others with restaurant backgrounds (and some with both), along with entrepreneurs from other walks of professional life, starting to open small-format grocery stores throughout the U.S.

Just like the big chains--where the small-format grocery stores range from no frills, deep discount markets like Adli's and Sav-A-Lot's and combination basic grocery and fresh foods stores like Tesco's Fresh & Easy, Safeway's "The Market" and Wal-Mart's Marketside, which will open this fall in the Phoenix, Arizona region, to natural and specialty format stores like Trader Joe's and others--these independents also are opening up a variety of formats of small-format grocery stores. These markets range from upscale fresh, specialty and natural foods stores, to modern versions more basic grocery stores modeled after the corner grocery store of the past. Hence the title we are giving them: the "new corner grocery store."

Although in our analysis the small-format food retailing revolution is still in its infancy in the U.S. (and in many parts of the world as well), it is beginning to have positive effects on numerous cities and towns throughout the U.S., as well as on consumers.

Not only are the stores serving shoppers in locations often previously underserved, but the small-format grocery store revolution is starting to have a positive effect on urban, suburban and small town down towns because many of the grocery stores being opened in such areas are going into buildings which were either previously empty or rundown. In other words, grocers are improving these buildings and thus the neighborhoods in these communities, providing a higher and better use for the existing buildings and therefore the community as a whole.

This morning we read a story in the Rutland (Vermont) Herald newspaper about three independents and how they are making a go with three small-format grocer stores in three different towns in Vermont.

Those grocers--Bellomo's Market in Rutland, West Street Market in Proctor, Vermont, and California Fruit Market--are three excellent examples of independents who are helping to create this small-format food retailing revolution in the U.S. by reinventing what we call the "new corner grocery store."

Read the story, "Owners around town revitalize small-scale retail," written by Bruce Edwards here.

It's not easy competing with the big chains for independents regardless if they operate huge supermarkets or small-format food stores. However, the fact is small-format independent food and grocery stores are in a growth mode rather than in decline in the U.S.

The ingredients for success for independents, as well as chains, are the same in the main regardless of store size. Those ingredients include creating a niche and them communicating it in all a retailer does, providing excellent customer service, operating clean stores regardless of the format, and a handful of other essentials.

Small-format grocery stores do offer a couple interesting particulars for retailers however.

First, because of the smaller size, the overhead--monthly rent, energy costs, labor--are less. For independents this means fewer barriers to entry, as it costs millions to open a new supermarket of say 40,000 square feet or more.

Second, it is easier to focus on a particular niche or niches in a small-format food and grocery store. By sheer virtue of its smaller-size, a retailer is focusing on a narrower niche--neighborhood residents, gourmets, natural and organic foodies, for example--which all things being equal should allow for easier focus in merchandising, marketing and operations.

Lastly, small-format stores allow for a strategy that doesn't have to force a retailer to directly compete against the big chains. For example, a corner grocery store can focus on being a fill-in, secondary and even tertiary, store for neighborhood residents. Additionally, by creating a natural-organic and specialty niche, the small-format store can brand itself as the place to shop for affordable "quality" foods for example.

Again, creating a niche, executing and communicating it aren't any easier with a small-format grocery store. But by virtue of the smaller physical size it can allow a retailer to do so more economically and in a tighter fashion.

It's our analysis that chains like those mentioned earlier are opening small-format stores in large part because they figured this fact out. Of course, it is something many independents have know all along in the U.S.--which accounts for the fabulous success of the independent food and grocery retailing segment overall in America.

We're observing the beginnings of the emergence of the "new corner grocery store" in the U.S. This time around though it's being conducted as much by big chains as it is by independents.

Therefore, independents in this current food retailing revolution will have to be even more competitive than they have been in past campaigns and battles. Of course, that is something independents as a segment have shown they can do time and again in the United States.

Global Retail Roundup Memo: Selected News and Insight On Food and Grocery Retailing Throughout the World

United Kingdom

United Kingdom-based retailer Tesco's Ireland branch has launched a new merchandising scheme in an attempt to increase sales amid that nation's slumping economy.

Tesco-Ireland has created what it is calling "value zones" inside its Ireland stores in which the retailer has over 1,000 "cash saver" food and grocery items offered at everyday low price discounts. The "cash saver" "value zones" are differentiated in the Tesco stores in Ireland with a store-with-in-a-store-type scheme, featuring black and amber colored signage and point-of-purchase materials touting the "cash savor" values theme.

A number of the over 1,000 staple items in the "cash saver" zone are natural and organic versions, primarily Tesco's store brands, of basic staple items like peanut butter, cereals and related items.

Denmark-based small-format, no frills grocery chain Netto also is responding to the slumping UK economy. It plans to launch a major price-cutting initiative in all of its UK grocery stores in which the grocer will cut the prices of key, everyday food and grocery staple items across all categories. The German retailer says the total item price reductions will amount to ~6 million-p (British Pounds) total.

Netto already is a discount food and grocery retailer in the UK and throughout Europe where it has over 1,000 small-format discount grocery markets in Denmark, Germany, Poland and Sweden, in addition to the United Kingdom.

Netto is owned by Dansk Supermarket Group which is in turn owned by A.P. Møller-Mærsk Gruppen, a £3 billion company, which has business interests in oil tankers, logistics and distribution , along with retailing.

Netto-UK claims it saves shoppers 20% compared to conventional supermarkets, the small-format discount retailer is challenging German based Aldi and Lidl head to head in the no frills, small-format discount supermarket sub-segment. However, it competes against every other food and grocery retailing format and store size as well, as do Aldi and Lidl.

Netto currently has about 200 stores throughout the UK and is opening about 20 new stores in the nation each year as part of its long term growth plan.

Netto stores are limited assortment, but do offer a variety of natural, organic and specialty food and grocery items at discount prices. They also are putting an increased emphasis on these and other sustainable products as the "green" movement continues to grow in the UK despite the poor economy at present.

Wal-Mart, Inc.-owned UK retail chain Asda has moved ahead of Sainsbury's to become the UK's number two sales leader in the online ordering-home delivery food and grocery retail segment, according to data just released from research firm TNS Worldpanel. The firm's latest figures show Asda growing its online sales at 71.8% for the 12 weeks to June 15, 2008.

Earlier this year Asda made a major financial investment in improving and growing its online business. That investment appears to be paying off for the Wal-mart-owned chain, which also is the UK's number two brick and mortar food and grocery retailer.

Tesco is the largest overall brick and mortar and online food and grocery retailer in the UK, followed by Asda and then Sainsbury's. Although Sainsbury's is number three overall behind Asda and Tesco, until these online sales figures came out this week it was number two in online sales, ahead of Asda. The brick and mortar and online rankings are now the same: Tesco number one, Asda number two, and Sanisbury's in third place respectively.

Germany

Germany-based international food and grocery retailer Metro Group is obviously doing something right, even in what is becoming a world-wide economic slowdown.

Metro Group has reported half yearly growth of +7.1% to €31.7bn, with international sales contributing over 60% of revenue for the first time. In the second quarter, turnover grew +6.9% to €16.1bn.

Those are seriously strong numbers even in a thriving international economy.

Metro Group, which sells hard and soft goods in addition to food and groceries, operates three primary formats: large combination food, grocery and general merchandise hypermarkets (called Real Hypermarkets), cash & carry-style stores and consumer electronics stores.

Below is a sales and profits breakdown by each format:

Real Hypermarkets
Increased sales of €5.6bn, up +6.3%
Like-for-like sales growth of +6.5%
1.7m additional customer visits
Sales growth of +33.5% in Eastern Europe to €1.3bn

Cash & Carry
Turnover growth of +6.1% to €15.7bn
Eastern European sales increase of +14.4% to €6.0bn
+14.6% growth in Africa/Asia
EBIT increase to €410m, up +6.9%
Eight new stores

Consumer Electronics
Sales increase of +12.1% to €8.4bn
German sales up +7.4% to €3.9bn
Eastern European sales leap of +43.1% to €1.0bn
EBIT growth of +11.3% to €137m
19 new stores

Metro Group had global sales of $88,034 billion in fiscal year 2008, making it the world's fourth largest retailers behind number three Tesco, number two France's Carrefour and number one U.S.-based Wal-Mart, Inc.

The global retailer operates stores in 31 countries in addition to Germany. Those countries are: Austria, Belgium, Bulgaria, China, Croatia, Czech Republic, Denmark, France, Greece, Hungary, India, Italy, Japan, Luxembourg, Moldova, Morocco, Netherlands, Pakistan, Poland, Portugal, Romania, Russia, Serbia, Slovakia, Spain, Sweden, Switzerland, Turkey, Ukraine, UK, Vietnam.

Metro Group CEO Dr. Eckhard Cordes says its cash & carry division was a big contributor to its impressive half-year numbers in terms of the company's food and grocery sector. He also said improvements made to its hypermarkets division, which has been faltering a bit, helped as well. He added the hypermarket division has become a major renewed focus for the glabal retailer, including plans to grow its number of hypermarkets in many international markets. That renewed focus includes a new marketing campaign for the Real Hypermarkets which the retailer launched earlier this year.

As part of its new marketing program for its hypermarkets, especially throughout Europe, Metro Group is touting natural, organic and sustainable food and grocery products, along with increasing the number of items in these categories the retailer sells in its hypermarkets.

India

A. Srinivas, a writer for the Indian Hindu Business Line publication, argues on a piece today that the global "food crisis" is being caused primarily by people in the developed world, and now people in the rapidly developing countries like India and China, eating too much of the "wrong foods" like meat.

In his piece, "Lifestyle changes and food crisis," A. Srinivas argues people in the developed world are eating more than what is good for their health. The increase in demand for meat products, thanks to the popularity of fast food and eating out, is the single biggest reason for the depletion of grain supplies that has precipitated the food crisis.

Since dietary-induced obesity and illness is a major problem in the United States and other parts of the western world, and soaring foods prices especially for meats and dairy products are causing consumers in the developed world to find ways to spend less on food, the writer's argument is good food for thought. Read the article here.

Should consumers in the developed world begin to eat less meat for example in significant numbers, such behavior has numerous implications for food and grocery retailers in the areas of store design, marketing, merchandising and other operational segments of the business.

Additionally, such a behavior change even on a small scale, could be a boon to natural foods retailers in the west because these retailers tend to put far more emphasis on the selling of healthier foods like fresh produce, grains and meat substitutes.

Malyasia

The Malaysian government may be on the verge of allowing foreign hypermarket operators to open smaller outlets via a franchise system.

In a press interview this week, Domestic Trade & Consumer Affairs Minister, Datuk Sharir Samad, said that foreign retailers would be able to open stores which are slightly larger than convenience stores, without being subject to the regulations governing hypermarkets. The stores will still be 30% owned by Malaysians, as required by law. The franchise proposal will be submitted to the Malaysian Cabinet for consideration in the coming month.

This would be good news for international retailers like Tesco, Carrefour and Wal-Mart, who want to open versions of their small-format grocery and convenience stores in Malaysia. Carrefour in particular wants to open some of its Carrefour Express small-format grocery stores in Malyasia.

South Africa

A University of Pretoria, South Africa food scientist says soaring food prices in that country are taking a toll on the health of South Africans.

Food scientist Hettie Schanfeldt says a big part of that problem can be solved with consumer education however.

This story in yesterday's Sunday Independent newspaper discusses the professor's ideas and how she is enlisting South Africa's government and food industry to help her and others do more to educate the nation's consumers about the correlation between rising food costs and healthy eating.

The irony in South Africa, which has seen considerable economic development and improvement in the economic and social lives of many of its people sense Aparthied was ended in 1990, is that many of those who have risen to the middle class are following in the same behavioral patterns of many people in the developed world, which is that they have changed their diets to include much more high fat and unhealthy foods, leading to obesity and other diet-influenced health problems like like diabetes, high cholesterol and high blood pressure.

Australia

Australia is dealing with soaring food and grocery prices just like the rest of the world is currently doing. Prices at the nation's supermarkets have risen by about 14% overall over the last four years, according to the Australian government, with the costs of dairy products, meats and organic products soaring much higher than that.

The Australian Competition and Consumer Commission, the government-appointed body charged with regulating competition in the nation's the food retailing industry, is due to report to the federal Government on grocery prices next Thursday.

The commission has been silent in the main about what its findings will be, which has some in Australia's supermarket industry a bit skittish

However, the commission's former president, Allan Fels, who is now a University professor, tells The Australian, a business and politics publication in the country, he has what he thinks is one significant solution to high food prices in Australia

"The best single way of getting grocery prices down would be to change the town planning laws that hold back retail competition," Professor Fels told the Urban Taskforce industry group in Sydney yesterday.

"I would like to see more retailers and more opportunities for them to compete everywhere. Retail is too concentrated -- the two big retailers (Coles and Woolworths) have something like 80 per cent of dry groceries."

Read Professor fels' other prescriptions for food and grocery retailing in Australia, along with the rest of the article in The Australian here.

Canada

Gilligan, the skipper..and the grocer too: Three-hour tours aboard the S.S. Minnow may soon be coming to a Vancouver Island community near you.

The boat that was made famous for setting aground on the shore of an uncharted desert isle in the 1960s television classic Gilligan's Island is now owned by Ken Schley, one of the owners of the Quality Foods grocery store chain, based on Vancouver Island, Vancouver B.C.

Read about what the creative grocer has cooked up here.

Quality Foods is a very innovative 10-store independent food and grocery retailer. You can learn more about the grocer in this piece we wrote and published on May 3, 2008: Independent Grocer Memo: 'Romancing' Food and the Stores, Innovation and Customer Care Keys to Success for Vancouver Island B.C.'s Quality Foods.

United States

U.S. retail chain Target, which operates Target banner general merchandise discount stores and Super Target banner combination food, grocery and general merchandise discount merchandise stores, yesterday celebrated a major new store opening achievement. On Thursday, July 31, the retailer opened 43 stores throughout the United States.

The 43 store grand openings yesterday took Target's total US store count to date to 1,648, with a presence across 47 states nationwide.

California, Texas and Florida enjoyed the highest number of store openings on the day, with nine, six and four stores opening respectively. Many of the 43 stores opening yesterday were the retailer's Super Target banner combination food, grocery and general merchandise discount format stores. Averaging well over 100,000 square feet, the Super target stores are similar to Wal-Mart's Supercenter stores.

Target is making a major push to open more Super Target stores in the U.S., especially in states like California where it currently has only a handful of the mega-discount grocery and general merchandise stores. It wants to compete more in the food and grocery segment, including in the natural, organic and specialty foods categories.

Super Target stores carry extensive selections of natural and organic fresh foods and grocery products, along with lots of specialty, gourmet and ethnic food and grocery items across all categories. This includes the retailers store brands, which feature natural, organic and premium products across all perishable and dry grocery categories.