Food, Society & Economics Memo USA: Numerous Provisions of the Government's $790 Billion Economic Stimulus Package Good For Grocers and Food-Makers

Numerous provisions in the massive $790 billion comprehensive economic stimulus package approved by a U.S. House-Senate Conference Committee and set to become law possibly as soon as tomorrow, offer significant sales-growth potential for the U.S. food and grocery industry -- retailers, food-makers and marketers. Many of the package's provisions also provide much needed help for American consumers.

It's not by any means a perfect package -- but it could be the nation's best hope right now. And if it builds some real business and consumer confidence, something that's most-lacking in the U.S. economy right now, that accomplishment in and of itself will go a long way towards making the package a successful piece of legislation.

But after all is said about which provisions of the stimulus package help which business sectors -- which we say below in terms of the food and grocery industry -- the most important thing to say is that we are all in this together. United we succeed, overly divided we fail.

It's apt that today we celebrate the real birthday of perhaps America's greatest President -- Abraham Lincoln -- the great unifier. Lincoln staked his Presidency and the country's future on what to him was a crystal clear premise and certain in his soul article of faith -- that America's best hope for the future was as a united nation -- not a confederacy or as a series of blue and red states, as President Obama likes to say, but as a "United States."

President Obama echoed Lincoln, the President he takes as his role model, in his speech today at the annual Lincoln Day event in Illinois. Both Presidents -- both from Illinois -- are right in having that crystal clear premise and certain article of faith that America's last best hope has and always is when her citizens are united. Let's not foget that in these bad economic times, especially.

The $790 billion economic stimulus package agreed upon by a conference committee of the U.S. House of Represenatives and U.S. Senate yesterday -- and which will be voted on and passed by the House today and is set to be voted on and most likely passed by the Senate tomorrow -- includes as one of its provisions a 14% increase in the amount of food stamps the U.S. Department of Agriculture (USDA) will distribute to the millions of Americans who are receiving the food assistance vouchers (food stamps actually come in the form of an EBT debit card these days) in this recessionary (or depression, you choose) economy.

The House-Senate bill allocates $20 billion out of the $790 billion package to increase the food stamp benefits by the 14% for the rest of this year. This is money that will go right into the economy as fast as it is received by food stamp users.

A 14% increase may not sound like much (or perhaps to some too much) but for consumers who are say surviving on say $300 a month in food stamps, that added $42 (14% increase) a month in benefits can go a long way in stretching what is an already very thin food budget.

The 14% increase in food stamp benefits also is good news for America's food and grocery retailers, as well as food manufacturing companies.

By there very nature food stamps can only be used to by food and grocery products, and there are limitations on certain things people can purchase using the stamps, such as alcoholic beverages, tobacco products and a few other products. As a result, consumers spend the food stamps at supermarkets, natural foods stores and other food and grocery format stores almost exclusively, which means added sales for grocers. And because it is food and grocery products in which the extra 14% ($20 billion extra) will be spent on, that offers some very significant added sales for manufacturers and marketers of consumer packaged goods as well.

Additionally, there is no saving of food stamps by users. They spend them as soon as they get them. This is the point of including them in the economic stimulus package -- along with doing so because the human need is so great -- because they are spent as soon as obtained, thereby hopefully provided a cash stimulus to the dead economy.

According to recent figures released by the USDA, there are currently about 31 million Americans, about 10 percent of the total population, (and growing) who need food stamps in order to be able to put food on the table each month.

And with about 1.7 million American workers having been laid off from their jobs from just November, 2008 -to- January, 2009, and likely another 500,000 -to- 7000,000 for February, applications for food stamp assistance are flooding USDA offices, according to the agency. Many Americans are receiving food stamps for the very first time in their lives at present, in large part because in this serious economic downturn it's becoming increasingly likely that both household bread winners in a family are losing their jobs, where as in more recent passed recessions that didn't happen to the degree it is happening now.

CNN newsman launches a food stamp survival experiment

As a way of offering readers a flavor for what it's like to reley on food stamps in order to put food on the table in these bad economic times, CNN's Sean Caleb, who appears on the cable news network's "American Morning" morning news program, has launched an experiment in which he is using the current government allocated amount of food stamps as his only source of food and grocery purchases for a month.

CNN's Caleb is then chronicling his food stamp experiment in his Blog -- Blog: Living On Food Stamps -- at the CNN Website. He has learned much about what it is like to have to get by with just food stamps so far in his month long experiement and is sharing his self-insights in posts on the Blog. Of course, at the end of his one month experiment newsman Sean Caleb gets to go back to using the fine salary provided him by CNN to purchase his food with -- assuming he keeps his job. None of us are immune from losing our jobs in this economy, except perhaps CNN's iron horse of interviewers and network cash cow Larry King.

[You can read Sean Caleb's Blog posts about his life living on food stamps so far at his CNN Blog here.]

Food retailer and food-maker stimulation

The $790 billion economic stimulus bill, which could land on President Obama's desk for his signature as soon as tomorrow, contains a number of other provisions in it that should benefit America's food and grocery retailers, and food and grocery product manufacturers and marketers.

These provisions of the package are the most direct cash-oriented benefits and most immediate tangible ones to consumers, that also it is hoped will begin providing some immediate stimulus to the overall economy shortly after they are distributed.

The provisions of the $790 billion House-Senate economic stimulus package pushed by President Obama we think will benefit the food and grocery industry the most, and the most rapidly, are:

1. AID TO POOR AND UNEMPLOYED
$40 billion to provide extended unemployment benefits through Dec. 31, and increase them by $25 a week; $20 billion to increase food stamp benefits by 14 percent; $4 billion for job training; $3 billion in temporary welfare payments.

The extended unemployment benefits (and $25 a week increase), food stamp increase and $3 billion in temporary welfare payments are likely to provide the biggest and most immediate benefits to food and grocery retailers and food makers. The reason is because people on unemployment, food stamps and welfare spend pretty much every cent they get right away on basic needs like food and groceries. The fact consumers in all three of these categories are getting extensions and increases means more money will be spent, and rapidly, at America's food and grocery stores. The job training provision is a good one but won't have any immediate direct benefit to the food and grocery industry in terms of sales increases.

2. DIRECT CASH PAYMENTS
$14.2 billion to give one-time $250 payments to Social Security recipients (per receipient), poor people on Supplemental Security Income (SSI), and veterans receiving disability and pensions.

Folks receiving SSI benefits are among the poorest of the poor. They spend pretty much all the income they receive. They also spend most of that income on the basics like food and groceries. We suspect they will spend most of the $250 payment on food and groceries, along with using part of it to pay things like the utility bill. Additionally, a great majority of retired folks on Social Security get most of their monthly income from the retirement program. They tend to spend what they get each month, also primarily on the basics like food and groceries, as do veterans living off of disability payments.

There are many people collecting social security who also have substantial additional income from pensions, 401-K plans and investments. The federal government estimates about 40% of retired Americans today obtain all or nearly all of their monthly income from Social Security. Another about 30% rely on Social Security for 50%-75% of their total monthly income. So even if just 40% and 50%-75% of America's about 30 million Social Security receipients spend half of their $250 check on food and groceries, that will provide a nice shot in the arm to grocers and food makers. (Note: People receieving Social Security have to pay income tax if their adjusted gross income is over $30,000 a year. Those folks in that bracket qualify in the stimulus package for the higher tax rebates listed below, rather than the $250 check.)

3. TAX CREDITS
About $116 billion for a $400 per-worker, $800 per-couple tax credits in 2009 and 2010. For the last half of 2009, workers could expect to see about $13 a week less withheld from their paychecks starting around June. Millions of Americans who don't make enough money to pay federal income taxes could file returns next year and receive checks. Individuals making more than $75,000 and couples making more than $150,000 would receive reduced amounts.

This is much needed money in the pocket for most Americans. We suspect consumes will do three things with their $400 (single filers) and their $800 (joint filers). First, we think they will take about one-third -to- half of the total check amount and use it to pay off past do bills: credit cards, utility bills, cable TV, ect. Many consumers are a month or two behind in these areas, and the utilities and companies are letting them make payments. Therefore we think this is one area where many Americans will first apply their tax rebate monies to.

Second, we think people will then use a third or more of the check amount to buy mostly basic items (read food and groceries and related items) that they've been doing without, along with buying a few more endulgent food items they have been avoiding because of the bad economy. Consumers spending a third or half of their rebate checks at the grocery store will be a big shot in the arm for food retailers and a good one for many food makers and marketers.

Lastly, we think most Americans will attempt to save about a third of their tax rebate checks for emergencies. They know they are going to need it the month after they get it, or the month after that, for example.

4. ALTERNATIVE MINIMUM TAX
About $70 billion to spare about 24 million taxpayers from being hit with the alternative minimum tax in 2009. The change would save a family of four an average of $2,300. The tax was designed to make sure wealthy taxpayers can't use credits and deductions to avoid paying any taxes. But it was never indexed to inflation, so families making as little as $45,000 could get significant increases without the change. Congress addresses it each year, usually in the fall.

This provision will put money in the pockets of a number of tax payers. It won't be enough to buy a new car, or perhaps even a new big screen television. But it will be enough to pay off some bills, buy better and more groceries, and perhaps have a little left over for clothing and a blender or new toaster for the kitchen. It's important to note that this provision only effects a small percentage of America taxpayers. But it still helps.

COLLEGE TUITION TAX CREDIT
5. About $14 billion to provide a $2,500 expanded tax credit for college tuition and related expenses for 2009 and 2010. The credit is phased out for couples making more than $160,000.

Those consumers who can take advantage of this tax provision will end up with more cash in their pockets. That means a bit more disposable income. That's good for grocers and food makers. Many of these folks are married couples with a kid or two at college. They've been really cutting back because of the added tuition and related college expenses. They might take some of the tax savings and buy some premium organic and gourmet foods items, along with some higher-priced wines and craft beers, for example. A little affordable indulgence.

6. CHILD TAX CREDIT
About $15 billion to provide the $1,000 child tax credit to more families that don't make enough money to pay income taxes.

Again, not significant, and not applicable to all consumers. But the amount those who can take advantage of it save is good news to grocers and food makers in that it's not enough to make a major purchase but is enough to spend a bit more at the supermarket.

7. EARNED INCOME TAX CREDIT
$4.7 billion to expand the Earned Income Tax Credit for low-income families with three or more children.

This provision also puts cash into the hands of those consumers who quilify can take advantage of it. And added benefit to grocers and food makers is that those people it applies to are in the lower income segment. This means they tend to spend most of the income they take in. Therefore they are a consumer segment most-likely to spend much of this money at the supermarket for basic needs and essentials like food, groceries and houshold items. They will spend most of the savings rather than save it.

The end-game: Get private sector moving once again

Our focus in this piece is on the provisions of the $790 billion economic stimulus package that in our experience and analysis offer the best opportunity to food and grocery retailers and food markers to gain some increased sales in an overall industry sense . Adding increased profits and income will be tough because retail price and thus margin pressure is intense. And it will get even more competitive and intense.

We say overall because even with the extra cash in their hands consumers will choose where they shop and what brands they buy carefully, as they've been doing for months now. We suspect most shoppers will also continue to shop at food stores that offer them the best value. We also believe shoppers will continue to buy the brands (including store brands increasingly) that also offer them the best price and value.

They also will continue to seek out the best deals and promotions available at retail.

As a result, while the extra cash and food stamps consumers get from the stimulus package provisions will increase sales overall for food retailers and food makers, it won't for all of them. Consumers will continue to go where they perceive the value is, in our analysis.

Aggressive promotion even more important with stimulus

Aggressive marketing and promotion for both food and grocery retailers and food-makers and marketers is even more important now that an economic stimulus package with all of the benefits offered the industry is at hand. Why? because as we mentioned above, shoppers with a little extra cash in their hand don't have to shop at your store or buy your food product brand.

Additionally, consumers have learned some very frugal food and grocery shopping habits over the last six months to a year and they aren't about to dump those money saving habits just because of some extra cash, unemployment benefits or food stamps in their pockets. In our analysis it's the complete opposite in fact. We think shoppers will be looking for even better deals and prices so they can stretch their new found cash from the economic stimulus package.

Therefore, it will be the retailers and food marketers that aggressively launched promotions and related programs tied to the benefits from the stimulus program that will be the winners.

For example, retailers that offer consumers 10% bonuses if they cash their tax rebate checks at their stores, like Wal-Mart, Safeway, Kroger Co, and a few others did with the Bush Administration tax rebate checks, will be the ones that get the lions share of those dollars. Cash the $400 check, get an extra $40 in the form of a store gift card. Cash the $800 check, get an $80 gift card. That's big money to consumers right now.

Wal-Mart, Safeway and Kroger cashed many extra checks than they otherwise would have had not they offered that 10% stimulus bonus package of their own last time around. And most of those conumers who cashed their checks in the stores spent money on food and groceries at the stores.

Retailer's also need to launch promotions with an economic stimulus theme. Disocunted prices under the tag line "An economic stimulus package from Whole Foods," for example. Or "Deals to stimulate your pocketbook," from Safeway, as another example. These need to be product promotions, line drives, in-ad coupons, all sorts of "stimulus" croos-promoted means to get more of the dollar then your competitor.

Food makers and marketers need to do the same, even more so since many shoppers are buying store brands rather than manufacturer brands. Companies need to offer coupons tied to when the tax rebate checks come out. Call the product "cents off" coupons "stimulus extenders," or "stimulus helper," for example.

Additionally, create store-specific product or item promotions with various retailers; the promotions timed with when the rebate checks hit. Play up the "stimulus extender" theme. Do so with item price disounts but also on the company Web site and in public relations efforts. Make it real and it will work. Offer real value not just hype. Get creative. Let the bad economy and the promise the added cash will bring to consumers be your canvas. Encourage confidence with good deals.

It's all about grabbing a share of the extra dollars and doing so by giving consumers a better deal. Help them extend their stimulus money and they will reward you with their business.

We are all in this together. Retailers and food makers can't survive without consumers who have money to buy the goods they offer. Consumers can't survive without jobs. Business can create them with drmatically reduced sales and profits.

The end-game of the mega economic stimulus package is to put some money in the hands of hard-pressed Americans, create some added business for companies, start to improve consumer and business sector confidence, create jobs, and jump-start the private sector so it can get the nation's economic engine going again. It's a social as well as economic package in reality.

Below is a summary of the other provisions in the $790 billion House-Senate economic stimulus package bill that's set to become law, perhaps as soon as tomorrow:

HOMEBUYER CREDIT
> $6.6 billion to repeal a requirement that a $8,000 first-time home buyer tax credit be paid back over time for homes purchased from Jan. 1 to Nov. 30, unless the home is sold within three years.

AUTO SALES
>$1.7 billion to makes sales taxes on paid on new cars, light trucks, recreational vehicles and motorcycles tax deductible through the end of the year.

RENEWABLE ENERGY INCENTIVES
>About 20 billion in tax incentives for renewable energy and energy efficiency over 10 years, including extending tax credits for energy produced from wind, geothermal, hydropower and landfill gas; grants to build renewable energy facilities; tax credits for purchases of energy-efficient furnaces, windows and doors, or insulation; tax credit for families that purchase plug-in hybrid vehicles.

BONUS DEPRECIATION
>$5 billion to extend a provision allowing businesses buying equipment such as computers to speed up its depreciation through 2009.

BANK CREDIT REPEAL
>Repeal a Treasury provision that allowed firms that buy money-losing banks to use more of the losses as tax credits to offset the profits of the merged banks for tax purposes. The change would increase taxes on the merged banks by $7 billion over 10 years.

HEALTH CARE
>$24.7 billion to provide a 65 percent subsidy of health care insurance premiums for the unemployed under the COBRA program; $86.6 billion to help states with Medicaid; $19 billion to modernize health information technology systems; $10 billion for health research and construction of National Institutes of Health facilities; $1 billion for prevention and wellness programs.

INFRASTRUCTURE
>$46 billion for transportation projects, including $27.5 billion for highway and bridge construction and repair; $8.4 billion for mass transit; $8 billion for construction of high-speed railways and $1.3 billion for Amtrak; $4.6 billion for the Army Corps of Engineers; $4 billion for public housing improvements; $6 billion for clean and drinking water projects; $7.2 billion to bring broadband Internet service to underserved areas; $4.2 billion to repair and modernize Defense Department facilities.

ENERGY
>About $50 billion for energy programs, focused chiefly on efficiency and renewable energy, including $5 billion to weatherize modest-income homes; $6.4 billion to clean up nuclear weapons production sites; $11 billion toward a so-called "smart electricity grid" to reduce waste; $6 billion to subsidize loans for renewable energy projects; $6.3 billion in state energy efficiency and clean energy grants; and $4.5 billion make federal buildings more energy efficient; $2 billion in grants for advanced batteries for electric vehicles.

STATE BLOCK GRANTS
> $8.8 billion in aid to states to defray budget cuts.

EDUCATION
>$44.5 billion in aid to local school districts to prevent layoffs and cutbacks, with flexibility to use the funds for school modernization and repair; $25.2 billion to school districts to fund special education and the No Child Left Behind law for students in K-12; $15.6 billion to boost the maximum Pell Grant by $500 to $5,350; $2 billion for Head Start.

HOUSING PROGRAMS
>$4 billion to repair and make more energy efficient public housing projects; $2 billion for the redevelop foreclosed and abandoned homes; $1.5 billion for homeless shelters; $2 billion to pay off a looming shortfall in public housing accounts.

SCIENCE PROGRAMS
>$3 billion for the National Science Foundation for basic science and engineering research; $1 billion for NASA; $1.6 billion for research in areas such as climate science, biofuels, high-energy physics and nuclear physics.

LAW ENFORCEMENT
>$4 billion in grants to state and local law enforcement to hire officers and purchase equipment.

HOMELAND SECURITY
>$2.8 billion for homeland security programs, including $1 billion for airport screening equipment.

DEBT LIMIT INCREASE
>Increases the statutory limit on the national debt by $789 billion, to $12.1 trillion.

The whole must be greater then the sum of its parts

A number of these provisions also offer benefits to the food and grocery industry, albeit more indirect ones. The Renewable energy, bonus depreciation, energy and health care provisions particularly offer some strong benefits to the food and grocery industry on the investment and expense side of the balance sheet.

But our main focus in this piece is on the provisions that in our analysis offer the most direct benefits to food retailers and food makers on the sales and income side of the ledger. That's why we have separated the various provisions the way we did.

And, of course, overall the goal and hope of the $790 billion comprehensive economic stimulus package (the whole) is that once the spending in its various parts starts happening, all of the provisions (the total sum of the package's parts) will work together and began stimulating the economy, thereby giving a jump-start to the private sector, and to consumers, so that eventually job creation can begin on the business side and increased consumer confidence will start coming back so that people are more willing to spend (of course they have to have the money to spend it). And key to all this is that the credit markets must thaw -- and if and when they will is the $64,000 question?

Lastly, this all comes at an obvious cost -- a bigger deficit and more national debt. Notice the very last provision of the package we listed above -- the Debt Limit Increase -- which increases the statutory limit on the national debt by $789 billion (an interesting number), to $12.1 trillion. That provision, and the $789 billion, is needed in order to create the new government securities (debt) and print the money so the federal government can pay for this $790 billion spending package.

Notice how the debt increase amount is $1 billion less ($789 billion) than the total $790 billion stimulus package? We hope that's because the federal government has that extra billion on hand to apply to the $789 billion to get to the $790 billion, rather than being yet another example of how the government gets the math wrong when it comes to government spending, even on the stimulus package, which we approve of as just about the only alternative available right now to keep the U.S. economy from going all the way over the cliff. But it must be nice to be able to create a line item in your spending plan that pays for your deficit spending.

And once this $790 billion is spent and the debt added to the deficit and the already multi-trillion dollar national debt, President Obama and Congress are going to need going to ask the American people and business community, to paraphrase former President John F. Kennedy: "Ask not what your country can do to stimulate you, but ask what you can do to stimulate your country."

Consumer Trends Memo: The 'Era of Cheap Food' May Be Over in the U.S.; But Good Cheap Eats Can Still Be Found...it's All About Value

New York magazine is just out with its annual "New York Best Cheap Eats" cover issue. The magazine scours the Big Apple every year for its "Best Cheap Eats" issue, which devotes dozens of pages to the restaurants and stores in New York City where consumers can find the best deals on foods ranging from the simple--a slice of pizza--to gourmet-quality meals across nearly every ethnic range.

The magazine's editors say this year's issue will likely be its most popular ever since the poor state of the U.S. economy, which includes soaring food inflation, is driving even many of New York's more affluent residents--not to mention the scores of business travelers, and tourists who flock to the Big Apple this time of year--to search out cheaper alternatives for their meals and food purchases.

The current economy is doing the same to most lower, middle and even many upper-income consumers in every big city, suburb and small town in America.

This year's edition covers what seems like every square inch if New York City's food landscape in terms of the editorial teams search for the cheapest eats in America's largest city.

Among the food categories the special New York magazine "Cheap Eats" issue features include:

The Cheap List
The best cheap eats of 2008.

Chef’s Choice
Top cooks’ favorite cheap eats.

Cheap Eats Consumer Price Index
How the rising cost of food trickles down to pizza and hamburgers.

The Cheapest Of the Cheap
The ten best new things to eat in New York for $5 or under.

Beggars Can Be Choosers
What can you get for a measly dollar these days?

The High-Low $20 Showdown
We asked two very different chefs to create a three-course meal for two using the same $20 budget.

New York magazine also asked two chefs to design a three-course meal, giving them just $20 to complete the task. You can read that story at the link directly above ("The High-Low $20 Showdown). One chef created a more basic meal with the $20, while the other went more high-end and gourmet with the $20 budget.

The more basic (not so basic to many eaters) but tasty looking $20 feast on the cheap is pictured directly below. Below it is the higher-end, gourmet quality menu on the cheap.

Twenty bucks can buy lots of good, cheap eats, as the graphic above shows, if one knows how and where to shop, along with being able to cook, or learning to do so. Click on the graphic for an enlarged view. [Graphic source: New York magazine.]

The chef put together this three-course gourmet dinner, plus wine and desert, for $20. That's value, considering the same meal would easily cost four to five times that amount at a white table cloth restaurant. Click on the graphic for an enlarged view. [Graphic source: New York magazine. Food retailers take note: value gourmet recipes are something consumers are looking for. A three-course gourmet meal promotion using the chef's concept above would be hot.

Consumers are searching out bargains today like food and grocery retailers and restaurant operators have not seen in decades.

At retail, store or private label brand sales are rapidly rising, as are items on promotion. Value is becoming the new black among American consumers, who are being pinched by a combination of soaring gasoline and home energy prices, rapidly-rising food costs, a credit crunch, increasing unemployment and job security, dramatically lowered housing values, and now what looks to be rising overall inflation overall as well.

Good cheap eats no longer are merely for lower-income American consumers. For example, Whole Foods Market, which up until now has been fairly immune from concerns about food prices from its consumer base, has launch what it is calling its "Real Deal" program. The supernatural foods grocer is lowering prices throughout its stores, offering more and deeper price promotions and has even created "value scouts" in-store, who help shoppers find deals and values being offered in the stores.

Mid-range casual dining restaurants like Applebee's for example in the U.S. also are drawing more diners, while higher-end restaurants are putting more basic, lower-priced items on their menus because even affluent consumers are feeling pinched in the down U.S. economy.

As is often the case during bad economic times, behaviors consumers acquire--such as being more price and value conscious when it comes to food shopping and eating out--often stick even once the economy improves.

If true this time around, value and cheap eats could not only become the new black, but also could prove to be the biggest challenge--and as a result a real deal for consumers--to food retailers and restaurant operators in the U.S.

The natural, organic and specialty foods industry also needs to look more closely at how important price and value is becoming to most American consumers. Shoppers are trading down to discount supermarkets. Many are even shopping at salvage grocery stores, which are reporting sales increases of up to 15% in the last year, along with rapidly increasing customer counts in those stores, which sell discontinued, overstock and food and grocery items with slight label flaws.

Further facts: Two U.S. food and grocery retailing chains, Safeway Stores, Inc., which operates nearly 1,800 supermarkets across the U.S., and upscale eastern USA regional chain Wegmans, reported last week sales of their respective store brand grocery items are currently outselling national brands in the stores, both retailers attributing the fact to the poor U.S. economy and consumers' search for greater value.

There's a tipping point at which even the most dedicated natural and specialty foods shopper will buy conventional over natural or organic, or specialty and gourmet. That tipping point in terms of price is unknown. Rather, its defined as "we know it when we observe it." In other words, as we see sales of natural, organic and specialty food and grocer items starting to remain static or even decline, which there currently are some signs of, we can assume price is the primary reason in this current poor U.S. economy.

Therefore, natural and specialty foods retailers and suppliers need to take value very seriously at present or they will lose market share which could take a decade or so to gain back.

We aren't ready to fully proclaim it yet, although we have proclaimed the "era of cheap food" in the U.S. is over...but Natural~Specialty Foods Memo is willing to go as far right now as to say we think the "era of good, cheap eats" may be just around the corner.

Retail Memo: Analysis & Commentary: U.S. Upscale Grocers Need to Adapt to the Down Economy by Adding Value and in Some Cases Lowering Prices

The current economic news in the U.S. isn't good. The negative indicators abound. For example, The sub-prime credit crisis not only has a record number of homeowners getting their houses foreclosed on, but its also having a more profound macroeconomic result, which was witnessed the other day when Bear Sterns, the country's fifth-largest investment bank, nearly had an old-fashion bank run on its funds.

In order to prevent that from happening, banker J.P. Morgan and the U.S. Federal Reserve Bank loaned the company ten's of billions of dollars in a scheme not used in the U.S. since the great depression. J.P. Morgan then stepped in a couple days later, and with the Feds backing acquired Bear Sterns for $2 per-share, a mere fraction of what the investment bank's share price was just a week before.

Further negative economic indicators include record oil, gasoline and energy prices, food price inflation, rising unemployment and a host of other serious economic ills. About 50% of the professional economists in the U.S. recently polled by the Wall Street Journal said they believe the U.S. was already in a recession. Economic forecasters in states like Michigan and California are saying the respective states have probably been in recession since the end of last year.

We don't have to wait until a committee calls an official recession however to know the U.S. economy is in a severe patch. Like billionaire investor and chairman of Berkshire Hathaway said in this piece we wrote a few days ago, "The U.S. economy is essentially in a recession."

For example, food and grocery product inflation jumped by 4% between 2006-2007, the highest increase since 1990, according to the U.S. Department of Agriculture's Economic Research Service. And, of course, we don't have to tell you how much better the U.S. economy was doing in 2006 and early 2007, compared to its current performance. All indications suggest food and grocery inflation will rise at least 4% this year, and likely higher, according to the Economic Research Service's forecasts. As a point of contrast, in the mid -to- late 1990's food and grocery inflation averaged about 1%.

Retail prices on key food and grocery items has increased in the last year by far more than that overall 4% however. Eggs are up 15-20% over 2007 prices. Milk is up about 12%, compared to last year. Additionally, the commodity prices of wheat and corn, which are used in everything from bread and tortillas, to cereals, packaged and prepared foods, and in the case of corn as a major food additive and sweetener.

These soaring commodity prices have pushed the price of items like whole wheat bread up by 15-20% in the last year--and food products containing wheat and corn continues to increase since there's currently no light at the end of the price-increase tunnel in terms of when the commodity prices might stabilize.

For example, Supermarket chain buyers are telling us they've been receiving more frequent price change notices from vendors (in categories and on items across the board) than they can remember receiving in the last 15 -to- 20 years. Food manufacturers and marketers also are telling us not only are they getting significant price increases in the commodities they purchase but that the frequency of those increasing is record setting.

In low food and grocery inflation times (like the 1% 1990's) grocery retailers try to not pass on, or to pass on only a portion of, the price increases they get from their suppliers. However, in times of high food inflation like now, the retailers like to pass on the entire price increases, as the food inflation provides cover, so to speak, for doing so. It's also a must to do so in such bad economic times.

We believe, and are beginning to see evidence, that the current economic downturn in the U.S. economy could have serious negative effects on some upscale food and grocery retailers. In particular, we think the more middle-range upscale grocers like Safeway (Lifestyle format), Kroger (its upscale format), SuperValu (its more upscale banners) and a few others are likely to experience some significant sales downturns beginning in the second quarter of this year.

Our analysis also is that smaller, regional upscale food and grocery retailers (the single and multi-store independent and the smaller, privately-held regional chains) are at serious danger do to the current economic conditions in the U.S. One of the primary dangers to these grocers financial markets' credit crunch.

These independents and regional chains generally don't have a corporate cash-flow to tie them over like the upscale banners of larger supermarket chains do. (for example, gourmet grocer Bristol Farms is owned by SuperValu.) As a result, if sales drop significantly and the grocers need temporary operation funds, the difficulty of obtaining a credit line, or the interest rate cost of doing so, could put them in serious financial and operation straights.

The good news for these independent and regional upscale grocers is that they've been there before, and have survived previous recessions. Those retailers that have survived severe economic downturns in the U.S. have done so because they are in touch with their customers and communities. They also haven't been afraid to innovate and change--including lowering prices temporarily if needed--until better economic times arrive. It's all about increasing value during the down times.

Those upscale retailers at the very top-end and those with a solid niche, will fair much better, we believe. For example, our analysis is that Whole Foods Market should only feel partial effects from the recessionary economy, as it's niche is strong enough we believe to avoid serious sales losses. However, we predict the supernatural grocer will have to get more aggressive on its pricing in order to keep its same-store sales from eroding throughout the rest of this year.

There currently are signs that shoppers are beginning to trade down and search out bargains as their wallets and purses (and available credit) grow emptier because of soaring gasoline costs, the credit crunch, escalating food costs and other negative economic factors. Even worse, their confidence in the economy is very low.

Discount warehouse food store chains like Costco Wholesale, BJ's Wholesale Club and Wal-Mart's Sam's Club, have all recently posted strong same-store sales gains in the last couple months. Further, Wal-Mart just reported solid sales overall and at its Supercenters, which sell food and grocery products at a discount. In fact, Wall Street investment houses last week gave strong buy recommendations for Wal-Mart stock, primarily on the strength of its increased food and grocery sales.

Costco, BJ's, and to a lessor extinct Sam's Club, sell extensive selections of specialty, gourmet and natural-organic foods at prices generally lower than upscale supermarkets. With shoppers visiting these club format stores more frequently because of the bad economic times, many likely will make many of their upscale-oriented purchases while in the club stores, which is going to hurt the upscale grocers sales and margins, especially because these are higher-margin categories.

Dollar Stores like Dollar Tree, Family Dollar, Dollar General and others also are thriving in the current economy, as consumers--including upper middle-class shoppers--search out bargains. These stores carry fairly large grocery product selections, most for a dollar each as advertised

Another sign consumers are searching out lower priced food and grocery stores is the fact that salvage grocers, those grocery retailers who buy overstock, discontinued and slightly blemished products, are reporting increased sales, and saying they're doing dramatically more business than they've done in the last 10 years or so. The salvage grocers also are saying they're seeing lots of new faces (shoppers) in their stores.

Upscale food and grocery retailers that sell basic grocery items as well as more upscale offerings like prepared foods, specialty and gourmet foods, natural and organic products, and other higher-end goods, will need to get more competitive on their everyday pricing strategies in order to stave off the combination of a poor economy and cash and credit-strapped consumers.

People have to eat, and not all consumers are in a position to buy in bulk at stores like Costco, Sam's Club or BJ's Wholesale Club. They either don't need the quantities the stores sell, can't afford to spend a considerable sum of money on any one shopping trip, or just don't like shopping the huge, big box stores. Many of these consumers also would prefer to shop at a more upscale supermarket than visit a combination of stores--a salvage grocery for their hot buys, a warehouse club for loading up, and the upscale supermarket for the specialty, organic and prepared foods items.

However, that's what many consumers are starting to do. It's the economy, stupid, as that old political saying goes. We think upscale retailers can retain many of these shoppers by tightening up operations, buying better, lowering margins a bit for the rest of the year, and offering far better in-store and newspaper promotions than most currently do. The key is to not become a tertiary retail venue for shoppers, who only come shop the upscale store after they've been to a warehouse club and discount store like Wal-Mart.

Many upscale supermarkets have been spoiled by the good economy, allowing the stores to serve primarily as primary grocery shopping venues, and to a lessor degree as secondary stores. The current state of the U.S. economy is changing that. However, upscale grocers can weather this economic storm, even is they see a significant shift in some shoppers from primary to secondary, if they focus on providing value in both basic grocery items and in more upscale offerings like specialty, natural and organic, and prepared foods.

Our analysis suggest there will be some shakeout in the upscale grocery retailing sector. Some upscale grocers will put off building new stores they already have on the planning docket. Others will even close some stores. A few--those who fail to adapt and provide better value during the economic downturn or recession--might even fail completely.

Failing completely, and even closing stores, doesn't have to be an option though. The key is to add value. Buy better, promote more, take a little margin hit, and get ready for a better day--and better economy, which will come, perhaps as early as mid 2009.

Food & Economy Memo: Warren Buffett, 'The Oracle of Omaha,' Says U.S. Economy Essentially is in a Recession

Legendary billionaire investor and major food and grocery industry company owner and stockholder Warren Buffett says that the U.S. economy is basically in a recession even if it hasn't met the technical definition of one.

Buffett, Chairman and CEO of Omaha, Nebraska-based holding company Berkshire-Hathaway Inc., said in an interview last week on the cable business network CNBC the reports he gets from the retail businesses his holding company owns show a dramatic slow-down in consumer purchases.

The legendary stock-picker, and world's second-richest human according to Forbes magazine, said in the CNBC interview millions of people also have lost equity in their homes because home prices have dropped so significantly.

"I would say, by any common-sense definition, we are in a recession," Buffett, who is often referred to as the "Oracle of Omaha," said on CNBC. However, he added it's not clear how far the recession will go because that is near-impossible to predict.

Buffett's Berkshire-Hathaway holding company owns some 50 company's, ranging from Gieco Auto Insurance, home of the famous "Caveman" television commercials, and the Acme Brick Company, a seller of bricks for residential construction, to Netjets, the world's largest provider of fractional private jet time, and Fruit of the Loom, maker of men's and woman's underwear.

Additionally, the holding company owns a number of companies in the food and grocery industries. These include: confection company See's Candies, convenience store grocery wholesaler and logistics provider McLane Company, The Pampered Chef, a retail chain of upscale kitchen equipment and gourmet products, and International Dairy Queen, the fast-food restaurant chain. [View a complete list of Berkshire-Hathaway-owned companies here.

Through his holding company, Buffett also is one of the largest shareholders of Atlanta, Georgia -based beverage industry giant Coca-Cola. Coke was one of the first companies the "Oracle of Omaha" invested in when he started Berkshire-Hathaway. He also is the single-largest individual shareholder in Kraft Foods, and owns sizeable portions of consumer packaged goods giant Proctor & Gamble and beer maker Anheuser-Bush, marketer of Budweiser brand beer.

Buffett's Berkshire Hathaway also is one of the single-largest shareholder in United Kingdom-based grocery and general merchandise retailer Tesco plc. His holding company owns about $1.3 billion worth of Tesco shares, which works out to around a 4% ownership stake in the company. The legendary investor also owns a sizeable chunk of Wal-Mart, Inc. stock. Wal-Mart is the world's largest retailer; Tesco plc. is the third-largest in the world.

Buffett is a "buy-and-hold" investor rather than a trader. He has said he sees strong long-term value (and eventual solid profits) in Tesco plc. In fact, he increased his investment stake in the British retailer late last year, shortly before the company opened its first Fresh & Easy Neighborhood Market grocery stores in the Western United States.

What about the "Oracle of Omaha's" track record? Well, keep in mind that the U.S. stock market on average has grown historically by about 10% per year. Meanwhile, Buffett's Berkshire Hathaway has grown on average by more than 21% annually since 1965. Today, the holding company is worth more than $200 billion. Ten thousand dollars invested with Buffett in 1965 has grown to be worth more than $36 million today. The "Oracle of Omaha" is personally worth about $45 billion, the majority of which he is giving to the Bill and Melinda Gates Fountation to be used for charitable causes.

Although the legendary investor is calling a recession in the U.S., technically there isn't one at present. The technical definition of a recession most economists' use is two consecutive quarters of negative growth in the nation's gross domestic product.

Last Thursday, the U.S. Commerce Department reported that the gross domestic product increased at a low 0.6% pace in the quarter that ended December 31, 2007. In the previous quarter--July - September, 2007--the U.S. economy grew at a strong 4.9%.

About half of the economists in the U.S. believe the first quarter 2008 growth in the U.S. economy will either be about what it was in the fourth quarter of 2007, or will actually be negative. These economists argue either the U.S. is already in a recession, or heading for one soon.

The other roughly 50% of U.S. economists say they are either unsure, or that its possible the U.S. can avoid a recession completely, especially since Congress passed an economic stimulus package, which starting in May will result in checks ranging from $600 -to- $1,200 being sent to every American who files a 2008 tax return. (This 50-50 split reminds us of the "on the one hand, but on the other hand, joke about professional economists.)

Despite saying the U.S. is already in a recession, the plain-talking Buffett added he believes the U.S. economy will be just fine in the long run. "Over time, my children are going to live better than I do, although they don't believe it," Buffett said on CNBC.

In addition to the dramatic decline in the gross domestic product in the last quarter of 2007, unemployment is increasing in the U.S. This includes the states of California, Arizona and Nevada, where Tesco's new USA venture Fresh & Easy Neighborhood Market has its small-format grocery stores. In California, the unemployment rate has increased by two full percentage-points since late last year.

Energy costs, especially gasoline, also have gone up significantly in the U.S. in the last year. The per-barrel price of oil is now well-over $100. The average cost of a gallon of gas at the pump is currently about $3.20 per-gallon in the U.S. and about $3.45 per-gallon in California.

Food inflation also is hitting the U.S. economy hard. On average, grocery prices at retail are up nearly 10% in the last year, with prices on commodity items like milk and eggs up nearly 20% from early 2007. For example, Steve Burd, CEO of California-based Safeway Stores, Inc. said two weeks ago in a conference call with supermarket analysts that food and grocery price inflation is currently the highest he has ever seen in his 15 years as CEO of the grocery chain.

Buffett tends to call things as he sees them, rather than waiting for the "official" word on economic issues like recession. His view is similar to that of the American consumer, who is feeling the pinch from rising energy costs, higher food prices, the financial market's credit crisis and rising unemployment.

Like Buffett, consumers aren't all that interested in waiting to find out if the U.S. economy is really in a recession. Rather, they are feeling the effects of the serious economic downturn--as are the nation's retailers--in their pocketbooks.