Industry net profits decreased to 1.43 percent, from 1.82 percent, as companies competed more intensely for fewer consumer dollars in a recessionary economy. Contributing to this decline were increases in the cost of goods, health insurance and credit card interchange fees, among other expenses.Independent retailers (companies with 1-10 stores) posted the highest net profits and identical-store sales increases at 1.90 percent and 5.11 percent, respectively.
“The industry showed its resilience in the most challenging economy in modern history. Retailers aggressively discounted products and increased their lines of private brands to help American families lower their grocery bills. At the same time, they continued to control costs by improving efficiency and productivity, a hallmark of this industry,” said FMI President and Chief Executive Officer Leslie G. Sarasin.
Concern Increasing Over Strategic Issues, Led by the Economy
Looking at the future, retailers reported increasing concern over the impact of numerous issues — especially the economy, which is having a pervasive impact on the industry. The impact of issues, measured on a 1-to-10 scale with 10 being the highest, increased for nearly every issue, comparing the rating in 2008 with the expected impact in 2009-2010. For the first time in the six years FMI has tracked concern levels, retailers rated the impact of two — competition and the economy — at 8.0 or more. In fact, the economy received the highest rating by a large margin at 8.7 — registering a major jump from the 5.9 rating as recently as 2007 — and six issues had a future impact rating of 7.0 or higher:
| Impact on a 1-10 Scale With 10 Being the Highest | 2007 | 2008 | Expected in 2009-2010 |
| Local and National Economy | 5.9 | 7.8 | 8.7 |
| Competition From Other Retailers | 7.3 | 7.4 | 8.0 |
| Healthcare Costs | 7.4 | 7.2 | 7.6 |
| Credit/Debit Card Interchange Costs | 7.0 | 7.1 | 7.4 |
| Food Safety | 6.7 | 6.8 | 7.1 |
| Local, State, Federal Gov. Regulations | 5.3 | 5.9 | 7.1 |
Food Retailers Increase Emphasis on Low Prices, Private Brand Growth Surges
Supermarkets are responding strongly to consumer demand for lower-cost foods in three ways. First, the research found a significant increase in companies emphasizing low prices as a competitive strategy — from 69.9 percent in 2008 to 78.4 percent this year. They now rate the success of this strategy at 7.3, up from 6.9, on 1-to-10 scale.
- Second, retailers are featuring private brands more prominently, demonstrated by a series of figures:
Private brand products now comprise 9.7 percent of the items carried in a typical store — up from 8.1 percent in 2008 and 7.5 percent in 2007. - More than nine in 10 retailers (93.3 percent) plan to increase the number of these products in the coming year.
- They account for 15.0 percent of supermarket sales — up from 14.0 percent in 2008 and 11.5 percent in 2007.
- Private brand sales increased 10.8 percent in the most recent fiscal year — more than twice the industry’s overall growth rate and well above the 2.5 growth rate for manufacturer brands.
- Nine in 10 retailers are promoting private brands as a core competitive strategy and report a success rate of 7.1.
(FMI is holding a Private Brands Summit June 14-16 in New York to provide industry leaders a forum to explore the growth opportunities for these products.)
Third, half of supermarkets (50.7 percent) offer savings through frequent shopper or loyalty card programs, and rate their success at 7.3, up sharply from 6.4.
Retailers Realign Assortment to Meet Changing Customer Demands
Food retailers made significant adjustments to their product mix in 2008 in an effort to keep pace with changing customer demands in a recessionary economy. In fact, 69 percent of consumers say the recession is affecting their grocery shopping, according to FMI’s 2009 U.S. Grocery Shopper Trends report.
The typical company added 2,000 new products to store shelves and removed the same number. One-quarter of food retailers added and removed at least twice as many items, changing the mix of more than 20 percent of the products in their stores.
These efforts were reflected in improvements in key productivity and efficiency measures as product assortment was better aligned with consumer needs. For example:
- Inventory turns for the total store increased to 16.43, up from 15.60 in 2007 and 13.50 in 2006.
- Sales per hour increased to $145.51, from $138.90 and $133.31.
- Sales per square foot rose to $8.32, from $8.01 percent and $7.32.
Focus on Perishables, Health and Wellness
Supermarkets continue to pursue strategies other than discounting prices. Nearly all (97.3 percent) emphasize perishables to gain a competitive advantage and give it the highest success rating at 8.1, although this figure is down from 8.4 in 2008.
In addition, 68.4 percent are focusing on consumer wellness and family health as a competitive strategy, rating its effectiveness at 5.6. These figures decreased from 84.9 percent and 6.5, respectively.
Ad Spending Stable, More Focused
The recession did not lead to a decrease in advertising as spending remained at a median of 1.00 percent of sales. Retailers continued efforts to spend their ad dollars more effectively, relying less on the mass media and more on targeted campaigns. In fact, newspaper advertising fell below half of ad spending to 48.6 percent, from 52.2 percent the previous year. Radio and television advertising also declined.
Supermarkets increased direct-mail campaigns, including mailbox-delivered circulars, to 18.9 percent of ad sales, from 16.7 percent the previous year. Companies are targeting delivery to specific zip codes to allocate ad dollars to high-potential customers.
Retailers are devoting more ad dollars to community donations, which increased to 5.8 percent of their advertising budgets, up from 3.9 percent.
Methodology and Purchasing Information
The data for this report are based on surveys of 87 companies operating 13,641 stores, filings with the Securities and Exchange Commission and information from the U.S. Bureau of Labor Statistics and Census Bureau. The analysis is also based on other FMI research, including 2009 U.S. Grocery Shopper Trends, Facts About Store Development 2008 and the 2007-2008 Annual Financial Review.
To purchase the 2009 Food Retailing Speaks: The Annual State of the Industry Review ($95 for FMI Retailer/Wholesaler Members, $175 for FMI Associate Members and $250 for nonmembers), contact the FMI Store by calling 202-220-0723 or visiting www.fmi.org/store/.
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