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RETAIL VIEW: 'Trading down': a strategy for difficult times

Even in poor economic conditions, people have to eat. But in our society, they have a great bit of discretion concerning how they spend their food dollars, and there is some evidence that supermarkets are benefiting during these difficult times.

The Food Marketing Institute has determined that Americans are spending 5 percent more than they did a year ago, and Kellogg's, General Mills and Kraft each registered double-digit sales increases in the second quarter of this year. Many are suggesting that these sales increases are coming at the expense of restaurants, as many chains are reporting a decline in volume of 5-15 percent from a year ago. Others noted that the increased grocery sales are blaming higher prices rather than crediting increased volume.

In any event, there is no denying that the economic news is bad and people are scared. Polls that track these issues have revealed that the typical American's perception of the economy is worse than it has been in decades.

So how does this affect grocery stores in general and produce sales specifically? There appears to be no consensus answer. Interviews with more than a half-dozen retailers and produce salespeople revealed that the economy is playing a major role, but defining that role is very difficult.

"I think we are in the right business," said Mayda Sotomayor, chief executive officer of Seald-Sweet International in Vero Beach, CA. "People do have to eat. I am glad I am not in a technology business that sells high-priced items."

And she added that within the food sector, there probably is no better item to sell in difficult economic times than produce. "The products we sell are very nutritious; they are not high-end luxury items but staple items that consumers are going to continue to buy. I'd hate to be selling boxes of high- end candy."

Indeed, a vice president of produce for a good-sized West Coast chain said that the produce section is probably the department least affected by the downturn in the economy. While company policy would not allow him to be quoted, the anonymity gave him the opportunity to be candid. "We have seen an increase in sales in items such as bananas and 10-pound russets. Those are two items that were either stagnant or declining in recent years, and we have seen increases in the last few months. We have also seen more action on our ad items as the consumer tries to stretch their dollar. But overall sales haven't changed much."

He said that the stocking up on value-priced ad items does not plague the produce department as much as it does the meat and grocery departments during these times. This executive explained that when the meat department puts a steak on ad, shoppers stock up because they can put those steaks in the freezer and eat them over the next several weeks. They can do the same with good buys from the grocery aisle. "They can't really do that with produce because of its perishability, so our sales don't change that much."

This longtime member of the West Coast retail scene said that he believes there is also some "trading down" from one retailer to the next. He believes the club and super value supermarkets are probably very happy with their current sales, "while the rest of us are just satisfied."

As a mid-level, full-service supermarket, he suspects that he is getting some additional business from customers trading down from high-end grocers, while he is also losing some to discount outlets, with each shift offsetting the other.

Domenic D'Antuono, vice president of produce sales for Stop & Shop Supermarket Co. in Boston, believes that some customers in his marketing area are also "trading down." But he said that there has been no overall negative effect for his chain. "We are probably losing some to the discounters and gaining some from the higher-end stores -- but our overall sales are right where they should be," he said.

Mr. D'Antuono said that the shift in what people buy within the department has not changed much, although a few of the high-end items are lagging in sales. "We've seen a decline in sales at our melon bar, which is higher priced, but we haven't seen any drop off in sales of organic produce, which is also higher priced."

In fact, as he was being interviewed, the Stop & Shop produce executive said that there were many high-priced produce items in his stores because of the traditional change in seasons that occurs in September. Apples, for example, were very high priced but they were still selling well.

While he is happy with the current situation, he does not expect it to last if the economy continues to falter. "I think we might see a big impact around the first of the year, after the holidays, if the economy doesn't get better. In the long term, we will probably see a reduction in sales."

Mr. D'Antuono said that the company has seen a drop in sales near the end of the month when assistance checks typically run out, with a corresponding increase in sales during the first few days of every month. This indicates that those assistance checks are not lasting until the end of the month.

Mark Maxwell, who handles produce buying for a half-dozen of H.G. Hill Stores while also operating as store manager for the Tennessee company's newest store in downtown Nashville, said that the economy has had very little effect on produce sales. "Produce is different than meat. If you are going to buy a steak, you think of it as a luxury item in the first place and you buy it to reward yourself. That isn't what people think about when they are buying produce. Most produce is bought as an ingredient. If you buy onions or celery or anything else, I don't think you are going to cut back because of the economy."

He said that the weather has a great effect, with cooking vegetables now becoming more popular as the summer heat fades.

But he did say that his customers do "seem to be shopping our ads a little closer. We are still a store where the customer often comes in with the newspaper ad in hand. They may be doing that a little bit more."

But he also said that his higher-priced items, such as sliced apples, are selling very well with no perceptible shift to lower-priced whole apples. He has seen no change in sale patterns with regard to shifting from packaged salads to whole vegetable commodities such as head or Romaine lettuce.

Mr. Maxwell also noted the shift in buying power as the month wears on and food stamp vouchers are depleted. He explained that food stamp credit cards are typically filled during the first 15 days of the month. "In fact, the Tennessee Grocers Association is trying to get that changed so that they are filled all month long and grocery sales don't fluctuate based on that."

Rob McDougall, vice president of produce for the upscale Gelson's chain in Southern California, said that one might not expect his customers to be affected by the downturn in the economy. But he has noticed some shifts in buying habits. "I have seen a little bit of trading down, specifically with bananas. On a per-pound basis, bananas are the cheapest fruit item in the produce department and our tonnage has gone up. That shows you that even customers that are less economically challenged do trade down."

At the wholesale level, Alan Siger, president of Consumers Produce Co. Inc. in Pittsburgh, said that he has not seen an effect on his company's sales because of the economy. Anecdotally, he has heard that restaurant sales in his marketing area are down, but his sales do not reflect that. He said it is difficult to determine the causes of particular spikes or declines in any specific item. For example, Mr. Siger said that sales of packaged salad items have never returned to the level prior to the spinach crisis in 2006. It is difficult to know if the economy has had an effect on that or if the public has just been slow to return because of food-safety concerns.

And he said that one might expect apple sales to begin to dip because wholesales prices were hovering around $40 in late September. Again, is it the economy or the inordinately high price of apples that might cause that decline -- if one occurs?

Matt Seeley, vice president of marketing for The Nunes Co. in Salinas, CA, said that the discussion of the economy and its effect on the produce industry is "more anecdotal than it is quantitative."

He explained that the commodity market on many vegetable items was very good in late summer, with shippers believing that the poor economy had increased demand for the value-priced whole product over the higher-priced packaged items. But there is little empirical evidence to back that up.

Anecdotal or not, as the financial markets sunk and the American economy teetered on the brink of collapse, a host of produce items were selling at near record-level prices and many others had very strong markets.