August/September, 2009

From the Editor

Selling Cheap Just Won't Work

The role of the deli/retail foodservice operation during a time of recession is unclear. Many retailers have jumped on the “value” bandwagon, but the results are mixed and how much value consumers want — and in what fashion they want it — is an open question.

Royal Ahold’s Stop & Shop and Giant chains stole a jump on the value emphasis back in 2006 when they launched their Value Improvement Program. Basically focused on rationalizing assortment by reducing SKU count, the idea was to reduce handling costs, gain velocity on fewer items thus reducing inventory costs, and providing fresher product to consumers. Finally, because the expectation was for more rapid movement of fewer products, the program would increase Royal Ahold’s leverage to negotiate price discounts with suppliers. In the current environment, this approach has been very successful, and sales have actually increased with same-store sales rising 1.7 percent at Stop & Shop and 3.7 percent for Giant-Landover.

Supervalu, still struggling with the investment needs of many of the stores it acquired in the Albertsons acquisitions and burdened with some heavy debt payments, tried to tap-dance around the issue of value. It lowered prices on a limited assortment of items in the hope of wooing consumers to its full-price lines. The plan was a bust, with identical store sales for the quarter ended June 20 down 3.2 percent from last year. This comes after a 2 percent decline for the quarter ended February 28. Don’t think this refusal to slash prices preserved profits — for the quarter ending June 20, earnings fell by 30 percent.

Safeway, hoping that its Lifestyle stores — focused on freshness and upscale décor — would attract spending, was disappointed. It found sales dropped in the most recent quarter with same-store sales down by 2.2 percent.

The mighty Kroger Co., relying heavily on a sophisticated use of loyalty-card data dictated by a Dunnhumby analysis, was able to boost same-store sales by 3.1 percent in the first quarter. Although CEO David Dillon acknowledged reducing prices, he claimed it was part of a multi-year strategic approach to win over valuable customers, not a panicky move to boost sales that most likely would catch just cherry-pickers.

What role can the deli/retail foodservice operation, typically a high-margin department, play in this value-seeking world?

Each chain, indeed each store, is different. Even the chain reports mentioned above are not directly comparable as these chains operate in different areas and have different formats and customer bases.

One thing is clear though: The response of many deli operations to assume that all the customers are impoverished and to promote the cheapest boiled ham is not typically a strategy likely to succeed.

Many consumers who “trade down” from restaurants to retail are generally upscale. Even if they have temporarily lost a job, they are conditioned by years of living and eating a certain way to look for a certain type of experience. A paper plate taped to the deli case and offering a cheap cold cut isn’t likely to appeal; it certainly is not likely to win a long-term customer.

One place to look for clues as to how to adjust to the recession is foodservice operators. Many are finding customer counts are holding up reasonably well, but it is the size of the check that is dropping.

  • Menus are being rearranged to offer “small plates” and make clear that appetizers can be used as entrées.
  • Menu planners are looking to reduce the use of expensive proteins and use more fruits, vegetables and starches in their dishes, thus allowing for lower price points.
  • More prix fixe offerings make it clear to consumers that they can get a complete meal within a budget.
  • Sampler platters, because they feature a lot of different foods, seem, to most consumers, to be more than they are.
  • New offerings, other than just a traditional meal, are being suggested: Just a fruit and cheese assortment, for example, or just appetizers, or just soup and bread or just dessert.

Few retail deli operations are showing the kind of explosion of creativity that these foodservice operators are exhibiting — but that’s the exact kind of creativity that will be necessary to satisfy consumers in a new economic environment.

In an age of margin compression, deli/retail foodservice operations are rare in having the ability to satisfy consumers in ways other than price. That is crucial both because it means that a creative approach can woo customers to the store and because when others are deep-discounting to attract the increasing numbers of consumers who buy almost everything on sale, there is still a department that can make a little money.

In times such as these, that is a valuable department indeed.  DB