September, 2012

Research Perspective and Comments & Analysis

Macro Trends Drive Produce Consumer Loyalty In The Face Of Rising Prices

By Kelli Beckel, Senior Marketing Manager, Nielsen Perishables Group

Price inflation is back in a big way, and this summer’s drought is setting the stage for further commodity costs. While the produce department has posted smaller price increases than some other fresh departments, its 3.4 percent increase during the 52 weeks ending June 30, 2012, is still significant. Although prices increased, the department also received less promotional support. The percentage of produce volume sold while on promotion declined 2.3 percentage points, and the average promotional price increased 5.9 percent. Each item in the Top 10 categories in the produce department showed declines in promotional volume, and all except bananas declined in promotional lift. Fortunately, shoppers remained loyal to fresh produce, as volume sales remained steady (+0.4 percent).

While pricing is one consideration shaping the way consumers shop the department, macro trends are also playing a role in fruit and vegetable purchase decisions. The continued growth of private label products, greater preference for global products and shifts in everyday eating occasions are helping the produce department maintain sales in the face of rising prices. These growth drivers can be leveraged to draw in consumers even if prices continue their upward trend in the coming year.

The consumer preference for private label has remained strong this year, as lower price points remain attractive to consumers faced with economic constraints, and a rising emphasis on quality makes private label options preferable on multiple levels. Some private labels are even positioning an increasing number of items as “gourmet” or “specialty,” which has helped increase private label average retail prices. In the produce department, the average retail price of private label products increased nearly 2.8 percent, but this is still a smaller increase than the department’s price increase average across all products. Additionally, the average price of private label produce was 21 percent lower than the average price of branded products during the latest 52 weeks, a significant price differential for shoppers who are facing higher prices across the store.

Just as the availability of private label products is growing, so too is the availability and popularity of fruits and vegetables with global flavor profiles. Flavor preferences continue to evolve as more Americans seek out new cuisines and bold ethnic flavors. According to Nielsen’s State of the Hispanic Consumer: The Hispanic Market Imperative, Latinos will wield $1.5 trillion in buying power in 2015, or 50 percent growth over 2010’s $1 trillion. Their growing spending power is clear in the produce department, where items with Hispanic roots are increasing by double digits. Jicama and cactus leaves experienced dollar growth of 10.5 percent and 30.5 percent, respectively, while passion fruit increased sales 34.8 percent in the latest 52 weeks. 

Some global products are even becoming mainstream, thanks in part to greater year-round availability and more attention in the foodservice sector. Avocados are the best example of this mainstreaming of global fare. Avocadoes now rank 17th in dollar sales among all produce categories, and they posted double-digit dollar (+10.3 percent) and volume (+13.3 percent) growth in the past year. Avocados are also benefiting from promotional activity, as the promotional volume and lift both increased — a trend only experienced by two other categories in the department.

It is evident that Americans are shifting their flavor preferences, but many are also shifting the time of day and quantity they’re eating. New eating occasions are forming around snacking and a renewed focus on breakfast. These trends are most evident in the deli department, but they reveal opportunities on which the fresh produce can capitalize. In the in-store deli, sales of prepared foods are growing in part because retailers are offering fresh quality product and the convenience factor associated with foodservice. Deli/prepared items such as deli snacks, sushi and pizza each increased by double digits in the past year. Deli breakfast foods — items such as breakfast sandwiches, breakfast meals/combos and quiche — grew sales by an impressive 24.2 percent. 

While the produce department boasts the freshness factor that is helping to fuel deli prepared food’s success, creative merchandising and promotions may spur consumers to grab fruits and vegetables as part of their snacking and breakfast items. The department already offers a growing number of options for healthy fruit and vegetable snacks, but merchandising them in a central location can encourage shoppers to stock up or try new healthy snacking items. To generate thoughts of breakfast, cross-merchandising fresh fruits with cereals or fresh baked breakfast items can build incremental purchases.

 

Opportunity To Concentrate On Increased Sales

The impact of price inflation on retail produce sales probably has a lot to do with relative price inflation across different departments. A 3.4 percent increase in produce prices may depress produce sales, but if meat prices increase at a quicker rate, produce can become relatively less expensive, even while more expensive in an absolute sense.  

The effect of a drought on meat prices is often counter-intuitive — at least in the short term. The drought causes high grain prices, which leads cattle ranchers to liquidate their herds. This can mean more supply of beef in the short term, so higher grain prices can cause meat prices to fall. However, long term, fewer cattle generally translate into higher prices. Now that summer is over and many ranchers are running out of grass, many herds are still bound to be liquidated, but the Bureau of Labor Statistics announced that the average price of ground beef hit a record high in July at $3.085 per lb. It is a good bet it will go higher still. So produce may yet be a bargain.

It is, of course, true that macro trends influence demand, but it is hard to know what to make of the boom in private label in terms of a driver of produce consumption. Although “the average price of private label produce” may well be “21 percent lower than the average price of branded products,” it seems unlikely that this is an apples-to-apples comparison. In many cases, private label programs do not encompass as extensive a line as branded items, so the numbers can easily be distorted by comparing the more basic private label assortment with a branded assortment including more specialty variants of, say, a bagged salad line. 

Anecdotally, although it is true that there are many upscale private label items, we sometimes shy away from products because they are only available in private label format. At our local Publix, for example, other than Ready Pac Cool Cuts carrots and dip geared for schoolchildren, all the carrots are typically private label. It is not a beautiful upscale label — just a plain white label on clear plastic; we would buy more and pay more for a branded alternative or even a more upscale private label.

Carrying the products that consumers want is a sure-fire way to boost sales, and so the internationalization of the produce trade, which keeps items such as avocados on the shelf, is certain to provide a leap to sales. Also having products that appeal to the changing ethnic composition of America and to new cooking and taste trends is, of course, a wise idea. Yet, even such obviously good things pose risks. The big risk is improper or inadequate promotion. In the old days, seasons themselves provided natural merchandising and marketing opportunities: “Melons are Back” — now if they never really left, we have to consciously work to promote the product.

Staying in sync with consumer preferences for meal and snack times and venues is key. Yet we are hesitant to make too much of the boom in deli and prepared-food sales. Although some of this may represent a change in consumer habits, a lot of it seems to represent a change in retail perspectives, with many retailers focusing on broader deli operations, including prepared foods, breakfast programs, etc., as a way to compensate for shrinking grocery sales in the face of supercenters, club stores, deep discounters, etc.

Perhaps the real lesson here is that the day when delis were small scale and could buy (or steal) the occasional green pepper they needed from the produce department is long gone. Now many delis have substantial cooking operations, at store level or via commissary or prepared food supplier. As such, delis now represent a third market — not quite retail, not quite foodservice — and so there is an opportunity for those looking to ride the retail trend to focus on this market.

Here are four big opportunities for boosting sales:

First, have product that consumers want to buy — that includes the imports and assortment, but it also includes having bananas at various stages of ripeness to appeal to different consumers.

Second, suggest usage opportunities. It is fine to remind folks of old stand-bys, say bananas or peaches or berries with cereal, but it is also important to suggest new usage ideas. We wrote elsewhere about making Banana S’Mores — by slicing a banana with the peel still on, putting in marshmallows, chocolate and crumbled Graham crackers, putting the whole thing in aluminum foil and throwing it in the fire. It is easy to sell an extra hand of bananas every day to some families during the summer as they go out every night to the fire pit.

Third, get produce out of the produce department with extra displays at key points throughout the store.

Fourth, tie into big trends and big ideas — it may be local, it may be greenhouse grown, it may be organic.

Rising prices tend to make all produce directors look good. The great ones are already thinking about their comparables when prices start to fall.