February, 2009

Research Perspective and Comments & Analysis

Opportunity For Produce In Food Cost Hikes

The fresh produce department occupies the most valuable position in supermarkets. I choose these words carefully because this position is more than just the real estate. It’s a position combining profitability, image-setting for the whole store, nutritional appeal, a plethora of appealing cultural flavors in our melting pot society and the frequency of shopper visits, as produce is both fresh and perishable. As the produce department goes, so goes the store.

Profit margins aside, the department’s stocking of hundreds of unique produce items provides diversity to satisfy wide-ranging consumer tastes and preferences. Such diversity captures both sales of staple fruits and vegetables and lower-volume specialty items, adding to the department’s profit potential. Its potential is also seen as a bright spot for retailers and the entire produce industry amid the dreariness of today’s rising food costs storewide. Remember too that supermarkets have been the beneficiaries of greater customer traffic as people eat out less and eat at home more.

Consumer research conducted for Produce Marketing Association (PMA) by Opinion Dynamics Corporation in September, 2008 indicates that despite a clear perception that fresh produce prices are on the rise, most consumers are reluctant to cut back on their fresh fruit and vegetable purchases. In fact, among the 500 consumers questioned in this national telephone survey, a full 70 percent of the sample either maintained their fresh produce spending during the three months prior to September or actually bought more fresh produce. Consumers seem to recognize the value of produce in managing food costs by downsizing or eliminating higher priced proteins in favor of retooling household menus with more innovative uses of the wide variety produce offers.

Consider that an overwhelming 88 percent of consumers surveyed say per-pound prices for fresh fruits and vegetables rose in June, July and August 2008. Yet in this same period, 26 percent of them say they have purchased more fresh fruits and vegetables. In addition, 56 percent of the consumers reported not making trade-offs about what to buy or not buy in the produce department as a result of price increases. PMA members will find additional insight in the full research report, which is available through PMA’s Solutions Center.

Furthermore, consider the recommendation of the Dietary Guidelines for Americans, which states that fruits and vegetables, along with grains, are the only food groups that people should be eating more of, not less. These guidelines, combined with the economic and nutritional value fruits and vegetables offer, present an ideal opportunity to increase produce’s share of the plate. Imagine shrinking waistlines and reduced obesity resulting from improved health as Americans eat more fruits and veggies to control their food costs. Think of how this should bring new meaning to “tightening one’s belt” during a recession.

Americans enjoy the lowest percentage of disposable income spent on all food, and we’re now seeing that cheap and plentiful eventually has a higher price long-term. The reality of increased food costs indicates that cheap is not sustainable, whether for our farmers, for our environment, or for consumers.

Yet, at the same time, within the competitive marketplace of all foods, what we offer in fresh produce is so superior that we should be promoting that advantage in marketing our products. Because the fresh fruit and vegetable industry already enjoys a high level of product diversity, consumer loyalty, health community support and product affordability unmatched by any other food category, our industry’s opportunity during economic market disruptions could be as bright as the sun that nourishes our crops. Strategically, we must ramp-up our communication of all the benefits of fresh produce, which have led to our shopping-cart staying power during these difficult times.

To ensure you are attuned to our changing economy and the message points that resonate most with customers, I encourage you to attend this year’s PMA Produce Solutions Conference, to be held in Nashville, TN, in March. Attendees will learn much more about the impact that economic market disruptions are having on the produce supply chain, and how to turn these obstacles into opportunities. After all, many great innovations and opportunities are sparked by the greatest disruptions.

We all must be on the lookout for opportunities everywhere and anywhere, including making sure we have an up-to-date understanding of our consumers’ perceptions. Most fresh fruits and vegetables appear to be among the last things consumers are willing to sacrifice from their grocery lists. This is a unique opportunity that could maintain — and perhaps even boost — produce department sales, and in the process lead to healthier Americans. Consider it a win-win situation.

Will Consumers Revalue Produce?

One of the reasons we write this column each month is to discuss the uses and abuses of research. Bryan’s column gives us an excellent chance to do that as it brings to mind nothing so much as the haunting voice of Dinah Washington exclaiming, “What a Diff’rence a Day Makes.”

The PMA research is quite recent and under normal circumstances would be quite useful, but these are not normal circumstances. Lehman Brothers collapsed on September 15, 2008. The psychological blow of seeing this iconic name disappear and the real loss of stock market value that followed in the wake of its closure makes any consumer sentiment gathered before that date highly suspect.

The economy is battled on two fronts. First with a recession, there is rising unemployment and thus less spending. Second, and probably more important in its macro effect, because real estate is down and most people own homes with a mortgage, their equity in their homes is way down. In other words, a person who owned a $500,000 house with a $300,000 mortgage had $200,000 in equity. If value of the house drops 20 percent in price, to $400,000, the homeowners’ equity drops 50 percent to $100,000. Add in serious drops in the value of 401-K plans and we have consumers determined to rebuild their savings.

Now everything Bryan mentions is correct. Some people spend such a small portion of income on fresh produce that consumption, for these people at least, is unlikely to be affected by the economy. It is also quite true that fresh produce is cheaper than most proteins so, certainly, some people will “trade down” to fresh produce and save money.

The problem is not that any of this is wrong; it is just incomplete. Yes, produce is cheaper than protein but it is significantly more expensive that cheap starches such as macaroni or rice. There is a reason why restaurants often serve a big hunk of meat — that is how consumers judge value — and a big mass of mashed potatoes — that fills the plate cheaply — and then add a couple spears of asparagus and a cherry tomato for color.

So, logically, although some will trade down to fresh produce from protein, others will trade down from fresh produce to starches, and we have no real data to judge the interplay of these forces.

Besides, people don’t have to go from fresh produce to pasta; they could stop at canned and frozen produce along the way. After all, those Dietary Guidelines for Americans recommend canned and frozen just as adamantly as fresh. Not only are canned and frozen typically less expensive than fresh, these products eliminate for consumers the risk that product will go bad. In tough times, that is a risk many consumers may be hesitant to take.

One issue for the produce industry is whether the model fresh produce departments Bryan refers to are actually in sync with consumer preferences anymore. There was a moment in which bringing produce from every corner of the globe and offering an ever-increasing assortment of product was a way of respecting consumers and their desire for infinite choice.

It is easy to get carried away with the financial impact of declining home values or a stock market crash or an increase in unemployment. Very possibly the longer lasting impact may be cultural as people use this crisis as a moment to revalue things.

There was already an upswing in interest for local. Add in a sense that it is rude to flaunt money when others are suffering and a notion that it was the over-complexity of life - derivatives, collateralized mortgage obligations, etc. — that got us into this mess and, maybe, just maybe, people will want less complexity.

How would we give that to them? In Produce Business’ sister publication, PerishablePundit.com, CTIFL, a kind of French version of PMA, wrote in to tell us that they were pushing newsstand-like small stores with simplified offers focused on the best eating product at good value.

That may be a vision, or a dream, or a nightmare depending on where one stands but it does seem odd to think the country’ attitude toward money and prosperity will change, but the produce department will not.

Bryan speaks of cheap not being sustainable and he may be right, but it is also true that we don’t really know if something is cheap or dear if inputs are not priced properly. In other words, if our use of oil is going to cause enormous amounts to be spent on the Navy to protect supply routes or the environment to deal with global warming, then the price attached to that oil isn’t giving the right signals. That is where taxes often can play a useful role.

So consumers have no way of knowing what is “too cheap,” and if charged a high price they don’t have any way of judging if the vendor is more sustainable or just ripping them off.

Perhaps an important job is for our industry to work on finding ways to be more transparent so that consumers can know the true cost of realizing their desires and thus guide us to discover what kind of assortment they truly value. Maybe the produce department of the 21st century will wind up very different from that of the 20th.