March, 2012

Research Perspective and Comments & Analysis

Produce Department Maintains Appeal Across Polarized Customers

By The Nielsen Perishables Group

Multiple changes in consumer shopping behaviors occurred as a result of the economic turmoil of the past four years. Generally speaking, consumers initially put a heavy emphasis on deep discounts, and retailers obliged by offering attention-grabbing deals to pull consumers into their stores. More recently, some consumers remain focused on low prices, while others focus on the price/benefit ratio; this has created a polarization of consumers and their purchase decisions. 

The produce department has the advantage of appealing to consumers on both ends of the spectrum through bargain products, such as bulk potatoes, and higher-priced items, such as niche varieties and value-added options. The produce department’s advantage is apparent in the fact that the department has grown sales four of the past five years, despite its higher price points compared to canned or frozen alternatives. 

On one end of the polarization, consumers feel the continued pressure of economic turmoil. These price-focused consumers are taking advantage of more money-saving options than ever, including coupons, group discount deals, bargain items and shopping club or dollar retail channels.

On the other end of the polarization, consumers no longer feel the pressure of the recession and base their purchases on value rather than price. These consumers are drawn to produce items that appeal to a variety of consumer values including convenience, unique flavors and organics.

The Convenience Factor

Value-added produce continues to drive produce department growth. Dollar and volume sales of many value-added fruits and vegetables are rising, despite their higher price points compared to traditional offerings.

Packaged salad, widely considered the founding convenience produce item, declined when the financial crisis hit in 2008 and during most of the next two years. In the latest 52 weeks ending Dec. 31, 2011, however, packaged salad volume sales increased slightly, despite a 2.2 percent increase in retail price. Moreover, the percentage of volume sold on promotion declined nearly 3 percent, indicating consumers were willing to pay full price. 

Packaged salads’ future looks bright, as young consumers drive the category. An April 2011 consumer survey from Nielsen Perishables Group revealed that 63 percent of consumers ages 24 or younger reported purchasing packaged salad at least monthly; this was the highest rate of any age group. Even for organic packaged salads, 60 percent of this consumer group purchased monthly or more often, illustrating the demographic’s willingness to pay for fresh foods that align with their priorities.

Unique Flavors Are Bankable

There are consistently more and more items competing for space on produce department shelves.  The goal that’s often associated with product innovation is to “be the next Honeycrisp,” and it’s no wonder; despite its 60 percent price premium compared to the more traditional Red Delicious apple, the number of U.S. households purchasing Honeycrisp apples grew 2.5 percent in the past year, while its volume velocity increased 16.1 percent. During the same period, Red Delicious apples suffered a 4.9 percent decline in household penetration and 16.4 percent decline in volume velocity, according to FreshFacts Shopper Insights powered by Spire.

A similar story played out in the pepper category. Thanks to the growing popularity of unique pepper varieties, specialty peppers increased volume 8.6 percent, while traditional green peppers increased a more modest 2.4 percent.

Continued Success Of Organics

While organic produce posts an 80 percent price premium over conventional on average, consumers remain loyal to organics. Sales of organics in the produce department increased 10 percent in the latest 52 weeks, outpacing conventional produce’s 3.8 percent growth. 

Tomatoes are exemplifying the larger trend toward organics’ success. During the past year, organic tomatoes posted dollar and volume growth of 9.3 percent and 7 percent, respectively, despite being twice the price. Conventional tomatoes declined 0.5 percent in volume and increased dollars 2 percent (indicating the dollar growth was driven by price increases).

Natural (i.e., items with claims such as “naturally grown”) produce also posted near 10 percent growth, proving that consumers will still pay more for products with “natural” claims.

The produce department stands to benefit as additional consumers emerge from the recessionary mindset this year, but it’s essential to consider both ends of the polarized consumer when mapping assortment and pricing strategies. Offering items that appeal to the value-minded consumer (i.e. items with higher price points) will help grow overall purchase size in the department, but communicating low-priced, bargain options for the consumer base still pinching pennies can help maintain loyalty and bring additional consumers to the department.

 

Generalize Or Specialize? That Is The Question

What does it mean for consumers to be price-sensitive? How does one appeal to such a consumer? It is a bit of a quandary. For some consumers, a low price per pound on a package at a warehouse club is enormously appealing. Other consumers might shy away from the actual cash outlay required even though they might ultimately use that volume. For others still, they can’t use the quantity, so the best value when defined as the best price per pound is actually not the best value for them, since they would just waste the excess produce.

Motivations matter as well. A great deal offered by Whole Foods might appeal to a consumer, but if the concern is appearing “showy” before friends, the consumer might not even walk into Whole Foods, and instead, wind up paying more to get the same item at a supermarket with a less pricey reputation. Other people, perhaps desperately seeking value, would die before they let their friends know that the lunch they are eating came from the Wal-Mart deli.

It is also true that the lines of who buys what are kind of blurry. As the Perishables Group points out, the produce department at retail offers a range of different items from low-cost basics, such as potatoes, to exotic specialties, organic options, value-added options, special varieties, etc. Yet the customers for each are not easily predictable. Plenty of multi-millionaires are meat-and-potato folks, and people who are struggling can often cut back in ways that lead to high-end produce purchases.

For example, a two-income family where one spouse gets laid off may economize dramatically. That economizing, though, could take the form of no longer eating out. If they used to go out with friends and now they visit each other’s homes, they may buy some pretty pricey raspberries to entertain, though it is still economizing compared to going to the steak house.

Another family may economize by doing things such as postponing the purchase of a new car or canceling a vacation. These moves both free up income and create frustration, a perfect combination to allow the purchase of a small indulgence such as a preferred apple variety.

Some items that seem pricey are actually cheap if viewed from the right perspective. A stir-fry package, for example, may be a high price per pound, but if you make one stir fry meal for two people, it is probably cheaper than buying all those ingredients and throwing half of it out.

Also as the Perishables Group notes, generational perceptions alter what one perceives as an extravagance. There are young people in America who have never seen their parents make a salad from a head of lettuce; supposedly “convenience” items are staples to these people.

Psychographics and life stage make a difference as well. Starving PhD candidates may buy pricey organic product because it fits into their ethos, and more than a few moms give up things for themselves to make sure their baby’s food is organic. Whole Foods didn’t always search out the most affluent communities for store locations; it searched out high educational attainment.

What this all means is that while it is interesting to know what consumers in general are doing, it is much more important to know what the particular consumers at your store or, for a producer, the particular consumers at the stores he is selling to, are thinking and doing. That is not easily predicted solely based on income.

The Perishables Group’s suggestion that retailers need diversity to appeal to “both ends of the polarized consumer” is obviously true if what one wants to do is offer a broad-based assortment to attract a diverse community. The more interesting question, though, is whether that really makes much sense any more as a business strategy. Maybe the thing to do is specialize. Wal-Mart’s efforts to move upscale brought little but pain.

Maybe the future is Aldi, Trader Joes, Whole Foods, Costco, dollar stores, a back-to-basics Wal-Mart, HEB Central Market, Balducci’s, etc. Maybe it is stores that don’t try to be everything to everybody, but that delight particular types of consumers. Inherently, this means they also disappoint those customers for whom they are not suited, which adds the final complication. At any given moment, there is some product and promotional mix that will maximize profits. Yet switching back and forth between these strategies, even if possible, might still depress profits over time.

The problem is multifaceted. Part of it is that the consumers see the product intended for other consumer types and may feel alienated. Part of it is that there is limited space, so putting in items to appeal to a different demographic or psychographic can lead to a reduction of assortment aimed at the primary shopper. Part of it is that people have prejudices and preferences. So if the plan to attract diverse shoppers works — say the store attracts a whole new Latino population — one can easily wind up alienating the original consumer base.

Great data, such as that the Perishables Group has been kind enough to share with us, is, in fact, only the beginning of the process by which we learn how to best serve consumers.