Consumers Will Seek CPG Value in 2010
U.S. consumers will continue to show restraint and look for value pricing in their CPG shopping habits during 2010. These are two of the five key predictions research firm The Nielsen Company has released for next year.
Restraint Remains the New Normal
U.S. consumers have unemployment and other economic concerns at the top of their mind, suggesting that trends in restrained spending will continue into 2010. Some private consumer spending indices, such as the Deloitte Consumer Spending Index and American Express Spending and Saving Tracker, demonstrate a significant uptick in consumer spending. However, official government indices, such as the Personal Income and Outlays Report and Advance Monthly Retail Trade Survey, show much more moderate increases in consumer spending.
CEO, Wal-Mart
Wal-Mart CEO Mike Duke said “restraint is the new normal” during a speech about Wal-Mart’s future plans in June 2009. According to Duke, consumers will not revert to freer spending habits when the recession ends and Wal-Mart is building long-term loyalty by addressing customer desire for lower prices. Wal-Mart expanded and enhanced its Great Value line of CPG and grocery products this year.
Value is a Top Priority
Coinciding with consumers’ focus on restraint is a focus on value. A desire for low pricing could threaten margins, and widespread discounting across the retail industry will require retailers and brands to differentiate themselves beyond price.
Store Brand Growth Continues
As demonstrated by Nielsen research, store brand CPG products are growing in terms of both dollar and unit sales. Unit sales are growing quicker than dollar sales, likely reflecting retailers’ response to consumer demand for value pricing.
Grocery Consolidation Intensifies
Local and regional grocery players, unable to drive profits in the soft economy, will become acquisition targets and some larger national and regional grocers will divest unprofitable formats and banners to strengthen investments behind their winning formats and banners.
Earlier this week, bankrupt regional supermarket chain Penn Traffic hit a snag in plans to sell 75 of its 79 stores to an unnamed bidder represented by a consortium of liquidation firms when fellow regional chain Price Chopper made a surprise bid for its assets.
In addition, Southeastern chain Bi-Lo LLC filed for Chapter 11 bankruptcy in March 2009. According to Supermarket News, Belgian conglomerate Delhaize agreed to purchase Bi-Lo for $425 million last month, with the intent of folding the chain into its Food Lion banner. However, Bi-Lo has since rejected that offer in favor of a cash infusion from its existing owner, private equity firm Lone Star Funds, although Food Lion has publicly stated it is still interested in purchasing at least some of Bi-Lo’s assets.
Another Southeastern supermarket chain, Bruno’s Supermarkets, met a similar fate this year. Bruno’s filed for Chapter 11 protection in February 2009 with the intent of remaining in business. However, Southern Family Markets wound up purchasing Bruno’s assets at bankruptcy auction in April 2009 and liquidated 25 stores, keeping 31 open on a “going concern” basis.
Assortment Wars Escalate
Retailer efforts to simplify the consumer shopping experience by eliminating aisle and shelf clutter will cause market share land grabs for small and medium-sized brands in pursuit of elusive revenue growth. Retailers may lose sales as they shift away from in-store merchandising that drove impulse buying and built shopper baskets. Look for brands caught in the trap of greater store brand focus and assortment optimization to forge alliances with key retailers, enter or step up efforts as store brand suppliers, and/or explore direct-to-consumer sales.
Wal-Mart has launched a program called Project Impact, aimed at improving customer service and knocking competitors out of business. As part of Maximum Impact, Wal-Mart is redesigning store layouts to feature less crowded aisles with better sight lines, more convenient placement of consumables, improved assortments, and more prominent promotion of vertical products such as pharmacy items, toys, arts and crafts, and consumer electronics.
Drugstore retailer Walgreens is also rethinking its assortment and store layout strategy with a plan called the Customer Centric Retailing Initiative (CCR) that will streamline assortments and devote more store selling space to skin care and cosmetic products. During Q3 2009, Walgreens rolled out its new CCR format to 35 pilot stores, and plans to covert all stores to the CCR format by the end of 2010. Walgreens also optimized assortment resets for nearly 40 product categories nationwide. During its third quarter fiscal 2009, Walgreens did experience a negative impact on front-end product mix and markdowns related to CCR on its quarterly gross margins.