economics

January 11, 2009

What Your Supermarket Won’t Tell You

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by Jim Rendon
Thursday, January 8, 2009
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1. “Feel the squeeze? Actually, so do we.”

When the economy slows and businesses begin to feel the heat, grocery stores are often exceptions to the rule. That’s because when consumers cut back on frills like eating out, they tend to make even more trips to the supermarket. Still, all bets may be off in the wake of the crash of 2008.

Citi Investment Research analyst Deborah Weinswig forecasts falling same-store sales growth at many of the major chains in 2009; for one, she sees top performer Kroger experiencing a decline in same-store sales growth, from about 5 percent in 2008 to 4 percent in the coming year. Meanwhile, supermarket chain Supervalu forecasts its own flat sales growth through 2009.

Even the big-box stores—now established contenders in the grocery industry—are facing tough headwinds in the wake of the market meltdown. Weinswig says she expects dips in same-store sales growth for BJ’s Wholesale Club, from 11 percent in 2008 to under 7 percent in 2009, and a drop from 8 to 6 percent growth over the same period for Costco. Bottom line, “it’s tough to pass through higher costs when consumers have such a laser-like focus on price,” says Mitchell Corwin, a senior equity analyst for Morningstar.

2. “You’re getting less for the same price.”

When Linda Edwards, a nurse in East Windsor, N.J., picked up her usual $4.99 jug of orange juice at Shop Rite this summer, she was surprised to discover that it contained 7 ounces less than it normally did. A few months later she noticed her Skippy peanut butter and chicken strips were also lighter but not any cheaper. “Everything seems to be shrinking, but my family hasn’t shrunk,” says the single mother of five boys. A spokesperson for Unilever, which owns Skippy, says reducing product size is one way the company is coping with higher food and fuel costs.

Manufacturers know that in a tight economy, consumers are driven away by price hikes, so they quietly shrink products, hoping a few ounces here or there won’t be missed, says Alexia Howard, a senior research analyst for Sanford C. Bernstein. But it’s starting to backfire, says Ben Popken, editor of Consumerist.com, who says he’s getting more complaints from readers about shrinking products. “People are really sensitive to any decrease in their purchasing power,” he says. Popken recommends checking the unit price between brands to see whether you’re paying the same price for less food.

3. “We jack up prices where you’re least likely to notice.”

When times are tough, super-markets know vigilant shoppers notice even tiny changes in the price of foods like milk, cereal, bread and cheese. In fact, there are about 500 such products, and stores raise prices on these staples at their own peril.

So how do markets deal with rising food costs? They tinker with the price of the roughly 45,000 items people don’t buy regularly enough to have a fixed idea of their cost—tacking on 3 to 4 percent to specialty products like, say, gourmet pasta sauce or fresh-squeezed juices, without consumers noticing. “There’s an opportunity to make some margin back on those items,” says Jim Hertel, managing partner of Willard Bishop, a consultant for the industry.

But don’t expect the savings to be passed on to you when costs come down. Many manufacturers lock in prices well in advance, and they often hold off on bringing prices back down to make up for the resulting losses, says Howard. One way to be sure you’re getting the best deal when prices drop: Stick to basics. Products like coffee and meat are likely “to reflect their underlying costs more quickly than most other foods,” Howard says.

4. “You can’t always believe our nutrition claims.”

It seems people are more concerned with their health these days, but nutrition labeling on most foods can be tough to decipher. Hoping to bridge the gap, grocery chain Hannaford Bros. developed a program called Guiding Stars, which posts nutrition ratings of one to three stars on the shelf tags of some products. “We’d like to see the FDA adopt the program nationally,” says Bruce Silverglade, legal affairs director at the Center for Science in the Public Interest.

Sounds great, but according to a Government Accountability Office report, the FDA hasn’t randomly checked the accuracy of nutrition labeling in over a decade, and of those products it has tested due to obvious red flags, more than 20 percent had errors. (An FDA spokesperson says random sampling isn’t necessary; the FDA tests products according to guidelines set by its Office of Regulatory Affairs.) With so little oversight, consumers can’t fully trust manufacturers’ nutrition labels or any ratings system based on that data.

“It’s the manufacturer’s responsibility to provide accurate information—that’s all we can use to assess products,” says Julie Greene, director of healthy living for Hannaford Bros.

5. “We won’t take your coupons.”

The Sunday paper used to be the source for grocery coupons. But now they’re increasingly available online, from sites like Coupons.com as well as manufacturers’ and supermarkets’ own Web pages. The problem is, they aren’t always easy to use. Over 10.6 million Internet coupons were redeemed last year, according to Carolina Marketing Services. While that amount is expected only to increase, it’s still a fraction of all coupons redeemed, and many stores are still unfamiliar with them.

That’s what 61-year-old retiree C.J. Shearrer discovered when he printed out about $30 worth of coupons and took them to a Wal-Mart in Midwest City, Okla. Shearrer says the manager told him the store didn’t accept online coupons; only when he showed him a printout of Wal-Mart’s coupon policy, says Shearrer, did the manager agree to take them. (A company spokesperson says Wal-Mart accepts one Internet coupon per item per customer, as long as it’s legitimate and scans at the register.) Stephanie Nelson, founder of information site CouponMom.com, suggests doing what Shearrer did: Bring along a copy of a given store’s coupon policy, which should be found on its Web site.

6. “Our loyalty cards help us cater to our biggest spenders…”

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Many supermarkets offer shoppers loyalty cards that get scanned at checkout for savings on specially marked products. But saving money isn’t what these cards are really about. Whenever you use your card, stores record your purchases in vast databases that contain years’ worth of your purchasing information. That means they know what you buy year after year, how often you shop and when a coupon influences your purchases. And they use
this information for everything from promoting new products to deciding what to stock.

More important, stores tap this data to target customers who buy lots of groceries on a regular basis. Woolf says that as much as 65 percent of a store’s sales are derived from these core shoppers, who make up just 12 to 25 percent of its customers. Loyalty-card programs allow stores to cater to these folks by sending them free samples, offering special bargains other shoppers don’t get and structuring discounts to reward them for their regular, expensive shopping trips. “Those customers who contribute more profits, you look after them better,” says Woolf.

7. “…but they’re not always your best bet for big savings.”

Stores that use these loyalty programs want you to think you’ll save big by participating. But that’s not always the case: Wal-Mart, which has no such program, undercuts competitors on price, and most stores without these programs match their regular prices to competitors’ discounted card prices. In many cases, these retailers may even be able to offer lower prices than stores with elaborate loyalty-card programs, says David Livingston, managing partner with industry consultant DJL Research. “Loyalty-card programs do add an expense for stores,” Livingston says. “And stores can offer the same bargains without the card programs.”

In the end, what do consumers get for handing over their data? It depends. According to Stephen Hoch, a marketing professor at the Wharton School of the University of Pennsylvania, loyalty-card discounts really just shift higher prices onto those without cards. And even the best rewards don’t always amount to much. Supermarkets have a tight profit margin of about 2 percent, making it “hard for supermarkets to give customers big rewards,” says Hoch.

8. “Big sales may not mean lower costs for you.”

Supermarkets know you want bargains. And they’ll use bargains to get you through the door, via promotional flyers and advertised discounts. But the key is to make sure they don’t give away too much once you get inside.

How do they do it? For starters, atmosphere. Supermarkets know the first thing you see when you walk in sets the tone for your shopping trip. If it puts sale items or highly discounted products near the entrance, it can create the impression there’s real value to be had, whether that’s the case or not, says consultant Hertel. That’s also why space at the end of aisles is often used to display a small number of sale items. Stores know that you’re likely to buy lots of other products while you’re shopping—many of which will not be on sale or will be store brands—helping to cover the discounts on promotional items. Indeed, studies show that supermarkets have been effective at limiting giveaways, says K. Sudhir, a professor at the Yale School of Management. “Stores want to create the perception that customers are getting a good deal,” he says. “But they don’t want everyone to get the lowest prices.”

9. “We may carry local produce, but we’re no farmer’s market.”

When former Chicago software engineer Michael Morowitz wants to buy strawberries, he waits until summer and looks for those grown locally. “Strawberries shipped to Chicago in February are never going to be as good as those grown nearby in June,” says Morowitz, who runs The Local Beet, a Web site about locally grown food in Chicago. Like Morowitz, more people are looking for goods from nearby farms as a way of getting better, fresher foods and supporting local growers, not to mention cutting down on pollution from transportation. And supermarkets have heard the call—so much so that megaretailer Wal-Mart now touts locally grown produce.

But it’s not as clear-cut as it sounds. For one thing, there’s no agreement on what local means. For example, Wal-Mart defines local produce as that grown within the same state, but in a large state like California, that doesn’t mean much. Also, it’s tough for big chains to find enough local farms to fulfill their needs, and smaller farms can struggle to keep up with a large chain’s demands, says Julia Stewart, a spokesperson for the Produce Marketing Association. In the case of Wal-Mart, some of its local suppliers are the same massive farms that normally provide its produce. “It just makes for a positive press release,” Livingston says. A Wal-Mart spokesperson says the company works with farms of many sizes and doesn’t preclude its local farmers from selling their produce elsewhere.

10. “We’re experts in human behavior.”

Marketers know a lot about how you shop and what’s likely to make you pick up a product. For example, stores have discovered that shoppers are more comfortable staying to the right as they move through a store, says Ron Larson, associate professor of marketing at Western Michigan University. How much difference does it make? According to market-research firm Sorensen Associates, shoppers moving counterclockwise spend
$2 more per trip than those who go the opposite direction.

How to avoid getting psyched out by savvy marketing? Know what you want to buy before you enter the supermarket. Livingston recommends planning meals for the week and sticking firmly to your list once in the store. Also, grab the smallest cart that will hold all your items, and heed the old saw “Never shop when you’re hungry.”

Copyrighted, SmartMoney.com. All Rights Reserved.

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