Consumers Shifting Food Purchase Patterns Into Recession Mode

Consumers are finally beginning to shift their food purchasing patterns in response to the slowing economy and higher commodity prices.

The first major element of the food purchasing shift is they are eating out less. This bodes poorly for sit down restaurants like Applebees, TGIF, Red Lobster and other family chain restaurants. This has hurt sales for many foodservice providers like Sysco (SYY). Fast food restaurants like McDonald's (MCD), Taco Bell and Pizza Hut (YUM) seem to be less affected.

These fewer restaurant purchases are translating to increased grocery store purchases but all players are not benefiting equally and some are even losing share. T he major beneficiaries are the club stores (Costco (COST), BJ's (BJ), Sam's), low-end discounters (Wal-mart (WMT)) and some price competitive grocery stores (Super Valu (SVU), Safeway (SWY), Kroger (KR)). Club store same sales have jumped with Costco reporting same sales growth of +7% while BJ's has delivered its strongest numbers in years. Walmart has just reported increased guidance based on increased store traffic and larger sales $ per customer shopping trip. Consumers are clearly seeking better value for their food purchasers and being more aggressive buying on deal and cherry picking the best sales by store.

In traditional grocery stores two trends are emerging that will impact the bottom line's of the major food manufacturers. First, consumers are being more aggressive in buying products on deal. In categories like cereal roughly 55% of very product sold use to be on some sort of cents off deal. That ratio has now increased to over 60%. The same holds true for many other categories. This puts added pressure on the already strained bottom lines of manufacturers like Kellogg s(K), Kraft (KFT), General Mills (GIS) and Campbell Soup (CPB). While most food companies have been able to offset rising commodity prices through a combination of price increases, productivity and a reduction of advertising, the shift to increased trade discounts will further strain their bottom line.

Secondly, consumers are beginning to trade down to private label and value brands. The phenomenon is most pronounced in staple, commodity categories like milk, bread, meats, coffee and cheese where consumers do not perceive there to be much of a difference between branded and private label quality. These categories are also the ones that are most impacted by the rise in commodity prices further fueling consumers need to be more price sensitive. Many of the food companies were able to delay the impact of rising commodities by hedging or forward buying their needed raw materials. Unfortunately, as the higher commodities stay for a longer period of time food manufacturers are forced to pass on these increases as their forward buys expire and they have to purchase the raw materials at the new higher prices. We are just starting to see the impact in 2008 with more pressure likely to come if commodity prices continue to increase.

Thirdly, high end retailers like Whole Foods (WFMI) are facing sales pressures. The great organic and natural food revolution is slowing as consumers wallets get pinched by higher gas prices and other economic issues. Consumers are slowing their purchases of the more expensive organic items to make their grocery budget work. Discretionary purchases like Starbucks (SBUX) coffee are also being reduced in an effort to save money.

So what does this all mean for the balance of 2008? For family sit down restaurants its going to be a tough year. For discounters with low grocery prices they should see increased traffic and sales should hold up well. High end food retailers will struggle and will have to cut prices to attract customers. Food manufacturers with strong differentiated brands will do alright but they will continue to see margin pressure. Value brands and low cost manufacturers should perform well on sales but improving productivity and cutting costs will be the key to delivering bottom line margins. The consumer will continue to look for bargains and seek value in everything they purchase.

Comments

[sbenard]

Informative article! Thanks!

[BrucesMom]

Having lived through several recessions I learned long ago to watch my pennies. I practice all of these recommendations all the time. This is a very good article for the younger people who haven't been through a recession before. Why pay more for things if you don't have to?

[sniper6]

If you want to know what is happening to consumer spending patterns, and the state of the economy, ask someone who knows first hand. I know a guy that works at the deli counter of a large supermarket chain, has worked there for years.

He told me people are barely looking at the name brand meats and cheeses (Boars Head, Land of Lakes, etc) like they were a year or two ago. People are buying the discount (store) brands because of the lower prices. The store is cutting back big time on their orders of the name brand products, and getting a lot more of the generic stuff.

He said the same is true for all the departments in the store... name brand products are being passed over in favor of lower priced products.