The Price of Food

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Coupons, Discounts Gain Favor as Food Chains Avoid Price Cuts

Grocery-store aisles are filling up with fresh bargains.

In an effort to draw cash-strapped consumers and boost sales, supermarkets are offering more coupons, promotions and other price reductions on items from milk to frozen pizza.

For most of last year, grocers and food-product companies steadily increased prices to combat rising commodity costs. In a reversal, some of these companies are using promotions to boost sales without permanently cutting prices.

"It's important to show value," says Morgan Stanley analyst Mark Wiltamuth. "There's no question that price is paramount for the consumer now."

In a BMO Capital Markets study of 75 food retailers -- including Kroger Co., Wal-Mart Stores Inc. and Safeway Inc. -- nearly three-quarters of the retailers surveyed indicated that promotional levels have increased and were heavily weighted to staples like dairy, cereal and soup.

According to Nielsen & Co., 16.8 percent of dollar sales were discounted in U.S. food, drug, and mass merchandise stores, excluding Wal-Mart, for the year ended Feb. 21. That number had been lower, hovering at roughly 15.5 percent for packaged goods for the previous four years.

For grocers, the promotions are also a way of better competing with discounter Wal-Mart. After factoring in promotions, traditional grocers have cut their price gap with Wal-Mart to about 14 percent, from as much as 30 percent last summer, according to Morgan Stanley's Mr. Wiltamuth.

The recent promotions come as volumes for many branded consumer goods have fallen on higher prices and weaker spending. Big national brands, like General Mills Inc., Kraft Foods Inc. and H.J. Heinz Co., are so far saying they plan to hold on to most of the recent price increases. Using promotions like coupons offers both grocers and manufacturers a chance to provide consumers some respite without cutting list prices.

Manufacturers don't "want to be yo-yo-ing on our list prices," says Robert Gluck, operating chief of Smart Balance Inc., a maker of spreads and mayonnaise. "We are providing more value in the form of coupons. Our competition is doing that right now." The company normally spends between 15 percent and 25 percent of its total marketing budget -- expected to be about $50 million this year -- on coupons. Smart Balance expects its coupon spending this year to be at the high end of that range.

Store checks show some big bargains in aisles across the country. In Phoenix, Jefferies & Co. found that Safeway was recently discounting a Kraft Foods' DiGiorno pizza to $1.78, below Wal-Mart's price of $5.75, while Kroger offered half-gallons of milk for just 88 cents, compared with Wal-Mart's $1.23, prompting one shopper to stock up on roughly 40 cartons.

At a major retailer in California, BMO Capital found Campbell Soup Co.'s soup being sold for 88 cents, reduced from about $3.

Grocers and manufacturers don't disclose how they are sharing the costs of the promotions, and it is often hard to gauge who is bearing the expenses.

Morgan Stanley's Mr. Wiltamuth sees grocers as the ones absorbing the blow at this time. He noted that Safeway recently blamed a decline in gross profit, excluding fuel sales, on price cuts it had made.

"The grocers are sacrificing their own margins to help sales trends," he said.

Food companies and other suppliers have been reluctant to bring down their prices, arguing that they are locked into long-term contracts on ingredients that have yet to expire. But supermarket executives expect these vendors to chip in more on discounts through heavy promotions later this year.

Still, grocers do have some fuel to absorb any hit to margins. Sales of their private-label products have been gaining steam during the recession, as consumers look for ways to cut down on their shopping bill.

The promotions are also helping to boost sales. Executives at Ruddick Corp., which owns the Harris Teeter grocery chain, recently said the heightened promotional activity was increasing same-store sales in the early part of its current quarter.

It is still hard to predict how long the promotions will last and if they will be followed by list-price declines. Much of those decisions will depend on whether commodity prices stay off their peaks.

So far, the most prominent deals appear to be in packaged foods, whose sales have benefited from consumers eating more at home. Sanford C. Bernstein analyst Ali Dibadj says there hasn't been consistently more promotional sales of household products like paper towels and soap. But he expects promotions for these products to increase heading into the spring as consumers look for value.

(Source: The Wall Street Journal, 04/01/09)

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