business news in context, analysis with attitude

by Michael Sansolo

Content Guy's Note: This morning, at the annual Food Marketing Institute (FMI) Show in Las Vegas, outgoing FMI CEO Tim Hammonds will present the association's annual "Speaks" report on the state of the industry, which includes data on industry trends and consumer concerns that was gathered in a number of separate research studies. Michael Sansolo, who delivered the "Speaks" presentation for the past dozen years while he was a senior vice president at FMI, authored a summary of this year's industry trends report for FMI, and shares a version of that summary – in essence, a preview of the "Speaks" report – here.)

The crystal clear results found by FMI for the year just past stands in stark contrast to the cloudy, complex and confusing face of the future. In a time of such incredible volatility of prices and economics, the questions about the future in many ways tower over the results making them less significant than in most years. Let’s consider some of the most important questions.

Will sales gains keep pace with price hikes? Although industry wide sales gains roughly equaled the rise in the Consumer Price Index in 2007, it’s hard to know if that situation will continue at all into 2008. The concerns about economic conditions—both price and lack of growth—accelerated with such speed in the early part of 2008, that the results from the previous year tell us almost nothing. Only recently have retailers and restaurateurs—begun reporting evidence of trading down both in products bought and a reduction in shopping trips.

The bigger question is whether this is good or bad news. For many retailers, rising prices will enable them to report the highest level of sales growth in decades, even if those gains are largely illusionary. Plus, there is speculation that a worsening economy might push consumers to eat home more often. Both cases are more complex. The ability to pass along price increases will grow ever more difficult as the economy worsens and shoppers get more price sensitive. And the movement of meals back home is not guaranteed either. It’s also likely that shoppers will simply trade down among restaurants.

Inside the store, the shape of sales might provide some interesting questions. Given all the attention to improved private label products, will worsening economic conditions fuel a flight to these products (and potentially improved profits) or will consumers suddenly be put off by the more premium look given these same products? Let’s keep in mind that the CPI is a limited gauge of how consumers change shopping patterns year to year. The government’s market basket tracks the same products as if shoppers show no reaction whatsoever to varying prices of different commodities.

Will new competitors or formats emerge? One of the most interesting findings in "Speaks" this year is the lowering level of anxiety about many formats, including supercenters, clubs and limited assortment stores. The competitive power of all three grew significantly during previous economic downturns and all three might be well positioned to do so again. Of course, there’s always the potential of new formats or competitors emerging thanks to today’s economic conditions. The downturn of the 1970s accelerated the growth of barebones warehouse stores. The late 1980s gave us the explosion of supercenters (run by mass merchants) and clubs. And the brief downturn in the early part of this decade helped fuel the growth of dollar and limited assortment stores. Who knows what’s next?

Why is this fuel crisis different than previous ones? Sudden price hikes in fuel prices have happened before, but the current run up in prices is different. In the past, the price hikes were largely caused by changes in supply thanks to the volatility of the nations containing most of the world’s fuel oil supplies. (Remember OPEC?) Though that volatility remains, this time the hikes are more heavily linked to growing global demand, especially due to the booming economies of the world’s two most populous countries, China and India.

Rising fuel prices impact shoppers’ moods and spending power, which both hit the industry. In addition, the rising cost of fuel raises the cost of moving products through the supply chain. What’s different today is the impact on the food supply thanks to the growing use of grain-based bio-fuels. In the US, the appetite for ethanol is increasingly tied to price hikes on everything from chicken to bread, raising the question of the long-term impact on food prices.

The questions don’t stop there. The industry faces new challenges from the demographic time bomb of the looming mass retirement of Baby Boomers to the growing challenge to data security thanks to increasingly sophisticated hackers. As the "Speaks" worry chart shows, many other challenges also loom.

The great baseball philosopher, Yogi Berra, once commented that something felt like “déjà vu all over again.” When it comes to the raft of issues facing the supermarket industry today, just the opposite may be true. Many of these factors have been around before, but never as they are today. The lessons of the past may tell us less than ever about the years to come.

The entire FMI Speaks report can be purchased at www.fmi.org/store/.

Other FMI notes from the Content Guy…

• In Sunday's keynote session, Andrew Winston, author of "Green To Gold," made the case that "green" business strategies can lead to enhanced profits, and used Wal-Mart as an example of a company that has done a remarkable job of synergizing environmental attitudes with the profit motive. Another example - concentrated detergents that use less water, and require less packaging, less cardboard for cases, and, ultimately, less gasoline for transportation of the product.

Another compelling statistic – Winston suggested that 92% percent of undergraduates surveyed say they want to work for "green" companies.

And, Winston pointed to the connection between transparency and "green" attitudes, using as an example the way Stonyfield Farms lists a code on the lids of its yogurts that gives customers a way to get information on environmental rankings for many companies. The bottom line is that someone else can make you transparent, regardless of what you want.

KC's View: