The supermarket industry continues to provide a very tough competitive environment. Consumer pressure to drive value, quality, taste and nutrition in our food offerings requires strong companies with strong management teams to drive successful results. The consumer is calling the shots and voting with their grocery purchases.
We have identified 6 major trends for 2010 that will drive the results of the major food manufacturers and retailers involved in the supermarket industry.
- Value is King
Private label will continue to gain market share at branded products expense. This bodes well for private label companies like Ralcorp (RAH), Treehouse Foods (THS) and AIPC. Lower quality brand companies will be squeezed both on price and for shelf space. However top tier brands will fight for volume growth with increase consumer and trade spending making the savvy consumer the real winner.
Consumers will continue to increase their shopping occasions with discounters. This trend bodes well for warehouse clubs Costco (COST) and BJ’s (BJ), mass merchandisers Target (TGT) and Wal-Mart (WMT) and dollar stores Family Dollar (FDO) and Dollar General (DG). Promotional activity will continue to increase with traditional supermarkets like Kroger (KR) and Safeway (SWY) using their high low strategy and hot deals to drive traffic vs. the discounter’s everyday low pricing formats.
- Ad Spending Improves and Goes Digital
Brands will be forced to increase their ad and consumer promotion spending to drive sales volume and add value to their products. Budgets for consumer advertising will be up from 15-25% on average with increased emphasis on internet and social media spending. All the top food leaders - General Mills (GIS), Kellogg’s (K), Kraft (KFT) and Smuckers (SJM) - will look to increased efficiency in media spending (READ: more internet and targeted spending) to combat private label and drive profits. Ad spending will improve for search, banner ads, videos along with use of their own websites and online couponing.
- Health Drives the Consumer
The consumer is finally doing what they say and buying more healthful products. Of course it doesn't hurt that there are more healthful products being marketed by the major food companies than ever before. Kelloggs has increased the amount of fiber in its cereal and both Kellogg’s and General Mills are working on reducing sugar in kids cereals. Campbell’s (CPB) has reduced salt and improved the overall nutrition content in their soups. These product health improvements will help provide a buffer for their brand leaders vs. private label. Look for the consumer to also regain their love affair with natural and organic products this summer. The recession has been holding organic products growth down but further reductions in price will lead to greater consumer acceptance. This bodes well for retailers like Trader Joe's and Whole Foods Market (WFMI)
- Pricing Remains Stable
We don't see any real problems with commodity prices in 2010. Pricing will actually be stable and somewhat boring compared to prior year price swings. Deflation hurts the retailers the most but moderate price increases on basic commodities will not lead to aggressive price increases because companies will risk losing market share.
- Mergers and Competition Intensify
Look for increased consolidation and acquisition activities. Kraft's acquisition of Cadbury is the first of several more in 2010 in the supermarket space. General Mills, Kellogg’s and Smucker's are in the best shape to add strategic targets to their portfolio. There will be heavy activity for smaller private food manufacturers with strong sales in branded or private label manufacturing. The big companies will stick to their focus on brands but private equity firms like Ralcorp and Treehouse will continue to add smaller private strategic acquisitions to their product mix.
- Home Cooking But Not Really
Finally, the consumer will continue with their home focus over restaurants for family food consumption. Look for center store categories like pasta, baking mixes, soup and dinner replacement options like frozen pizza and frozen entrees to do well. Consumers want to eat at home with the family but they don't really want to cook, just have it look like it. Restaurant traffic will start to pick up in the latter half of 2010 when and only if the economy improves to include job creation.
All in all it should be a relatively good environment for branded and private label food manufacturers. Food retailers will have it a little tougher with a greater amount of pressure on margins. Dollar sales growth will be tough to come for all major food companies but profitability should be strong for the branded and private label producers, Expect luke warm results for the retailers on profit and sales growth.
Disclosure: No positions in stocks mentioned.