As food and gasoline prices climb steadily higher, regional grocers are finding it trickier to balance low prices for shoppers with the store’s own high costs.
From shifting inventory and focusing on private-label products to targeting cost-conscious shoppers who are eating out less often, supermarket chains are exploring every option to retain their customer base and draw new consumers.
But times have changed.
‘‘People are shopping on price rather than loyalty,” said Tom Gillpatrick, executive director of the Food Industry Leadership Center at Portland (Ore.) State University.
About 25 percent of shoppers now seek out big-box grocers such as Wal-Mart and Costco, where many prices are continuously lower than at conventional supermarkets, according to an analysis by the Food Marketing Institute in Arlington, Va.
Giant Food, the region’s top grocer in market share, has responded since 2006 by trimming back on selection throughout its stores to eliminate slower-moving items and lower prices on at least 70 percent of its merchandise. The company calls this its value improvement program, which was initiated by Giant’s owner, Royal Ahold of the Netherlands.
To customers of its 140 Maryland stores, this means cheaper, fresher items, as the chain also improves turnaround times between warehouse storage and distribution, according to Giant officials.
‘‘It’s allowed us to offer better prices, which certainly appeals to the customers and gives us a competitive advantage,” said Jamie Miller, spokesman for Giant, which has regional headquarters in Landover. ‘‘It takes the costs out of the business by simplifying it so we can pass those savings on to our customers.”
Giant captures the biggest slice of the state’s grocery pie, accounting for 24 percent of the market in Baltimore County, 16 percent in Frederick County, almost 40 percent in Montgomery County and more than 22 percent in Prince George’s County, according to the trade publication Food World. Net sales for Giant and its sister company Stop & Shop of Quincy, Mass., were about $5.1 billion combined for the first quarter of 2008, which ended April 20, according to Royal Ahold information.
A main force behind most grocer concerns is the rising cost of gasoline and diesel, which fuel their delivery trucks and those of their distributors. Gasoline is now selling for close to $4 a gallon, amounting to a 45 percent producer price index increase from last year, according to the U.S. Department of Labor’s Bureau of Labor Statistics. Gasoline prices rose 5.6 percent in April.
Mitigating rising costs
To mitigate the increase in energy costs, grocers — typically big users of electricity — are seeking ways to improve their efficiency through phasing out old technology, examining alternate sources of energy, constructing buildings to make the most of natural light and ensuring work practices complement efficient use of energy, Gillpatrick said.
Miller said Giant’s new stores use white membrane roofs to reflect solar heat, as well as systems that adjust interior lighting based on natural light coming into the store. The company recently completed multimillion-dollar renovations at six stores in Maryland and Virginia as part of its Project Refresh, Ahold’s plan to remodel or replace 100 Giant stores in the next three years.
Giant has also reworked its delivery routes so that truckers are on the road amid the lightest traffic and use less fuel.
‘‘We do whatever we can to absorb costs so they don’t come back to the consumer,” Miller said.
In addition to fuel, grocers are also paying more for food.
Since last year, the cost of dairy products has risen almost 75 percent and the cost of eggs has risen 45 percent, according to the U.S. Department of Labor Producer Price Index. The department’s food index rose 0.9 percent in April.
Those increases have led to consumers paying average milk prices of almost $4 per gallon and the price of eggs jumping to more than $2 per dozen.
‘‘People are looking to stretch their dollars further,” Gillpatrick said.
Much of these higher costs are driven by higher energy costs or by grains being used for biofuels, mostly ethanol, he said. Stock speculation has also been leading to increased investment in food commodities as demand grows, bolstered by other countries adopting Western practices of increased protein consumption.
Private labels help
Food Lion, which operates more than 80 stores in Maryland and is owned by the Delhaize Group in Belgium, looks to help its business through an emphasis on its private-label products. Food Lion ranks about third for grocer market sales in the state, capturing markets in Caroline, St. Mary’s, Somerset and Worcester counties, according to Food World.
Recently, as part of a store demonstration during its Switch and Save private-brand promotion, Food Lion filled two shopping carts — one featuring national brands and the other filled with equivalent Food Lion brands — to tout the price savings for sticking with Food Lion.
Over the past year and a half, Delhaize has been working to increase private-brand penetration, Kimberly Blackburn, a Food Lion spokeswoman, wrote in an e-mail. Food Lion is following the national trend of promoting its own health and wellness products and beauty products.
Smaller chains such as Food King in Baltimore view private labels as one of the few things they can do to offset their rising costs.
‘‘It’s a fact of life at this point. There’s not much we can do,” said Bernie Meizlish, owner of Food King, which uses Richfood Holdings, a subsidiary of SuperValu, as its wholesale distributor.
Safeway is also taking advantage of the private-label movement, establishing the Better Living Brands Alliance to promote its products to other retailers. O Organics, Safeway’s private-brand label of organically grown foods, and Eating Right, foods that feature lowered fat or sodium, are the first step in the company’s marketing campaign.
Highlighting private-label products is one of several suggestions industry experts are pushing to help grocers cope with higher prices and fuel costs, according to the Food Marketing Institute analysis.
‘‘This gives us the opportunity to provide a better channel for the two brands,” said Craig Muckle, spokesman for Safeway, which is based in Pleasanton, Calif., and has regional headquarters in Lanham. ‘‘They’ve been very successful in our stores.”
Safeway has 76 stores in Maryland and is in the process of reopening a former store in Arnold. The chain is tops in several Maryland counties, including Carroll, Calvert and Charles, plus Baltimore city, according to Food World. First-quarter results for Safeway were strong, with $10.0 billion in sales, up 7.3 percent from the first quarter of 2007, according to company financial reports. The company turned a profit of $193.4 million, up 10.9 percent from the prior-year quarter.
Earlier this year, Safeway converted its entire fleet of more than 1,000 trucks to cleaner-burning biodiesel fuel. The move is supposed to help Safeway reduce its carbon dioxide emissions by 75 million pounds annually.
Dining out, but actually in
Grocers are also exploring restaurant-quality products to benefit from Americans’ decreased interest in eating out.
‘‘We are providing more prepared-food options for consumers used to dining on the dash,” said Howard Klein, part of the family that owns Klein’s Family Markets throughout Harford County. Klein’s is the top grocer in the Harford area.
Klein said grocers are working to offer more such specials to show consumers their service is equal to or better than anything found in the big-box discount stores. This also involves altering packaging sizes to maintain prices on items considered to be consumer-sensitive, such as deli meats and fruits.
Harris Teeter prides itself on its customer service, with employees bagging groceries, escorting customers to their vehicles and walking customers down aisles to find products, said Jennifer Panetta, spokeswoman for Harris Teeter. The Matthews, N.C., company has one store in Gaithersburg, with another planned for Rockville this fall and distant plans for one near Baltimore’s Inner Harbor.
Still, the competition from mega-stores remains intense, with Wal-Mart officials promising the company strives to be the first to lower prices and the last to raise them, even amid tumultuous market conditions.
But Klein said the Wal-Mart⁄Costco regional approach makes it harder for them to keep up with local trends and control prices accordingly, giving independent stores a slight advantage.
