Special Report: Defining a New Reality – Part 1

The U.S. has been experiencing quite the economic adjustment period. The past two years have brought skyrocketing gas prices, plummeting home prices, sticker shock on food items and now an array of “everyday low prices” claims. While those factors have begun to moderate, with food prices rising just 0.1 percent in October according to the consumer price index, they are not back to “normal” levels and aren’t expected to be in the near future. The nation still finds itself in a definitive economic recession.

During the months of turmoil, consumers learned to adapt by being more conscious of their budgets and seeking out value. In a March 2009 consumer survey conducted by The Perishables Group, as many as 46 percent of respondents said they were choosing lower priced items over higher priced alternatives in the fresh departments as a way to economize. But now the transition period of consumers shifting their behavior has leveled off. Retailers face a new reality in terms of the economic climate and behavior of consumers who are no longer getting used to the recession, but living in the midst of it.

An in-depth study of consumer purchase patterns throughout 2008 and into 2009 found that fresh food consumers had begun to implement a number of primary strategies to squeeze the most value out of their dollars, with only 11 percent of consumers saying they were not doing anything to cut costs. The key economizing strategies shoppers turned to were:

• Trading down or out of fresh categories in search of value

• Cooking at home from scratch or turning to more affordable retail meal solutions rather than visiting restaurants

• Purchasing smaller quantities more frequently in order to eliminate shrink

• Stocking up on sale items

• Changing where they shop for food

It became clear that these consumer shopping behaviors were not just a temporary fix to get through the economic downturn, but a new way of spending that is more conscious of future consequences and circumstances outside their own bank accounts.

Yet this new reality is something the retail market is not used to, having had the luxury of generous spending habits from most consumers for nearly two decades. Even as the economic turmoil accelerated in the first half of 2008, retailers were somewhat protected by the high prices associated with the higher costs of inputs. Yet the dollar/volume relationship shifted among some produce items as prices began to decline in the third quarter of 2009. Many traditional pricing, promotional and merchandising tactics became less effective. Retailers were faced with developing new strategies to appeal to value-conscious consumers, while consumers applied pressure for retailers to lower prices.

This new reality of consumer spending patterns likely will not change anytime soon, especially considering the dismal unemployment rate that can’t seem to recover after 22 consecutive months, topping out at a 26-year high of 10.2 percent in October 2009.

It is now imperative to understand the new consumer value equation. There is a great opportunity to learn how the relative importance of consumer purchase drivers has changed. Will consumers still pay more for organic or locally-grown products, or will they go to a warehouse store to get more product for a discounted price? Will they opt to save money by cleaning and preparing their produce? Or do they value their time more than their money, opting to purchase convenient fresh-cut or value-added produce? Do these factors vary by shopper demographics?

Consumers finding a balance

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Initial analysis of consumer Web surveys and point-of-sale data indicates shoppers are still price-conscious but are easing up slightly on their tight spending.

Point-of-sale data from 11 retail chains throughout the U.S. during the first three quarters of 2009 showed average retail prices for fresh fruit and vegetables varied. Prices declined for three of the top five fruit categories during Q1 and Q2, but for all five categories in Q3. As a result, volume rose for three of the top five fruit categories in Q3, most notably in berries by nearly 13 percent.

Within the top five vegetables, prices declined in only two of the top five vegetable categories throughout Q1 and Q2, and for four categories in Q3. The average retail price of potatoes declined the most in Q3 at -12.7 percent, but volume still declined 2.8 percent, causing a sharper dollar decline of 15.1 percent. Despite price cuts, shoppers aren’t buying more potatoes than they did during the same time last year.

Thinking about your fruit and vegetable purchases over the past year (since last fall), are you doing any more or less of the following?

Shopping with a list

Making trips to retail stores thought to be lower in price

Shopping for fresh produce at stores other than the supermarket

Shopping for produce at stores thought to be higher in price

 

5 - Significantly More

4

3 - About the same

2

1 - Significantly Less

N/A

Primary purchase drivers

Contrary to assumption, price is not the primary driver of most produce purchases. The Perishables Group surveyed 6,000 fresh food consumers and found price ranked second as the most important attribute when buying produce and had the largest increase of any factor. Quality came in at No. 1. Notably, organic, brand name and convenience were the least important factors for consumers in their produce purchases. Shoppers are relatively price-sensitive when it comes to buying convenience items, with more than a quarter saying they only purchase convenience items when the price is right.

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A research at the University of California-Davis studies ways to use biotechnology to improve tomato traits.

Reinforcing the emphasis on quality, the survey found that some fresh food consumers are trading back into fresh produce, after having turned to canned or frozen produce last year in an effort to save money and waste less food. A third of those surveyed said they are now purchasing more fresh fruits and vegetables than they were a year ago, while fewer than 20 percent said they are buying more frozen or more canned fruits and vegetables.

Consumers may be willing to spend money on quality fresh produce, but they are still shopping with their budget in mind. Nearly 40 percent of respondents reported shopping with a list more often than they did a year ago, and more than half said they now purchase fresh produce on sale more often than they did a year ago. Consistent with the Perishables Group’s March 2009 research, some consumers are switching their purchases from higher-priced stores to more bargain-focused stores. Nearly a third of respondents said they now more often shop at supercenters, and 21 percent said they shop produce markets more often.

While locally grown products are growing in popularity, convenience items are taking a hit. Thirteen percent are purchasing more convenience items, likely as a result of their switch from eating out to cooking at home more often, compared with more than 20 percent who are buying fewer convenience products and opting to prepare the produce at home.

Point of sale data supports consumers’ responses. Though the average retail price of prepared fruit decreased 2.3 percent in Q1 and 4.8 percent in Q2 2009 compared with the same time period the year before, shoppers still aren’t buying it as much. Volume dropped by 11.1 percent in Q1 and 4.4 percent in Q2, while dollars fell 13.1 percent and 9.1 percent in Q1 and Q2, respectively. Prepared vegetables were somewhat shielded from the impact, possibly due to their more common use as meal ingredients. In Q1 2009, prepared vegetables’ average retail price rose 5 percent, spurring declines in volume (12.3 percent) and dollar sales (7.9 percent) compared with the prior year. Yet in Q2, prepared vegetable prices continued to rise slightly by 0.5 percent, but volume and dollars experienced increases of 1.2 percent and 1.7 percent, respectively.

A healthy lifestyle

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The desire to live a healthy lifestyle remains a driving factor for many produce purchases. When asked whether they are changing the package size of produce that they are purchasing, the fact that they are trying to eat more fruits and vegetables ranked among the top reasons for those who now purchase larger packages of produce.

Consumer responses surrounding organic produce were interesting and representative of a common debate among shoppers and suppliers alike. Consumers are divided on how the health benefits of organic produce compare to conventional. Nearly half of those surveyed believe organic and conventional to have the same benefits, however, nearly a quarter think organic is more healthful. While the majority of respondents rarely or never purchase organic produce, 16 percent either sometimes or regularly purchase organics. A significant number of shoppers base their decision on price, with nearly 20 percent purchase organics only when the price is right.

But when the price is right, consumers purchase a lot of organics. In the case of organic apples, consumers purchased organic apples when the price dropped, even when the price of conventional apples also declined, according to POS data. In Q2 2009, organic apples’ average retail price dropped 27.4 percent, causing volume to increase by an impressive 113 percent and dollars to increase 55.4 percent. During the same time period, conventional apples’ average price dropped 7.1 percent, yet dollars and volume declined by 12.3 percent and 5.6 percent, respectively.

Consumers also are divided on the definition of “locally grown,” but most consider it to be produce grown in their community or their state. Locally grown produce seems to be more desirable than organic produce. More than half of respondents said they sometimes or regularly purchase locally grown produce, and another 21 percent said they buy locally grown when the price is right.

Thinking about food safety issues, do you think some items may be safer than others? Please tell us about purchasing the following:

Safety of locally grown produce

Safety of produce grown in the U.S.

Safety of produce imported from other countries

 

5 - Very comfortable

4

3 - Not sure/don't think about it

2

1 - Very concerned

Food safety concerns

When it comes to food safety, consumers feel most comfortable purchasing locally grown produce and produce grown in the U.S. Nearly half said they had concerns with the safety of produce that is imported from other countries. This gives important implications for marketing in the produce department. While many consumers prefer locally grown produce because it supports the local economy and reduces the carbon footprint of product transportation, touting items that are grown in the U.S. may be just as appealing because of consumers’ perception of food safety.

It is evident in the initial analysis that the consumer priority is not always price. There is tremendous opportunity to learn what purchasing factors are important to whom, and how to accordingly tailor strategies at retail.

In the coming months, the Perishables Group’s research and analysis will come together to determine how and where consumers are shopping, and whether they are trading shopping channels. The Perishables Group will also build an understanding of current purchase drivers and how they may have changed over the last year, in addition to whether consumers are substituting lower-priced produce items for higher-priced produce items.

The Perishables Group will share results of the research in relation to both the produce department overall as well as specific categories, and then provide an understanding of which retailer tactics are standing out as successful in appealing to consumers in this new reality.

About this story

Throughout the coming months, The Perishables Group will present an extensive research project examining the new landscape of the produce department, including the relative importance of consumer purchase drivers such as value, sustainability, health, food safety and more. Taking it one step further, the project will also determine the effectiveness of various retailer strategies in light of new consumer behaviors.

The research project— sponsored by Chiquita, Fresh Express, Crunch Pak, Dovex, Duda Farm Fresh Foods and Ready Pac—will combine inputs from sales data, consumer surveys and retailer feedback to develop a comprehensive understanding of current consumer values and effective retailer strategies. Specific inputs include:

• 6,000 Web-based consumer surveys

• Perishables Group Trade Advisory Board interviews

• Point-of-sale data from 11 retail chains across the U.S.

• Consumer loyalty card data from two retailers

• Promodata promotional data tracking

• In-store audits

The Perishables Group will analyze these inputs to define the new reality for the produce department as a whole and for specific categories including packaged salads, bananas, whole apples, sliced apples, celery/snacking vegetables and fresh-cut fruit.

Highlights from the research results will be published exclusively in a six-part series for Produce Merchandising.

About PG:

The Perishables Group (PG) is a Chicago-based independent consulting firm focused on creating innovation and value for clients in the fresh food industry. We offer a full spectrum of products and services geared toward complete market and category understanding, including research, analytics, marketing communications, category development, supply chain management and activity-based costing. We have more than 15 years of experience refining tools and strategies for maximizing success in the perishables departments. Find out more at www.perishablesgroup.com