Shoppers Search Harder for Value at the Supermarket

By Ylan Q. Mui and Annys Shin
Washington Post Staff Writers
Friday, November 21, 2008

There was a time, not so long ago, when camembert bordered on blase and olive bars were all the rage as grocery stores sought to transform the weekly shopping trip into a gastronomic wonderland.

But in this economic environment, supermarkets are finding that frugal trumps foodie.

Giant posted its first positive sales figures in six years during the third quarter after two years of rolling back prices. Whole Foods -- whose nickname is "Whole Paycheck" -- has started giving tours of its stores to point out budget-friendly products. Wegmans announced this month that it is cutting prices on hundreds of items that would save families as much as $60 a month.

"These are uncertain times," Wegmans owners Danny and Colleen Wegman said in a statement. "We know our employees and customers are very concerned, and so are we."

Consumers have become increasingly skittish about spending money as the unemployment rate rises and home prices and the stock markets continue to fall. Shoppers have cut back on discretionary purchases such as new clothes to make room in their budgets for necessities such as food -- and they're not willing to pay top dollar.

"We're in a value-oriented environment right now," said Ron Paul, president of food consulting firm Technomic. Instead of eating out, he said, "all the research we've done supports the notion that people are returning to grocery."

Earlier this year, oil prices reached record highs, setting off a chain reaction of price increases that has rippled through the economy, ultimately showing up on grocery receipts.

In recent months, some of those trends began to reverse. With a gallon of gas now closer to $2, the cost of nearly everything has also decreased. The Labor Department reported this week that the Consumer Price Index, a closely watched inflation gauge, fell 1 percent in October -- the biggest one-month drop in more than 61 years.

One exception, however, was food prices, which rose three-tenths of 1 percent compared with the previous month. Although prices for several types of food, including produce and dairy, dropped last month, categories such as cereal and meat continued to grow. According to the CPI, the cost of food has increased 6.1 percent over the past 12 months, not adjusted for inflation, though the rate of growth has slowed since this summer.

Rising prices have made shoppers ever more alert for bargains, and grocers have begun to notice. Earlier this month, Wal-Mart launched "Operation Main Street" that included price cuts on food such as Betty Crocker potatoes (98 cents) and Crisco vegetable oil ($2.98). Wegmans said that it was lowering prices even though its costs remained high.

The supermarket industry operates on a notoriously razor-thin margin, and while grocers compete on price, many of the prices that they must pay their suppliers have not gone down. That means lowering costs to consumers can come at the expense of profits.

Giant found that its price-cutting initiative, dubbed the value improvement plan (VIP), struck a chord with customers last quarter. Sales at stores open at least a year -- a key indicator of a retailer's health -- rose six-tenths of 1 percent compared with the same period last year, the first gain since 2002. Several stores display shopping carts filled with similar items from Giant and a nearby competitor, and the receipts show Giant as the best on price.

For Thanksgiving, its circulars are promising, "We won't be undersold on turkeys!"

"The repositioning we have undertaken across the company was always the right thing to do," said John Rishton, chief executive officer for Giant's parent company, Royal Ahold. "In the present economic environment, we think it is even more appropriate."

But several analysts said it was unclear how much of Giant's positive results were because of overall increases in the price of food. Still, they said that the value improvement program seemed to be helping the grocer improve traffic in its stores.

"They would be in a very weak position without VIP in this kind of environment," said Jaime Vazquez, an analyst with J.P. Morgan. "It has become, for the first time that I remember, a price-offensive player."

Even upscale grocer Whole Foods has shifted its marketing to focus on value. The chain began giving "Value Tours" of its stores this year that teach customers about the savings of buying in bulk and how to order just enough fish. Once a week, the company posts tips on finding bargains on its blog. And for the holidays, the grocer is promoting a list of environmentally friendly gifts that cost less than $20. (Chocolate Advent calendar, anyone?)

"We've been nimble, and we're really able to help our shopper when they may have to shop with a budget for the first time," Whole Foods spokeswoman Kate Lowery said.

But despite promotional efforts, it remains unclear when food prices -- for both consumers and grocers -- will begin to ease.

When the price of raw ingredients such as corn and other grains go up, food companies such as Kraft and General Mills are reluctant to raise prices for fear of driving away business. However, once they do raise prices, and customers have gotten used to paying them, they are reluctant to lower them when commodity prices drop.

"There is no incentive to remove those prices because it would affect their own profitability," said Chris Lafakis, an economist with Moody's

This dynamic is what makes food prices "sticky," in economist parlance, even during economic downturns. In the 1990 recession, for instance, wholesale food prices didn't fall but were largely flat for the year, Lafakis said.

"We're going to not see prices come down," said Phil Lempert, who publishes "I think that's the number one thing people have to recognize."

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