PL Buyer's eReport August 26, 2008

August 27, 2008
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Paying the Price

Higher commodity and energy costs are translating into higher prices at the checkout line.


According to information released by the USDA, the Consumer Price Index (CPI) for all food is expected to increase 4.5 percent to 5.5 percent for 2008.

"Rising food prices mean prices are usually higher for retailers across the board," Ephraim Leibtag, an economist with USDA's Economic Research Service, Washington, D.C., told eReport editors. And while consumers might not be happy about the increase in food prices, they aren't really fighting back, Leibtag noted, since food is a basic necessity.

But Leibtag points to hope on the horizon for rising food prices. He says food price inflation seems to be peaking overall.

"We've seen a lot of big increases in the past six months, so food prices will probably end above 5 percent inflation this year," he noted. "Coming off 4 percent last year, we're predicting they'll rise 4 to 5 percent in 2009 - so slightly higher than 2007, but not as high as 2008. Different categories will lead the way at different points, but overall, the majority of this increase in commodity prices will be a 2008 phenomenon."

Leibtag said private label retailers and manufacturers can use the rising cost of food prices as an opportunity.

"Since private label ... products are usually at a lower price level to begin with, even with higher inflation they will remain lower priced," Leibtag said. "They can use their private label as a chance to promote their products as a lower-cost alternative. The weakening economy and higher inflation rate may be a chance to expand that endeavor."

Our Take: Shoppers increasingly are looking to store brands to help them make ends meet. But make no mistake: If they are less than happy with their private label food purchases, these shoppers will go right back to the national brands when economic conditions improve. Are you doing all you can to keep these shoppers happy?

Economy Watch

Down but Not Out
More consumers willing to change purchase behavior, shopping destinations.

The NPD Group, Inc., Port Washington, N.Y., announced the results of its most recent monthly "Fast Checks Study: Consumers Speak Out on the U.S. Economy." For the study, The NPD Group surveyed a nationally representative sample of 2,000 men and women aged 18 and over.

Of those men and women surveyed in July, 34 percent stated they would not change their purchase behavior. This percentage is down from April's survey, when 42 percent said they would do nothing different, despite the flailing economy. In addition, 41 percent of respondents stated that economic conditions would not affect where they would shop, compared to 44 percent in the April survey.

"This would suggest that we are starting to see signs that consumers are store and channel shifting," said Marshal Cohen, chief industry analyst for The NPD Group, "and it represents a huge opportunity for many retailers. Now is the time of year to make those all-important 'introductions' to new customers and make overtures to an established customer base. We will see which retailers know how to make new friends and hold on to their old ones."

Our Take: Also worth noting: The number of survey respondents who say they are concerned about losing their jobs has remained flat, at 34 percent. Cohen said this number "directly reflects the state of the spending psyche of consumers" -- and, therefore, is an important number to watch. If people feel secure in their employment, they will continue to spend money.

Industry Insider

Dare to be Different

Localized assortments, right pricing can be a boon to retailers.

Although localizing merchandise assortments is important to 21st century retailing success, equally important is having the right price for products. Miami-based Retail Systems Research's (RSR) new benchmark survey, "Customer-Centric Merchandising: Driving Differentiation Through Localization," reports that retail winners - those with year-over-year comparable store sales that outperform their peers' - believe these two factors are extremely important to their retail success.

The study states that 93 percent of respondents cited the importance of localizing assortments, but retail winners moved beyond that to price and markdown optimization. Additionally, the report notes that retail winners "pragmatically work with their merchandise vendors to improve understanding of demand signals and learn the best match between the products they sell and the customers who buy them. Winners place a higher focus on price optimization and price collaboration than their peers."

RSR's recommendations to retailers aiming for increased sales and success include driving process change supported by technology changes, and understanding the different localization requirements for different types of merchandise.

"Retailers that systematically work to localize both assortments and prices will achieve dramatic improvements," the report says.

Bits and Pieces

What's News in Private Label

Among the most notable retail and private label news:

  • CVS Caremark Corp., Woonsocket, R.I., and Longs Drug Stores Corp., Walnut Creek, Calif., announced that they have entered into a definitive agreement under which CVS Caremark will acquire Longs for $71.50 per share in cash, for a total purchase price of $2.9 billion, including the assumption of net debt. Through this acquisition, CVS Caremark will acquire Longs' 521 retail drugstores in California, Hawaii, Nevada and Arizona, as well as its Rx America subsidiary, which offers prescription benefits management services to more than 8 million members and prescription drug plan benefits to approximately 450,000 Medicare beneficiaries.
  • Winn-Dixie Stores Inc., Jacksonville, Fla., announced that it is now a member of Skokie, Ill.-based Topco Associates LLC. Winn-Dixie said it would look to Topco for procurement of its corporate brand products in the grocery, frozen, dairy, health and beauty care, general merchandise and perishables categories. "We are very excited about this partnership and believe that it will give us a tremendous advantage as we continue getting better at providing our customers and associates with a best-in-class private label program," said Joe McKie, Winn-Dixie's vice president of Corporate Brands.
  • HealthSport Inc., an Amherst, N.Y.-based developer, manufacturer and marketer of proprietary branded and private label film strip nutritional supplements and OTC products, announced that Walgreen Co. Deerfield, Ill., is the first national drug store to carry its pediatric electrolyte strips. Walgreens will sell the product under its own private label, and the products will be available nationwide in the baby nutrition section of Walgreen's stores.
  • Allegan, Mich.-based Perrigo, the largest manufacturer worldwide of private label OTC products, reported strong growth in fourth quarter and fiscal 2008 earnings. For the year, net earnings rose to $135.8 million compared to $73.8 million for fiscal 2007. The company attributed the increase to its ability to manage its supply chain and bring innovative new products to market.
  • Target Corp., Minneapolis, will focus on the latter half of their "Expect More. Pay Less," slogan, according to an article in Advertising Age. The retailer is making certain its prices are in line with those of Bentonville, Ark.-based Wal-Mart, and that customers are aware Target can be a one-stop-shopping destination. Marketing messages are being tailored to focus on value and convenience, the article said.

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