As 2008 comes to a close, the economy continues to make an impact on consumer shopping habits. Many consumers have established new shopping patterns, whether they include cutting back on products purchased, reducing the number of shopping locations or purchasing lower priced or private label products. One would think the current economy would be beneficial for club store and mass merchandise sales, since both originally were set up to offer value to consumers. This is not exactly the case.
A pass on mass
While mass merchandise and club store channels still offer value to consumers, supercenters are proving to be tough competition in winning consumer dollars. For the past seven quarters, Information Resources Inc., Chicago, has tracked the impact of the economy on consumer spending habits.
“What we have seen is a big movement across all income groups and actually across all departments toward supercenters,” says Sheila McCusker, editor of IRI’s Times & Trends reports.
In IRI’s Times and Trends “Channel Migration 2008,” the IRI Consumer Network reports that, for the year ended June 15, 65 percent of households made purchases in supercenters, which is up 4.2 percent from the same period the previous year. While 82.4 percent of households made purchases at mass merchandisers for the year ended June 15, that number is down 3.1 percent from the same period the prior year. The club store channel’s household penetration was up 0.7 percent to 49.7 percent for the year ended June 15.
In addition, supercenters were successful in stealing top shoppers from competing channels. This highlights “the critical importance of retailers indentifying and addressing the needs of their top shoppers as the economy continues its transformation,” IRI said. Of the channels, mass merchandisers lost the most heavy shoppers to supercenters, with supercenters making a 5.3 point gain from top mass consumers, according to IRI Consumer Network for the year ended June 15.
While the supercenter segment of mass merchandising is growing tremendously, mass merchandise sales are down for a couple of reasons. First, a number of mass merchandisers like Wal-Mart, which dominates the channel, continue to convert regular discount department stores to supercenters.
“The mass numbers for several years have tended to look pretty soft, but that is because they get converted to supercenters, and there are just fewer mass stores out there,” says Jim Hertel, managing partner at Willard Bishop, Barrington, Ill.
The other factor accounting for mass merchandisers’ sales loss to supercenters is fuel prices.
“At supercenters, consumers can do one-stop shopping, so they don’t have to drive around and use their gas, but they also get good prices, so it’s really been a very, very compelling value proposition,” IRI’s McCusker says. “Again, it’s been amazing that share has increased across even upper income consumers in supercenters.”
Cost inhibits club-goers
Even with the club channel’s value proposition of larger pack sizes with lower prices per ounce, the segment hasn’t benefited as much as other channels from the current economy.
“The opportunity may be a little bit more limited for club just because having the membership fee has the tendency to kind of raise that socioeconomic profile just a bit, and it also raises the bar for people who are going to be shopping there a bit,” Hertel says.
The supercenter segment’s growth also is inhibiting the club store channel’s growth. While the club channel’s food and beverage sales continue to be strong, and overall the segment is performing well, supercenters’ sales performance continues to outpace the channel, Hertel says.
Additionally, the economy has caused current Costco and Sam’s Club members, who might be a little bit farther up the income ladder, to cut back.
“Club stores have been a good solution for upper income consumers to a large extent, but for other consumers, we think what’s happening is the overall ticket,” McCusker says. “The overall cost when you go to a club store tends to be pretty high. You might be getting great value on a per-ounce basis, for instance, with large packs, but overall it tends to be a very large ticket, and the average consumer is really struggling … We think that has been what has really hindered club stores’ development within this economy.”
Food, fresh and packaged, and gasoline together represent more than 65 percent of sales at club stores. While the lower gasoline prices are a benefit to consumers, the cheaper prices decreased club stores’ profits, and the channel finds it harder to raise prices on food products on the risk of damaging the channel’s reputation for good value. In turn, club stores are relying more heavily on their private label brands.
“Costco has been very, very active with their Kirkland label and have probably pushed it harder and farther than a lot of retailers have,” Hertel says. “But Wal-Mart is on record with some of their recent commentary to Wall Street saying their private label brands are more important than they ever have been to them.”
Another way consumers are using club stores’ bulk packages and prices is by pooling their resources to shop together at the stores. BJ’s Wholesale Club is looking to profit on this group, and in its recent holiday preview newsletter featured siblings and roommates who shop together and save on gas, time and money.
IRI’s McCusker also suggests that offering smaller pack sizes might be something club stores could do to attract consumers in this kind of environment.
One area where club stores have continued to benefit is beer and wine sales. With consumers wanting to replicate the dining out experience at home, club stores have provided shoppers with a location to pick up reasonably priced wine and beer. In the United States, Costco sold more than 75 million bottles of wine in the fiscal year ended Aug. 31, making it the nation’s top wine retailer. During the same period, Costco’s global wine sales reached $1.1 billion.
Next year’s retail environment
Willard Bishop has been fairly bullish on beverage and food retail broadly and discount beverage and food retail in particular, Hertel says. He describes the current economic environment as one in which everyone is saying: “We haven’t seen the likes of this for decades.”
One way consumers have been coping with the economic situation is to eat more meals at home. People who are eating away from home less are likely to purchase prepared meals and also include beverage purchases in those baskets, Hertel says.
“The good news is that most people still are going to be consuming food, and so the food retailer, who is kind of sensitive, or I would say perceptive about the current economic realities, we think can do disproportionately well now because we think that everyone is going to continue to spend,” Hertel says. “They may start to pare off some of the more optional purchases, but food of some kind is likely to continue to be purchased as people are changing their behaviors. It’s probably the food away from home that is going to get hurt, and is being hurt, quite frankly, the worst.”
“The economy is going to be good for anybody who is in a value position in the marketplace, that is to say, they are a discount operator relative to more mainstream channels,” he adds.
Consumers still are expected to continue to watch their spending even though prices have started to improve on fuel and food. They still have to deal with the instability of financial institutions and rising unemployment, McCusker says. But some loosening up in shopping trip consolidation is expected, she says.
“Consumers will shop around more, which is good news for retailers outside the supercenter, because they are now willing to do more besides this one-stop shopping,” she says. “Club could actually pick up a little bit, for sure. For a total basket ring, consumers are still going to be cautious, but I think overall the club channel will have stronger prospects ahead for 2009.”
Supercenters are expected to remain strong in 2009 though. In addition, because the economic downtime has gone on so long, consumers are starting to establish some new habits, McCusker says.
“If they have positive experiences now within supercenters, chances are they are going to stay with it,” she says. “That is what is kind of unique about this economic environment, that it’s been so prolonged, so it gives ample time for new habits to form.”