Tough times are challenging supermarket frozen food departments across the USA, but that’s not necessarily a bad thing. In fact, in many ways the forces changing consumer spending habits and wreaking havoc on industry costs are benefiting the frozen food department, according to retailers who participated in Progressive Grocer’s first-ever Frozen Food Operations Review.
We asked supermarket frozen food executives across the country to share data on the performance of their departments in 2007, and also to check their barometers for how they expect to fare in 2008 – and the report and outlook are both positive.
Retailers report on average frozen food sales growth of almost 5 percent in 2007, and predict just short of 4 percent gains by the time 2008 wraps up. Product prices have indeed risen, but many consumers are turning to frozen dinners/entrees as a cost-saving measure. As a result sales of budget dinners and private label frozen products have increased, frozen food retail executives Say.
In addition, the frozen food department has not been hit as hard by higher commodity prices as some other sections of the store have. Sixty-five percent of grocers polled in the first annual PG Frozen Operations Review say their frozen sales increased in 2007, while 12 percent say their department sales fell, and an additional 23 percent report frozen sales remained the same.
In total, frozen food sales increased by 4.9 percent, to reach $35 billion in 2007, according to Retailers.
Grocers don’t expect that the downward turn in the economy and skyrocketing prices will drastically affect supermarket frozen food sales for the rest of this year.
In fact, they say they expect 2008 to closely resemble 2007. Sixty-three percent of respondents say they expect frozen food sales to increase in 2008, just a slight drop of two points from the percentage of total respondents who report sales increased last year. An additional 26 percent predict sales will stay the same (up three points from 2007 observations), while 12 percent forecast a decrease in frozen sales this year (up only one point from 2007). Grocers on average say they expect a 3.8 percent rise in frozen food sales in 2008.
The department’s share of supermarket sales is 6.50 percent, they report. Average weekly frozen sales per store stand at $19,249; average annual frozen food sales per store are $1,000,948, according to the survey. Average gross margin in frozen comes in at 30.3 percent. Shrink, obviously less of an issue in frozen foods than it is in perishable departments, stands at 1.7 percent, retailers say.
Frozen food execs are cooler on their profit predictions than they are on sales, as price increases continue to exert pressure. As long as manufacturers keep trotting out price increases, a guarded prospect for profit performance at retail is understandable. Less than half (48 percent) of respondents say frozen food profits will increase this year, while 32 percent report profit is unchanged, and an additional 20 percent forecast profits will drop. What’s more, many supermarket execs are warily watching activity at supercenters, which are intensifying their efforts to pull frozen food market share from supermarkets.
The threat is real, but full-service supermarkets remain the primary outlet for frozen food. According to data from Nielsen Homescan Consumer Facts for 2007, grocery accounted for 68 percent of frozen sales, while supercenters grabbed 19 percent.
The average frozen food department merchandises 212 linear feet on average, according to the survey. As demands on department space increase, fewer supermarkets are using coffin cases or open multideck cases for frozen foods.
Respondents report 5.7 cases and 43.2 freezer doors per store. Frozen food departments have labor issues: Keeping cases full, working in new items, checking dates, and rotating product are all vitally important to department sales and customer loyalty, retailers say. According to the study, labor as a percent of sales in frozen is 5.6 percent, with 1.1 full-time employees and 2.4 part-timers. The average frozen food department has 2.3 full-time equivalent employees per store, between both full- and part-time employees. Many supermarket chains combine labor for frozen food and dairy teams at the store level.
Ice Cream Screams Sales, Profits
We asked frozen food executives to choose their three fastest-growing frozen food items or categories. Resoundingly, they agree that the fastest growing is ice cream, with 61 percent of all respondents ranking it at the top. According to Nielsen Strategic Planner data, ice cream sales in 2007 amounted to $4.47 billion.
Entrees are the second-highestranked frozen food growth item, named by 51 percent, while frozen pizza ranks third, at 47 percent. Nielsen numbers peg frozen pizza sales for 2007 at $3.6 million. Frozen breakfast items ices fourth place with execs, at 33 percent, and handheld/snacks and vegetables tie for fifth, at 26 percent apiece. Desserts and frozen fruit tie for the sixth-fastest-growing frozen spot, named by 16 percent. Frozen chicken items rank seventh, at 14 percent; fish/seafood is eighth, at 12 percent; and pasta/bread is last, identified by 5 percent of respondents.
The majority (46 percent) of supermarket frozen food execs say ice cream is also their most profitable frozen food item. Frozen pizza’s profitability earns it second place, named by 14 percent, with frozen vegetables next, mentioned by 11 percent. Entrees rank fourth, at 9 percent. Rankings of other most profitable frozenitems include breakfast, handheld/ snacks, and frozen chicken, all at 6 percent, and fish/seafood tied with fruit at 3 percent..
In the popularity contest with consumers, meanwhile, supermarket frozen food execs say ice cream wins the day – again. More than40 percent of grocers identify ice cream as their most popular frozen food item. Pizza comes in second, with 23 percent naming it most popular. Entrees and handheld/ snacks are tied for third, at 8 percent. Frozen breakfast items, fish/ seafood, pasta/bread, and fruit are tied for fourth place, at 3 percent. Meeting customer needs New products are high on the wish lists of retailers, with over 73 percent of respondents reporting they’re actively seeking new products as a way to meet their shoppers’ needs. In particular, they want products to address consumer concerns about health and wellness: These types of products top retailers’ lists for must-haves, with 68 percent of respondents naming health and wellness as a new product Priority.
Organics Are Part Of The Equation
Organic frozen food is a $305 million segment currently, with labels such as Amy’s, Kashi, Dr. Praeger’s, and Alexia Foods at the forefront. While organic frozen food sales grew by 23 percent in 2007 over 2006, only 1 percent of all frozen food sales are generated by organics, compared with 1.2 percent in dry grocery, according to Nielsen data.
Customer demand for budget dinners is also on the rise, retailers say. Half of survey respondents say they’re trying to get more budget dinner solutions into their frozen food assortments.
Scott Groth, director of analytics and syndicated services for Omaha-based ConAgra Foods, says his company has seen a slight increase in the economy meal share of total frozen meals in recent months. “The economy meals represent 40 percent of total frozen meals as the largest segment of the category,” notes Groth, citing IRI research for the 12 weeks ending Aug. 17, 2008.
Frozen food department execs are also seeking new products in single/smaller portion sizes (42 percent), whole grain and lower sodium (each at 21 percent), and indulgent products such as gooey desserts, premium ice cream, and high-end, calories-are-no-object frozen meals (all in at 16 percent).
When asked how they’re dealing with rising costs, the overwhelming majority of grocers (86 percent) say they’re raising retail prices to offset margin losses. A whopping 43 percent favor running more specials, to keep prices in check. Surprisingly, 16 percent say they’re holding the line on prices and absorbing margin losses, while 16 percent say higher prices are driving them to switch vendors.
Rising costs for both food products and equipment in the department are serious issues, frozen food managers say. In the study, respondents rate 14 challenges they face on a scale of one to 10, where 10 equals “most serious” and one equals “least serious.” The No. 1 issue frozen food execs say they face today: finding space for new products, rated at 8.11 out of 10. Expansion is the word for grocers trying to stock a constantly mushrooming number of frozen food options, so many say they’re adding additional doors and case space.
Product cost is the secondhighest concern named by survey respondents, garnering 7.33 out of 10 on the “serious” scale. It’s appropriate that concern about profit (at 7.04) follows product cost, since the first affects the second. Recruiting effective employees, at 7.02, and equipment costs, at 7.00, are ongoing concerns. Equipment is an extremely vital part of the frozen food department, both for display to increase sales and for maintaining the quality of products at the store. While freezers may not be dropping in price, many grocers say they’re using LED lights behind freezer doors to save energy dollars and highlight product at the same time. The effects of the economy are again seen in responses from execs who say they’re concerned about local/national economic conditions (earning 6.78 out of 10).
Concern about other supermarket competition is next, at 6.62, and maintaining good variety/selection comes in at 6.40.
How suppliers can help From their suppliers, retail frozen food executives want better selection, lower costs, more promotions, more store visits, and better monitoring of product movement. In particular, they need a better selection of budget meals from vendors, as well as other products that are hot items during tough times. More variety in healthy and natural items is also on grocers’ wish lists.
A number of respondents say vendors aren’t doing a good job with category management, and also aren’t deleting slow-moving items soon enough. One grocer wants vendors to “help manage the category for product duplications and slow-moving items.” More promotions of product are also important to the department. Says one exec: “New items need high promotional activity to offset the inability to merchandise products in high-traffic locations.” Some grocers say they want more frequent service visits from suppliers. According to one, “Send a rep by our store every quarter…. We never see anyone.”
Forty-two percent of supermarket frozen food executives in the survey report their departments rely on category management systems to set departments, pricing strategy, etc. One grocer’s perspective: “We analyse the frozen food category sparingly, as we have a core group of very high-velocity items. However, when analysing items’ velocities, we have effectively eliminated or added items to our SKU offering.”
Frozen food department layout involves a lot more than stacking up products behind the doors. Some supermarkets are opting to group frozen products by type, such as frozen pizza, whether it’s Lean Cuisine or Freschetta, rather than brand. Others are using a door here and there for specific aims, such as Food City’s Party Zone, a party menu of items behind one door. Others are using portable freezer units for cross-merchandising in other departments, including perishable areas. Meanwhile, in upright cases manufacturers vie for eye-level positions.
While space and refrigeration are always mitigating factors, many supermarket frozen food executives say they’re exploring how to break out from the confines of the case by developing new ideas for marketing the department’s wares, both within the frozen food aisle and outside of it.
Private label is proving a bright spot in the department, say retailers. Many are focusing advertising efforts on their high-margin store-brand entries in frozen food categories, as shoppers search the department for ways to lower their food budget outlays.
The latest Nielsen numbers indicate 19 percent of frozen foods sold are private label, representing a higher percentage of the total department revenue than in dry grocery, fresh meat, produce, or packaged meat. The only department with higher private label sales than frozen is dairy, with store brand accounting for a whopping 39 percent. According to Nielsen research on product movement, the primary drivers in private label frozen foods include frozen dessert /fruit/ toppings, at 36 percent; frozen juices/drinks, at 34 percent; and ice cream, at 23 percent.