Challenges & Channels

Published in CSP Daily News

Drug stores, grocery stores increasingly stepping on c-stores' toes, IRI says

CHICAGO -- Total consumer packaged goods (CPG) dollar sales grew only 1.6% in 2005, as the industry faced an extraordinarily challenging year marked by a devastating hurricane season and an uneven economy. But while the industry growth was disappointing, trends across specific channels and categories throughout the industry were encouraging, according to 2005 CPG Year in Review: A Remarkable Year of Challenges & Wins from Information Resources Inc. (IRI), a provider of enterprise market solutions for the CPG, retail and healthcare industries.

The [image-nocss] drug store channel had an exceptional year, IRI said, mostly at the expense of convenience stores. With total CPG sales growth at three times the industry average, the channel enjoyed growth across nearly all departments.

The grocery channel grew dollar sales only slightly; however, the increase was enough to maintain an all-outlet share, which is a potential turning point in grocer's long-term battle against share erosion from value channels.

The study also reports that select categories, including sports drinks, bottled water, hand and body lotion and cold/allergy/sinus tablets posted double-digit growth through innovation and alignment with consumer needs.

Despite weak dollar sales growth, the CPG industry had a remarkable year, said IRI Global Chief Marketing Officer Janet Eden-Harris. Perhaps what is most extraordinary about this past year is that many categories, brands and retailers did grow within this challenging environmentlargely through innovation.

Across product segments, beverages were the true growth leaders in 2005. Sports drinks, bottled waters, coffee and wine led this segment, which posted a 5.1% increase in sales. The healthcare segment benefited from growth in cold/allergy/sinus products, in which new product introductions, including Mucinex and pseudoephedrine-free Sudafed PE, contributed to growth. The longstanding decline across general merchandise categories continued, with the most significant dollar sales declines occurring within photography supplies, batteries and kitchen storage.

Drug store dollar sales exceeded industry growth across all CPG departments. The largest gains occurred among less-developed drug store food categories, such as frozen, bakery and dairy, which provides further evidence of the channel's evolving role as a convenient food and beverage outlet. Drug stores were also successful in gaining share within core healthcare and beauty/personal care segments.

It appears as if the drug store channel's heavy focus on neighborhood merchandising, investment in destination departments and efforts to the link the front-end with the pharmacy are paying off, added Eden-Harris.

Top 10 CPG categories posted mixed results during the past year with the largest two, carbonated beverages and milk, experiencing flat sales. Total carbonated beverage demand continued to slide as consumers opted for alternatives, such as bottled water and sports drinks. Diet soft drink sales; however, continued solid growth. Milk dollar sales were impacted by lower price increases in addition to a slight reduction in volume.

Wine and spirits growth continued to negatively impact beer sales, but the category is poised for longer-term growth as the legal drinking age young adult market expands. According to the IRI report, the real standout category among the top 10 was frozen foods, with innovative new skillet and crock pot dinners leading the way.

A review of the top 10 growth categories highlights major growth drivers in 2005: health and wellness, enhanced performance, premium products and price. The perceived benefits of sports drinks, water and yogurt combined with innovative flavors and packaging propelled these categories onto the top 10 list. Refrigerated salad and coleslaw also benefited from a fresh, healthy positioning, as well as convenient new product offerings.

Channel migration was clearly evident in 2005, but at a slower pace than was seen in prior years. While supercenters accrued the largest gains, the channel appeared to take share from other value channels, including mass and club.

The grocery channel maintained share in 2005, following significant share loss in 2004. Industry efforts to differentiate grocery stores from value channels through new formats, fresh foods, private label and natural/organic products appear to be resonating with consumers.

During the past five years, consumer shopping trips have steadily declined in number. According to the report, consumers are now in stores one time less often per month than they were in 2001. The result is fewer opportunities to influence consumer purchases in stores, which creates an increasingly urgent need to enhance the effectiveness of in-store marketing and merchandising. In 2005, trip frequency had a slight decline of 0.7%, with grocery and mass losing trips among their shoppers, while other channels gained.

According to the IRI report, the following trends are expected to impact the CPG market throughout 2006 and into the next few years:

Micromarketing will become imperative: Given slow industry growth, CPG marketers will increasingly invest in identifying untapped niche segments. Companies first to market will win big by engendering loyalty among previously underserved consumers. The market will be characterized by dichotomy: During the next decade, more than four million consumers per year will turn 21 and an even greater number per year will turn 50. The newly minted young adults will have greater budget constraints and will gravitate toward value-channel shopping and lower-priced brands. Aging baby boomers will demand premium products and services. A moderate, total health management approach will prevail: Consumers will continue their gradual evolution towards a more balanced, healthy diet. The implication for marketers is increased opportunity for new products with general health benefits, in addition to weight management benefits and a need for marketing messages that stress balance and moderation. Time savings will evolve to time optimization: Products that not only save time but make the time spent worthwhile by delivering exceptionally high quality, health and wellness benefits and/or taste will find a waiting market. Traditional retailers gain additional traction: Supported by favorable demographic trends and innovative merchandising, drug stores are expected to thrive long term. The grocery channel's investment in new formats, distinct private label lines and new health and wellness initiatives will help them gain traction and ward off major share erosion for the next few years. Grocers will face new challenges; however, as the new young adult market maturing into primary shoppers will allocate a much higher than average share of their spending to super centers than the general population.

Findings presented in Times & Trends:2005 CPG Year in Review: A Remarkable Year of Challenges and Wins, are based upon an extensive analysis of consumer data from IRI InfoScan, IRI MarketInsight for Wal-Mart and IRI Consumer Network. For an in-depth view of the report, click here.