Under Attack'

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OAK BROOK, Ill. -- The sky appears to be falling, but convenience retailers can put themselves in position to pick up the pieces, said presenters during the CSPNetwork CyberConference "How's Business: Are You Having a Good Year?" Beware, however: The country's ailing economy is causing consumers to significantly alter their shopping habits, which could inch inflexible retailers toward the edge of the scrap heap. [To view an OnDemand replay of this CyberConference (free to retailers and wholesalers, $49 for others), click here.]

"Words cannot express what we are seeing with the changing landscape of the shopper," said Thom Blischok, president of consulting and innovation for Chicago-based Information Resources Inc., one of the CyberConference presenters. "We are in a transforming economy," rather than a recession or downturn. And it's bound to have lasting effects.

From the struggling to the most affluent, consumers are shifting their collective mindset away from that of "availability" to one of "affordability." In the new mindset, they are forced to make significant tradeoffs in their everyday purchases. They're also pursuing more shopping occasions guided by "a good, old-fashioned list," said Blischok, who co-presented the CyberConference with David Elkins of McLane Co. and Noel Vacanti of Mars Snackfood U.S.

It has been a gradual shift. Trip consolidation accelerated sharply in the second quarter of 2007, when retail prices spiked in the gas and consumer-packaged-goods sectors. Today's gas prices, with the nationwide price per gallon averaging more than $4, have further driven the phenomenon of trip conservation.

This "sticker shock" at the pump appears to be hurting c-stores' in-store sales, as consumers head elsewhere. Low-cost supercenters are meeting consumer needs for weekly shopping trips, while dollar stores and drug stores are staking claims on consumers' immediate fill-in purchases. And this is just the beginning, Blischok warned: "The convenience channel is under attack."

Blischok told the more than 90 retailer and supplier CyberConference attendees that looking to the past to weather this new era would not serve them well. While commodity costs, consumer confidence, price inflation, consumption and the availability of credit all took negative turns during previous recessions, the magnitude of change this time around makes the current economy a much different beast.

Consumer confidence appears particularly shaken, as Blischok illustrated with the results of a recent 1,000-person survey. Nearly 75% of households that make fewer than $35,000 per year feel they're worse off than last year. Among households making more than $100,000 per year, 39% felt the same. And only 25% of all consumers surveyed said they expected their financial situation to improve within a year.

"Across every single variable, the differences are dramatically worse," he said. "The last recession [in 2001] is not predictive of what's going on in today's retailing environment."

Retailers would be wise to adopt new strategies that recognize the consumer's struggle and offer solutions to save money or provide significant value. For example, Blischok suggested that retailers redesign the product mix focused on inexpensive "essentials" that people need to feed their familiesto survive.

Such strategies will become more important as costs continue their upward climb. Blischok made a startling forecast, suggesting the industry could realistically see gas hitting the $6-per-gallon mark by year's end. He also said the costs of food commodities such as corn, oats and rice would remain high, though wheat prices would moderate. And diesel prices, he suggested, would likely drop in the first quarter of 2009, though that would be off a very high base.

"We're a good year away from relief," he said. In the meantime, high shipping costs, packaging costs and fuel costs will keep prices inflated on the shelf.

At the same time, new realities are causing "pretty unbelievable" margin pressures for retailers, according to Blischok. Consumers are switching to lower-priced brands, including private label, or altogether abandoning some categories. Indulgent items such as cookies and ice cream, for example, may suffer significant sales declines because "consumers can't afford them" as the necessities drain the contents of their pocketbook, he said.

"Private-label tradeoffs are being made by the consumer where they think it makes sense," Blischok said. He also said private label is not for every consumer, nor does it apply to every category. Furthermore, consumers will spend money on affordable indulgences and brands they trust. He cited Anheuser-Busch, Kellogg's, Coca-Cola and Pepsi as brands that consumers "trust a lot" and have strong consumer appeal.

Following Blischok's presentation, Elkins, category development manager for Temple, Texas-based McLane, the industry's largest wholesaler, led attendees through a discussion of key in-store categories. Cigarettes, he explained, were up 1.1% in carton growth year-to-date, with premium and menthol brands faring particularly well. In the candy and packaged-beverage categories, innovation and brand extensions are driving strong performance but could be causing cannibalization of some established SKUs.

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