Winning with Prepared Food
LAS VEGAS -- For many retailers, foodservice promises higher profits and a powerful differentiator, whatever the channel. But it is by no means foolproof, as two analysts with Technomic Inc. explained at the recent 2013 IRI Summit.
“This is a business that is doing very well … but in many ways could be doing a lot better,” said Bob Goldin, executive vice president and director of the research & consulting division at Technomic Inc., Chicago, during an educational session on the opportunity of fresh prepared foods. “It requires retailers to sharpen their focus.”
Fresh prepared foods (FPF), or what Technomic defines as any fully or partially prepared food that requires minimal at-home reheating and served at a service counter, makes sense—“not for all retailers, but many,” said Goldin, citing an average gross margin of around 45%, making the category a very attractive profit driver. On the flip side is that margin’s dependence on controlling labor and shrink costs.
Technomic estimates the FPF market at $26 billion, with value-added meats, sandwiches, prepared meals, salads and pizza the largest segments, in that order. Sixty-eight percent of FPF sales at retail were generated by supermarkets, Technomic estimates, with c-stores providing 20% and mass/club 12%.
For c-stores, the bulk of FPF sales come from items such as sandwiches and roller-grill fare, which Goldin described as lower in quality and price, and questionably deliver on customer demands for fresh. The Technomic team pointed to Wawa, Sheetz and 7-Eleven as market leaders, noting that while convenience has inherent issues around fresh, these operators recognize the current menu constraints and are getting more adventurous with their offer.
Not surprisingly, the most ambitious programs are run by upscale grocers. Wade Hanson, principal and director of the retailer meal solution practice group at Technomic, highlighted the example of Giant Eagle’s Market District concept. With about a half-dozen sites in Pennsylvania and Ohio, the approximately 100,000-square-foot, gourmet-food-focused store includes crepe, waffle and gelato bars, Panini and salad stations, and cooking demonstrations.
At a grand opening of a Columbus, Ohio, site, customers received complimentary debit cards to use toward the purchase of wine. “The variety they go to is probably not best suited for most models,” Hanson said, but all retailers can learn from practices such as regularly replacing produce to convey freshness.
Wegmans Food Markets, a Mid-Atlantic chain that is widely respected by retailers in multiple channels, has a great understanding of its local markets, where the voids are and what customers want, Hanson observed. “Freshness—they define it.” This is tricky considering how diluted the term “fresh” has become, but Wegmans has been able to own the concept thanks to its impressive product and FPF offer at the front of the store, and small touches such as merchandising and messaging like “fresh-cut and pre-washed.” Consider that while 3% to 4% of total supermarket sales typically come from FPF, at Wegmans this figure is more than 20%.
Whole Foods, a pioneer in FPF, centers its program on quality, variety and unique items, although other supermarket chains are gaining ground on this market leader. “They’ve gotten much more precise and targeted about their promotional items,” observed Goldin, citing pizza- and sandwich-of-the-day specials. However, variety has its cost: Whole Foods’ shrink level is very high, the analyst said, and he expects the chain will fine-tune the variety going forward.
The Chicago-based chain Mariano’s gives the impression of a very expansive offer at the perimeter of its sites, but actually has a fairly limited assortment. Hanson highlighted the chain’s smart practice of offering price tiers on its meal options—one entrée and two sides for $6, $8 or $10, depending on the number of servings required—and keeps the offer simple with 16 to 18 meal options. “That is a good way to go—it looks fresh and is relatively simple,” said Goldin.
In mass and club, which has the smallest slice of the FPF pie, Costco is the clear leader, with a focus on entrees. While this channel has limitations of its own—lower visit frequency being one—Costco has had success with items such as rotisserie chickens, of which it sold approximately 25 million in 2012. If the chickens don’t sell in four hours, the retailer repurposes them in prepared items such as enchiladas and soup. The chain also offers “dinner made easy” promotions—or purchase one entrée, two side dishes and rolls for only $9.99.
Through all of these examples, Technomic determined a few keys to FPF success:
- Keep the menu relatively simple. “For retailers who get it right, it is an image, traffic and profit enhancer,” said Goldin. “That’s assuming they don’t overdo it on variety.”
- Do it right: focus on the food and delivering quality.
- Define freshness in your offer. Quality cues are critical here, whether through aroma, packaging or preparation method. Merchandising must communicate freshness, including when the product was made, offering simple labels on transparent packaging, all arranged on uncluttered shelves.
- Provide value options. “Understand the depth of your competitive set,” said Goldin. “This is important even for your financially comfortable customers.” This can be communicated by selling items by the ounce or pound, or in price tiers.
- Find the best supply-chain option. Whether produced in a commissary, finished on site, and/or sourced at a local or national level, figuring out the most efficient sourcing is key to maximizing the profitability and making the business case for FPF.