Supermarket industry sales increased 4.6 percent in 2007, and same-store sales rose 4.2 percent, the highest mark for this performance measure in more than a decade, according to the Food Retailing Industry Speaks: Annual State of the Industry Review 2007 released this week by the Food Marketing Institute (FMI). These gains, however, were largely offset by the 4.2 percent food-at-home inflation rate last year.

Unlike previous years, mid-sized food retailers (31-100 stores) posted the highest growth figures with overall sales increasing 7.4 percent and same-store sales 6.5 percent. The increases among independent retailers (1-10 stores) and the largest chains (500 or more stores) were closer to the industry medians. Among independents, overall sales grew 4.6 percent and same-store sales 4.4 percent. For the largest chains, these growth figures were 5.2 percent and 4.2 percent, respectively.

"The industry performed quite well in an extraordinarily challenging year," said FMI president and CEO Tim Hammonds. "Companies managed spikes in energy, commodity, healthcare and credit card interchange costs, along with relentless competition in the industry."

Supermarkets Help Consumers Manage Their Budgets
"Supermarkets are helping consumers manage their food budgets by offering multiple tiers of store-brand products and fresh, prepared foods, a convenient and less-costly alternative to restaurant food," he said. The report found that 98.7 percent of retailers offer store-brand products and 64.6 percent carry multiple tiers, from basic to premium offerings. These figures are up from 94.4 percent and 47.1 percent, respectively, in 2007.

Prepared foods are now a mainstay, featured by 94.9 percent of retailers, and a fast-increasing number offer customers a quick-stop area for tonight's dinner -- now at 50.6 percent, up from 36.8 percent.

"Retailers are innovating with a broad assortment of ethnic foods, sushi stations, and cooking classes and demonstrations to help consumers rediscover their enthusiasm for food," he added. "The most successful retailers are acutely aware of their customers' needs and demands, and delivering with precision."

Retailers Controlling Costs by Increasing Productivity
Supermarkets are tightly managing their own budgets, tempering the impact of cost increases in numerous areas. These efforts are contributing to improvements in key performance figures:
* Labor productivity -- sales per hour increased to $138.90, from $122.14 in 2006.
* Space productivity -- sales per square foot rose to 8.1 percent, from 7.3 percent.
* Inventory turns increased to 15.6 percent for the total store, from 13.5 percent.

Ad Spending Grows More Targeted
This year's report focused on advertising and found that annual spending remains at 1.0 percent of sales. Retailers are moving away from mass-marketing vehicles to more targeted ones, compared with spending results for 2004, when this report last probed this area:
* Newspaper ads, including circulars, declined to 52.2 percent, from 56.7 percent.
* Direct mail increased to 16.7 percent, from 14.6 percent.
* Radio advertising rose to 9.2 percent, from 7.3 percent.

More than one-third of retailers (37.1%) focus advertising on the fast-growing Hispanic market, allocating 5.5 percent of their ad budget.
Companies are just starting to use new media, including Web sites other than their own (19.4%), YouTube (6.3%), blogs (6.3%) and text messaging (6.3%).

Anxiety High Over Numerous Strategic Issues
Looking at the future, the report found a high level of anxiety over a growing number of issues. The impact, measured on a scale of 1 to 10 with 10 being the highest, increased for nearly every issue, comparing the rating in 2007 with that in 2008-2009. For the first time, six issues had a future impact rating of 7 or higher.

The largest increase occurred in the impact of the economy, although the net effect on the industry is uncertain at this time, according to the report. Consumers are cooking at home more and eating less at restaurants, increasing retail sales. At the same time, they are taking many measures to save money at the store, well documented in FMI's U.S. Grocery Shopper Trends 2008 report.

Retailers are divided over the effect of a recessionary economy: 58.3 percent believe it will reduce sales and profits while 41.7 percent foresee increases. Retailer anxiety over energy costs can be attributed largely to spikes in the cost of gasoline -- as high as 40 percent from December 2006 to December 2007, according to the Energy Information Administration. The increases have continued into 2008.

Food retailer healthcare costs rose 7.7 percent in 2007, continuing the long-term trend of annual increases in the high single-digit and double-digit range. With health benefits accounting for 1.6 percent of sales, these increases cost mid-sized retailers millions of dollars a year and the largest chains billions of dollars.

The frustration over some issues stems from the industry's inability to control them. The most significant example is interchange fees, averaging nearly 2 percent, which credit card companies and banks extract from every plastic transaction. These fees cost all retailers and, ultimately, consumers more than $42 billion in 2007, and are expected to near the $50 billion mark this year. They cost the average supermarket $126,000 per year, according to the report.

Many Retailers Compete With Health and Wellness Strategies
In 2008, more than eight in 10 food retailers are addressing competition issues by using five strategies with relatively high rates of effectiveness (measured on a scale of 1-10):
* Emphasis on perishables -- 97.3 percent use this strategy with an 8.4 effectiveness rating.
* Development of private-label products -- 90.4 percent and 6.9 effectiveness.
* Emphasis on natural/organic products -- 89.0 percent and 7.3.
* Emphasis on consumer wellness and family health -- 84.9 percent and 6.5.
* Unique shopping experience, store design and product selection -- 82.2 percent and 7.6.

The emphasis on perishables and natural/organic products is often tied to a broader health and wellness strategy, reflecting a major industry movement to help consumers eat more nutritious foods and promote their overall well-being. Some companies are adopting a complete store focus on health and wellness for their customers and employees. Several respondents to the survey for this year's report described how they are doing this.

One commented: "We are looking more holistically at consumer trends and developing comprehensive health and wellness programs to take to market, including advocacy with hospitals, in-store clinics and staff nutritionists."

Another said: "As a participant in the food industry, we must recognize our role in the education and providing of healthy alternatives to our customers. Health and wellness will become part of our company culture, touching all aspects of our company."