For most American shoppers, the weekly grocery list is filled with fresh foods: meats, deli, produce, baked goods and the like. For those who have been closely following consumer trends, this comes as little surprise, as Americans have reduced out-of-home dining and cook food at home more regularly. One part stretching household budgets and another part finding a genuine joy in cooking and breaking bread with family and friends, at home dining seems to be back in vogue. Obviously, then, fresh foods are important for grocers; in fact, they represent one-third of grocery channel sales.

Fresh foods have long been the purview of supermarkets. In most stores, shoppers are greeted by colorful displays of fruits and vegetables, refrigerated cases of fresh meat and the smell of freshly-baked breads and cakes. They appeal to the senses like few other categories. And they have maintained sales while other parts of the store have declined.

But supermarkets lock on this category is facing increased competition. Perhaps seeing this, mass merchandisers and club stores have bet on fresh foods, and thus far, it looks to have been a wise one: fresh foods have been the only departments posting sales increases in these channels, up 1.1 percent in mass merchandisers/supercenters and up 1.9 percent in club stores resulting in respective 0.1 and 0.2 share growth. Mass and Club continue to attract more fresh food buying households, increasing Grocery channel competition for the consumer’s fresh food dollar. Grocers need to create synergies to drive center store and perimeter sales.

How can grocers take advantage of perimeter store sales and leverage that success in the center store?

1. Assist the shopper’s decision-making process. Fresh categories require a high-level of decision making: how important is variety, brand assortment and promotions? Where do the products come from, such as locally grown produce, sustainability farming and animal welfare? Educate shoppers with in-store displays and online education with respect to origin, nutrition, growing trends and recipes. In-store product samples are always effective introductions to new products.
2. Drive impulse buys in bakery and deli. While Bakery and Deli are less likely to trigger a trip, finds ways to drive impulsive or reminder purchases. Few things are more mouthwatering than the smell of fresh bread or cookies coming out of the oven or expansive displays of lunchmeats.
3. Optimize center store strategies. When meat is in the basket, it is likely to be joined with meal starters and side dishes. Bakery purchases are often accompanied by deli meats and cheeses as well as condiments. Produce is often joined by fish and meal starters. Understand these synergies to build shopper basket size.
4. Expand prepared food offerings. The only deli department segment growing (+3.5% for 52 weeks ended Q1 2011), prepared foods such as cooked chickens, salads and sandwiches represent more than half of dollars spent in the category. These offerings cater to shoppers’ increasing desire for convenience, quick preparation and ready-to-eat meal options. Quality meal deals are key to driving repeat purchases, and offer opportunities to cross-promote (e.g., chicken plus soft drink deals).

The ways grocers can enhance their fresh offerings are almost endless, and done the right way, they are a key differentiating factor in the increasingly competitive marketplace that can keep customers coming to stores and increasing basket size.

It is undoubtedly a challenging time for Australia’s grocers. Consumer confidence is down due largely to concerns about the economy and rising food prices and utility bills. As a result, shoppers are tightening their belts and looking for ways to make their dollars go further.

To reach consumers, major retailers are aggressively promoting “value” to drive foot traffic and achieve higher basket values and embarking on a two-tier pricing strategy which combines Everyday Low Price (EDLP) on household essentials, together with Hi-Lo promotional activity. Both actions have challenged the grocery industry’s established equilibrium, and as a result of deflation driven by the aggressive pricing campaigns of the major retailers, the average spend on packaged groceries (excluding fresh produce) has declined versus a year ago. Coupled with an increase in above-the-line ad spending by major retailers, the grocery channel is undergoing significant shifts, with declines in the contribution of independent retailer and non-supermarkets being the most evident.

Consumers Shop Around – Loyalty Suffers
As the retail landscape continues to evolve, shoppers’ behaviors are changing with it. Allocation of household spending between competing stores and brands is also evolving. The average number of visits to a specific store is down, with one exception: online. Meanwhile, shoppers’ loyalty to a particular store or brand is largely flat or declining, with one in five shoppers now visiting four or more outlets in a four week period to fulfill their household requirements (up from 13% in 2009), as variety, convenience and “shopping around for the best deal” becomes more apparent.

Adding to this new landscape is the emergence and growth of new retail players such as a major club store that plans to triple its presence in Australia by the end of July (two new stores, one Sydney and one in Canberra, will add to one current store in Melbourne). This provides yet another alternative store format for shoppers to patronize.

Expanding Online Presence – the Sleeping Giant
Not only are shoppers presented with new formats, they are also presented with multiple avenues to purchase from these stores, such as online and car park collection. Further, we are seeing growth in parallel imports marketed via new online channels such as offyourtrolley.com.au and groupon.com.au. Each of these new channels is contributing to the changes we are witnessing across the grocery landscape, forcing long-established retailers to rethink their overall offer to shoppers.

Then, of course, there is online grocery retailing, which could be described as something of a sleeping giant in the Australian market. Online grocery shopping in the UK and U.S. is now a fast growing and important sales channel. In 2010, U.S. online FMCG sales reached $12 billion, representing close to 2% of all FMCG sales; by 2014, that figure is expected to double to $25 billion.

In Australia, online shopping for FMCG products has been slow to take off, but there are signs of growth: 8.2 percent of Australians (aged 14+) claim to have purchased food or groceries online in the past 12 months to April 2011, up from 7.1 percent a year ago. This suggests that significant opportunities exist for those retailers who know how to effectively use the Internet to reach shoppers.

Strategies for Growth – Mix it Up
How can retailers and suppliers in the Australian grocery sector spur growth? The key is to identify new shopper touch points. Advertising budgets – which have seen large swings over the past two years – are now stabilizing. My colleague Peter Cornelius, Managing Director of Nielsen’s Media business in Australia, recently noted in an interview that while advertisers had invested little in 2009, 2010 saw strong growth, but off a very modest level, and we are now seeing the market return to an acceptable level. TV continues to be the primary medium for grocery advertising, accounting for two-thirds of spending, followed by magazines. The real opportunities to engage with consumers exist as a result of continued media fragmentation, whether through social media, interactive targeted marketing, or even awakening the online shopping giant.

The rate of change in the grocery sector is accelerating, but so are the openings for creative marketers who understand shoppers’ needs and demands, and can maximize opportunities within the landscape.

Grocery spending is slowing down

More than 70 percent of Russians say the state of their personal finances is bad or not so good, according to Nielsen’s second quarter global online consumer confidence survey. As a result, consumers’ average monthly spend on groceries has slowed. In Moscow, consumers’ average grocery basket spend has slightly decreased, bringing the cash outlay for grocery goods equal to the amount spent St-Petersburg for the first time (~16 thousand Rubles). Consumers dealing with rising costs typically turn to retail channels that can offer better prices, like discounters. But in markets with a high level of competition, such as Moscow and St-Petersburg, discounters have actually started to lose consumer loyalty.

Hypermarkets are gaining back their positions

In 2010, discounters in Russia gained favor with shoppers because of their low price positioning. But today the situation is reversed. According to the Nielsen ShopperTrends 2011 study, hypermarkets are gaining back their positions – both in terms of brand equity, shopper loyalty, and basket size. Shoppers did not perceive discounters’ as providing their key communicated value – best prices for all goods – and started to switch back to hypermarkets where they spend the majority of their monthly grocery budget. Consumer loyalty must be built on trust.

Value – not price – is driving shoppers

Notwithstanding the price sensitivity of cash-strapped consumers, Nielsen’s study shows that low prices are not really the main store choice driver today. Value for money is. Assortment is the second most important driver for store choice. This is especially true in Moscow where getting good quality fresh food in modern trade is more difficult than in the port city of St-Petersburg where fresh-food delivery is not an issue. In St-Petersburg, where the modern trade development, retail concentration and competition is very similar to the European shopping experience, good service and a nice shopping environment are also key store choice drivers.

Shoppers want wider choices and a better experience

The rising number of specialty or niche stores that build assortment on one or two basic product categories, such as bakeries, meat stores, fruit and vegetable stores, and dairy stores are gaining popularity with consumers. The importance of these specialty niche stores will grow as consumers turn to them for better quality, freshness and wider choice. These specialty stores can also turn into an opportunity for the small retailer and owner of impulse kiosks and pavilions who will be affected by the new law banning beer from kiosks after 2012.

War on the shelves

As shoppers make more decisions based on the importance of ‘value for money’ and make decisions more often in-store, competition for consumers’ choice will move to the shelves. Correct price and assortment decisions and effective in-store communications will be vital for retailer and manufacturer success, which is especially true for products where brand power is low.

Promotion pressure is growing

The number of items sold on promotion is growing in each product category and is an effective means to drive basket size. Nielsen reports that 43 percent of survey respondents in Moscow and 54 percent of respondents in St-Petersburg say they seldom change stores based on promotions, but actively look for promotions in stores where they usually shop. Promotions will become an even more important means to drive consumption and market share. Manufacturers and retailers need to make smart promotion decisions and be careful to not over-promote the product category or take too many temporary price reductions. This could lead to devaluation of the brand power in the category, open the gates for private label expansion and potentially decrease the sales potential of the category in the long-run.

Now is the time to drive brand equity

The new wave of consumer pessimism will be a good test for manufacturers’ brand power. This is the time when leaders can get the best of the situation by investing in shopper marketing. At the same time, it is also an opportunity for new brands, including store brands or private labels, which will be able to offer shoppers the value for money they desire.

More consumers in the U.S. are online talking about fresh and unprocessed foods when it comes to healthy eating, and a vocal segment of health enthusiasts are setting trends on the next wave of hot ingredients and spices.

To better understand these emerging trends in nutrition, Nielsen has been analyzing online consumer conversations about food and health and wellness since 2003. Our analysis highlights discussion trends among mainstream consumers and also quantifies buzz among health enthusiasts, a passionate and informed consumer segment that Nielsen monitors across 400+ social networks, key blogs and forums. Listening to what health enthusiasts care about helps us to see what’s next.

As we look at what consumers buy and how they talk about products, we’re able to quantify the online buzz around products and ingredients, as well as product label claims like low fat or high fiber.

One key trend we’ve observed is that health enthusiasts are expanding their palate with fresh citrus fruits and flavors.

• Kumquat buzz among health conscious consumers and search activity* in Q4 2010 were up significantly in part due to inclusion in recipes.
• Satsuma – a seedless fruit of Japanese origin – is on the rise with health enthusiasts touting high levels of vitamin C and fiber. Beyond health, Satsuma oranges promise a “beauty from within” benefit and are used in skin care peels.

*Google Insights

Comparing Health Enthusiasts with the Mainstream

Key observations from online conversations:

• Fresh and unprocessed foods generate the highest volume of all online claim conversation across the mainstream audience.
• Presence of fiber is on the rise with mainstream consumers – up 14% in Q4.
• Preservative-free offerings should be watched closely given increasing mainstream interest (+8%)
• Carb presence and sugar-free offerings are leading topics in terms of total volume for both segments.
• Gluten-free interest is on the rise among Health Enthusiasts
• Mainstream consumers are conscious of sodium offerings likely as a result of recent news on sodium content and manufacturers introduced reduced-sodium offerings.
• Low- and no-sodium offerings are on the rise among health enthusiasts.

While Americans have had many things to worry about during the recession and now the sluggish recovery, fast-rising prices at the supermarket were not one of them. The U.S. Department of Agriculture’s all-food index showed a modest 0.8 percent price increase from 2009 to 2010, and just a 0.3 percent increase in the price of foods consumed at home – the lowest levels of food price inflation since the 1960s. But at a time when many countries around the world are facing double-digit inflation on basic food items, can the U.S. be far behind?

The simple answer is no. The USDA is forecasting overall food prices to go up between two to three percent in 2011, due largely to the rising cost of commodities and lower supplies of basic ingredients – higher than the past few years, but certainly not the levels being encountered around the world. Demand for corn is at the highest levels in recent memory: supplies of the U.S. crop are at 15 year low as increasing demand from the U.S. ethanol industry is using existing resources. To get a better sense of how price increases could affect the average American household, it makes sense to look at overall food spending and how it compares to other countries.

Cost of Food
According to the USDA, Americans spent more than $607 billion on food consumed at home in 2009, and another $575 billion in food consumed away from home. For most of the decade, food eaten outside of the home was making steady gains, and by 2008, in-home and out-of-home food consumption was essentially on par. But the recession changed all that, and as consumers sought ways to save money, outside dining was one easy way to reduce household expenses.

The cost of food for the average U.S. household makes up a lower percentage of income than almost any other nation. Food accounts for just 6.9 percent of the average American household’s expenses, compared to more than 11 percent for the average Austrian household, 15 percent in a South Korean home, 42 percent in a Ukrainian home and 45 percent in a Pakistani home. On a per capita basis, that amounts to $2,208 in the U.S., $2,860 in Austria, but just $701 in Ukraine and $309 in Pakistan.

Inflationary Impact on Families
With that in mind, how might inflation affect the average American family? If the USDA’s forecast holds true, inflation of 2–3 percent would add $178 – $267 to the food bill per year. If inflation goes a bit higher than expected, say 4–6 percent, food would cost the average household another $356 to $554 each year – not an insignificant amount. But the real story is more complex. Consider the reduction in the social security tax rate for 2011: the decrease in the rate from 6.2 percent of income to 4.2 percent equates to an additional $1,000 in the average American’s wallet, enough to cover increased food costs and then some. And, we should expect increased demand for products and services in the U.S. as unemployment subsides throughout this year and consumer confidence builds.

With the cost of basic commodities such as meat, wheat, milk and eggs rising by high-single or low double digits, CPG manufacturers will need to raise prices. We think that most retailers will simply pass those costs on to consumers – a move that may prompt more households to shift to less expensive private label goods, which have already enjoyed solid growth over the past three years. A smaller percentage of retailers will resist price increases and will look to turn lower prices into a competitive advantage.

The stability of food prices during 2010 was a small blessing for families looking to control expenses during a time of economic uncertainty. But for retailers and CPG manufacturers, it has come at a cost. Unable to pass on cost increases to consumers, they have had to find new, innovative ways to maintain sales and margins. Some of this came through new product innovation, while others reverted to adjusting ingredients and package size. Now, however, it looks as if they may finally be able to justifiably increase prices as the economy improves and consumers show a renewed willingness to spend.

Cautionary Note: Global Oil Price Impact
With continued unrest in the Middle East and northern Africa and the resulting impact on global oil prices, we will likely see increased inflationary pressures from rising fuel prices have a similar impact on U.S. consumers as experienced in 2008 (i.e., shopping trip compression, more at-home consumption, value buying and increased coupon usage). Global demand for U.S. food in developing countries is great for U.S. exports, but those gains may also lead to higher food prices for U.S. consumers.

SUMMARY: As the economic downturn forced consumers to make trade-offs and buy less, consumers focused greater attention to at-home meals and in-home entertainment. Smart manufacturers and retailers are taking advantage of this trend by offering creative meal solutions, collaborating with partners to co-promote, creating engaging online sites and making it easier for consumers to relish the joy of cooking.

When you think about it, isn’t food the real social network of the ages? Food is, and always has been, that special bonding agent that connects family and friends—with no electronic device necessary! Whether we gather for holiday celebrations, special occasions or the traditional family dinner, food, plain and simple, brings people together. And, as the U.S. economy experienced one of the worst downturns in recent history, consumers showed a renewed focus on back-to-basics in-home cooking.

Food Matters Most
When money is tight, food matters most. Edible departments are growing and non-edible departments are off as consumers are making trade-offs or buying less. Consumers are placing more attention on at-home meals and in-home entertainment options as evidenced by more time spent surfing cooking-related websites, watching food-related TV programming and reading cookbooks. Nielsen reports that each month, food and cooking websites are visited by an average of 70 million unique online visitors, taking into account home and work online activity from year ending September 2010. The number of households tuned to the Food Network during prime time reached over 1.1 million viewers in the first quarter of 2010 — an increase of 9 percent versus year ago. And as total book sales saw a year-to-date decline of 4 percent, cookbook sales rose 5 percent.

Savvy manufacturers are capitalizing on opportunities that demonstrate how brands not only deliver a consumer solution, but also help drive a retailer’s sales efforts. For example, unit sales of womens’ cosmetics have been showing low or flat growth over the past couple of years, but the category is faring better than the entire health and beauty department. Evidently, looking and feeling good is something most women are not willing to sacrifice. Food and non-food retailers need to look for opportunities to win consumer hearts, minds, and dollars with the right assortment, right price, right promotion and right message.

Seize the Opportunity
An all-out food fight is taking place in the industry as grocers are seizing the moment to grab a share of declining restaurant sales through innovations relating to ready-to-eat foods for consumption in and out of their stores. With retailers offering improved quality of prepared foods and in-store food-service programs, this is the initial phase of lifestyle retail formats emerging as retailers look to enhance the entertainment value of a traditional mundane shopping trip and entice shoppers to spend more per shopping trip.

And if you don’t think food matters, stop into a mass merchandiser retailer where you will notice how some have modified and expanded food sections in their stores by selling fresh perishables (meat and produce). And, take a look at how drug and dollar store retailers are expanding the selling space in their stores devoted to food.

Restaurant brands may have appeared in grocery stores well before the U.S. economy turned south, but more and more of them are finding a spot on grocers’ shelves. And the latest is celebrity chef-inspired brands. Dollar sales for a broad set of selected restaurant and celebrity chef brands are up 12.6% and unit volume is up 10.6% versus two years ago, with annual sales just shy of $4.75 billion. Regardless of the economic situation, this is a great way for food manufacturers and restaurants to collaborate and extend the reach of known brands and drive sales at retail.

Creative Collaborations
Meal-deal programs that help families save can be described as the next generation of recipe marketing. And most grocers are playing “follow the leader” by making recipes ideas and easy meal solutions—featuring manufacturer and store brands offerings—a prominent part of their websites.

Many retailers and some food manufacturers are also doing a great job of merchandising or co-promoting with complementary food categories during key selling periods. Using these categories in continuity-based loyalty programs by rewarding shoppers with discounts based on spending levels to get consumers to spend even more!

Want to Sell More Groceries – Try Cooking Classes
Another way for grocers to drive more sales of groceries and cookware is to teach shoppers how to cook. Since cooking schools won’t work in all banners or locations, retailers should explore options for online cooking lessons. And don’t forget about the kids…or dads. With more men out of work than women and with some families opting to have the husband stay at home with the kids, online cooking tips and online cooking videos gets the whole family involved in the process.

Smart manufacturers are also providing consumers with cooking solutions that include items that go well beyond the products they sell by enabling consumes to purchase kitchen and cooking solutions online. And providing cooking solutions via online established cookbooks using recommended ingredients is a great idea too.

Food for Thought
While our economy has many consumers thinking about the prices they pay for just about everything, it seems that too much emphasis is being placed on low prices and not on the benefits and solutions (real and emotional) consumers can receive from manufacturers and retailers. Here are some thoughts for how retailers and manufacturers can capitalize on these trends:

1. Consider meal solutions for breakfast, lunch and dinner that leverage both center store and perimeter categories.
2. Collaborate on meal solution formats and arrange the store aisles so shoppers don’t have to walk the entire store to find one-stop items.
3. Leverage cooking classes and recipes both in-store and through multi-media (print, online, smart phone apps) outlets.
4. Try in-store and mobile demo and sampling stations so your shoppers and consumers can smell and taste what you have to offer to drive a sale.
5. Cross promote against complementary food and non-food categories to provide value along with solutions.
6. Look to social media sites to attract recipe ideas and feedback from shoppers or consumers and use banner or brand advocates to speak for you.
7. Explore celebrity chef or restaurant alliances to build equity with people who enjoy cooking.
8. Use advertising copy that embraces the joy of cooking and celebrations with family and friends. Be sure to make the brand or banner clearly visible and learn from the growing trend around reality video and leverage banner and brand advocates in your ads.

As we manage through one of the most challenging U.S. economic downturns, American consumers have made significant shifts in what they buy and watch.  From planning their shopping trips to focusing on value to trading down to going out less and staying in more, consumers have pressed the reset button and fundamentally changed their habits.

At the same time, consumer packaged goods (CPG) retailers and manufacturers have seized the moment to drive – - rather than ride — the recession wave through innovation.  How is this innovation impacting consumers today and impacting the evolving retail landscape of 2015?

Some of our Retail 2015 predictions:

1. Mass supercenters and e-commerce will be the big winners.
2. Low and high-end grocery stores will grow share.
3. Pet stores and dollar stores will grow.
4. Retail consolidation: the big will get bigger.
5. Smart phones will be the primary enabler of shopper engagements.
6. Store formats will evolve: new formats, smaller stores, pop-up retailing to accelerate.
7. Anywhere in-store check outs to replace self check-out and open floor space.
8. In-store kiosks, digital media and holograms to interact with shoppers.
9. Demise of traditional consumer age and gender targets as technology enables seamless view across languages and ethnic/generational groups with links to purchase and usage behavior
10. Evolving U.S. demographics have major impacts

Tune in as we review the innovations impacting the retail landscape today, discuss our retail predictions for the future and what retailers can do to prepare during the webinar, Retail Landscape 2015: An Update on Tuesday, October 26.  Join the conversation via Twitter at #Retail2015.

Buzz about Greek yogurt suggests something of a triple threat. The category appeals to consumers to satisfy three core needs: health, convenience and taste. In online conversations, consumers focus more on the health benefits (using attributes like “fresh” and “better”) and the rich and creamy texture. Dieters, health seekers and athletes recommend eating Greek yogurt across all meal occasions – particularly as a satisfying on-the-go or evening snack. Underscoring its multifaceted appeal, cooks claim to opt for Greek yogurt as a more nutritious base for homemade salad dressings and mayonnaise. Remarkably, apart from a relatively small subset of total category buzz related to deals and coupons, most of the conversation deals not with price but instead with the benefits of Greek yogurt.

As consumers continue to redefine value and repair their balance sheets, retailers and manufacturers can look to solutions that drive sales beyond price alone. Connecting with consumers’ “need states” requires a critical review to determine the factors driving behavior. In the case of Greek yogurt sales, the healthy benefits of the more expensive variety justify the higher cost in the minds of consumers. And while controlled spending in the tough economy is the new norm, there are some things that consumers will not sacrifice at any price – and health is likely one of them.

TV and the Web key places for information
When asked what main sources of information were relied on during the unrest, most Thai consumers claimed TV (95%) was their key source of information, followed closely by Internet (94%), Newspaper (76%) and Radio (43%) respectively. Interestingly, consumers also indicated non-traditional sources of news such as online blogs (35%) and Twitter (25%) were important channels too, perhaps reflecting a need to engage and interact with one another.

Increased TV viewing and Radio listenership
During May 13-21, 2010 the number of people in Bangkok who watched TV increased by 23 percent compared to the same period in 2009. On Wednesday May 19, when the red shirt sites were reclaimed and the curfew started, the number of people watching TV increased by 36 percent compared to the same day last year. Similarly, the number of people who listened to the radio in May 2010 increased by 14 percent.

Food categories ranked high on consumers’ buy lists during the crisis
Nielsen’s Retail Index indicated that overall fast moving consumer goods (FMCG) growth slowed in May 2010 to 4.9% vs. 8% in April 2010 as consumers focused on purchasing necessity products.

“During the political unrest, we observed more people eating at home. This meant that more Bangkok households purchased categories such as rice and frozen food. At the same time, households stocked up on other basic food categories including fresh food, milk powder, instant noodle, canned fish and ready-to-eat meals” said Aaron Cross, Managing Director of Consumer, Nielsen Thailand. “The negative impact of the red shirt protests in May on FMCG growth was slightly more prevalent in Greater Bangkok than Upcountry. However, we are of the view that FMCG growth will return to normal from June.”

Consumers to focus on value, quality time with family and savings after the unrest
Seven out of 10 consumers expected their lives would return to normal immediately or within a month after the political unrest. Following the May unrest, more consumers indicated they plan to focus on spending more quality time with family (53%), staying at home (49%), saving (39%) and seeking value for money (25%).

“The events of May were significant. Subsequently we have seen a rise in national pride as Thailand looks to recover and get back on its feet in the second half of 2010. This is evidenced by one quarter (24%) of consumers indicating they are planning to buy more Thai products post the May events” said Cross.

When asked about their financial plans after the unrest, consumers claimed they plan to increase deposits in saving accounts/fixed savings (31%), increase Omsin Lotto (30%), Gold (22%) and increase life insurance (20%) in their future investment portfolios.

Nielsen’s integrated study report comprises insights from an online survey (targeting 500 internet users aged 18 and above), Nielsen Retail Audit, Nielsen Homescan Consumer Panel, Nielsen Television Audience Measurement and Nielsen Radio Ratings.

Stuart Taylor, Vice President, Custom Analytics
Kristin Chaudoir, Manager, Price Promo Modeling

SUMMARY: The CPG industry has been abuzz over assortment downsizing. Yet, despite all the talk of major SKU reductions, the average food channel store decreased variety by just 1% in 2009. The majority of grocery retailers plan to either maintain current levels or continue slimming SKU count in 2010. It’s a tricky balancing act, feeding consumer hunger for personal variety while bulking up margins through operational efficiency and store brand sales. The key is determining which products deliver true incremental category sales.

What size is the right size to downsize? Assortment challenges vary by format, region, category and brand, but the objective is the same: satisfy the shopper need for choice and innovation without drowning in an unmanageable sea of SKUs. In 2009, four out of ten food retailers surveyed claimed to have decreased assortment roughly five percent on average. One-third of retailers claimed to have maintained the assortment status quo, while 22% claimed to increase assortment options an average of 3%.

There were many reasons fueling the frenzy. Sixty percent of retailers indicated they downsized to alleviate shopper confusion. The other reasons cited were mostly internally-driven operating decisions including: gives better facings/merchandising (75%), provides better inventory control (71%), high profitability/cost savings (52%), makes more room for store brand products (48%), shrinks shelf space so other areas of the store can be larger (33%) and keeps up with other retailers who are doing it (4%).

Despite media hype anticipating double-digit assortment decreases, the actual total percent of item changes for the year across major categories in the grocery channel averaged a very reasonable 1%.

When More is Too Much
The old school assortment philosophy summed up by one retail executive was simple: “bigger, bigger—how much money can I get for new items?” This “more-is-better” approach eventually evolved into a “more-is-too-much” outcome. In the midst of our economic malaise, retailers found an overwhelming number of consumer product choices at odds with delivering customer value and profits. Many began aggressive SKU rationalization efforts to decrease overhead costs and reduce in-store clutter.

More than half of those retailers surveyed in the 2010 Nielsen Retail Assortment Survey claim to have, or plan reductions of up to 10% of all SKUs on the shelf. Even as redundant products were eliminated, certain segments saw their product counts increase. Store brands enjoyed a 2% expansion over the prior year, while premium national brands held their own, avoiding cutbacks.

The Assortment Reality
When it comes to downsizing, not all categories are created equal; some added SKUs and some lost items. According to the Nielsen study, of the 32 categories analyzed, 23 experienced an average decrease of 2% in the number of items offered. The biggest losers were the cookie (-8%), water (-6%) and shampoo (-4%) categories, which saw the highest number of items removed from the shelf.

Concurrently, the biggest winner categories expanding SKU count included carbonated soft drinks (up 3%), shower gel and yogurt, each growing its product roster by 6%.

Working Smarter
Assortment downsizing is a difficult puzzle, weighing competing pressures from consumers, manufacturers and retailers. The major question faced by retailers is simple: how do we cut assortment smartly? More than 90% of retailers who claimed to have reduced assortment made their decisions through simple reductions in variety, by getting rid of flavors, pack sizes and the like within brands, while almost 70% targeted third and fourth tier brands. One executive described these moves as “one big draconian flow-through” designed to get “rid of low hanging fruit.”

While retailers cite cleaner shelves and easier assortment management activities as the stated reasons for such downsizing tactics, the often unstated objective of many retailers is the desire to increase store brand sales and profit margins. However, Nielsen analyses show that not all categories actually benefit from store brand expansion. It is essential to trim SKU counts by eliminating non-incremental items.

Incrementality is the concept that no single product action (addition or elimination) occurs in a vacuum. Taking products off a shelf might impact category or aisle sales positively or negatively and the interaction of products on the shelf must be taken into account when choosing where to delist, and where to add.

Shopper Reaction
Assortment is a complicated, interlinked chain of decisions balancing manufacturer and store goals with consumer needs. One of the major pitfalls to overly aggressive de-listing is consumer response. On one hand, shopper attrition is a major retail concern (indicated by 77% of retail respondents in Nielsen’s 2010 Retailer Survey). And retailers should be concerned: over half of the respondents (in our 2010 Consumer Shopping Survey) said they are less likely to shop a retailer if they perceive a decrease in assortment.

If assortment downsizing is necessary to not only reduce retailer costs, but to also provide a cleaner shelf for consumers without creating customer frustration, then it is essential to trim SKU counts by eliminating non-incremental items. And a well thought-out assortment strategy can make a big impact. Achieving even a one-half percent improvement in shopper closure across the grocery channel translates into an additional $1.5 billion in sales.

Success Strategies
For 2010, expect to see a continued SKU rationalization effort targeting economy brands, as well as a closer analysis of store brand offerings with an eye on possible expansion and a revamping across categories that have suffered sales losses as a result of overly drastic changes. To achieve these objectives, retailers will have to step back from the historical approach examining SKU rankings up to a category and focus on a more strategic, ongoing approach of balancing incrementality opportunities across departments, categories, segments and brands

Success lies with offering the right mix of products, not the greatest or fewest number of products. Winning retailers will be those who better leverage the concept of incrementality when designing their assortment strategy.