Recession Challenges: Food Industries Demonstrate an Appetite for Change

by Mary Turck

Beans. Macaroni and cheese. Premium dark chocolate. What’s the recession food? Probably all of them. Belt tightening means choosing cheaper, more filling foods. Fearful times call for familiar comfort foods. And chocolate? Consumers “enjoy it and think they have something really special,” reports the Wall Street Journal. Getting that special feeling from chocolate costs a lot less than a night out.

The recession affects all parts of the food system, from producer to processor, from grocer to diner. As the players jockey for position, all of them are moving within a system that was already in flux. The smartest in each sector are responding with strategies that go beyond cost cutting.

Challenge: rising costs, lower incomes

Rising petroleum prices impacted the cost of production, driving up the cost of both transportation and petroleum-based agriculture inputs. Food prices rose, with grain and dairy prices leading the way in 2007. Then producer prices began to fall toward the end of 2007 and through 2008. By the beginning of 2009, economic forecasts predicted rising unemployment for the balance of the year and into 2010. Falling stock prices diminished the value of stock portfolios, retirement funds, and pensions.

Restaurants were hit hard as consumers cut the cost of living by cutting the cost of eating. The National Restaurant Association reported declines in sales and customer traffic levels. Nearly two-thirds of restaurant operators reported lower sales in December 2008 than in December 2007.

The Chicago Tribune reported in November that business at traditional business-lunch spots, including the Capital Grille, Morton’s, and McCormick & Schmick’s, is down dramatically. Kathy Bergen wrote, “Advertising Executive Jim Schmidt ventured into a well-known seafood restaurant and found ‘you could roll bowling balls through the aisles at 12:15.’”

But even in tough times, people have to buy food. Overall, grocery sales continue to be strong. “Trading down” is the buzz phrase, as people look for cheaper ways to eat.

Restaurant strategies: from business lunches to the dollar menu

Dawn Sweeney, president and CEO of the National Restaurant Association, insists that restaurants are a key part of American lifestyle and predicts that people will continue to spend nearly half of their food dollars in restaurants. Dining out is a convenience for time-strapped customers. Going to a restaurant also remains a touch of luxury for many, a combination of recreation and necessity. Adapting to the current environment means moving lower on the food chain, rather than entirely cutting out restaurants.

Food Producers Are On a Different Cycle In agricultural economic cycles, production increases when prices go up, and then prices fall due to increased supply. According to Steve Thorson, a LarsonAllen agribusiness principal, most large food producers in the United States are affected more by agricultural economic cycles than by a recession. More

As fine dining and even casual dining operations scramble to stay afloat, McDonald’s, Burger King, and other fast food restaurants are scooping up customers. Both of the big burger chains are taking market share from competitors with higher price points, building on reputations for low prices and revamped dollar menus. While nutritionists cringe at their high fat, sodium, and starch content, the dollar menus deliver food at close to the price of cooking at home.

McDonald’s restaurants are even providing one of the “affordable” luxuries by breaking into the espresso coffee market. In 2008, McDonald’s introduced McCafé, high-end coffee at low-end prices, in many of its U.S. stores. (McCafé has been in Australia since 1993.) And while McDonald’s showed strong growth throughout the year, Starbucks took a major hit in the fourth quarter of 2008.

Casual dining and higher-end restaurants have also responded with special promotions and lower-priced entrées, including comfort foods, such as stews and meat loaf. In Chicago, more than 130 higher-end restaurants offered specials during the city’s second annual Week in February. Aggressive discounting and coupon deals are now nationwide strategies to get customers through the door.

Grocer strategies: taking advantage of trading down

The grocery sector as a whole has an opportunity for growth, as consumers move away from restaurants and toward eating at home. Busy families, accustomed to the convenience of eating out or ordering takeout from restaurants, have discovered the deli sections of grocery stores. A growing trend over the past several years, hot and cold deli sections offer ready-to-eat or at least ready-to-heat meals at a fraction of restaurant prices.

As parents rush from the office to soccer practice and piano lessons, they can swing by the local grocery and come out with dinner in a few minutes. Grocery store kitchens serve up family-friendly foods, from fried chicken to macaroni and cheese, with green salad bars offering health-focused veggie side dishes.

Grocery deli items, while cheaper than restaurant meals, can still take a big bite out of the family food budget. Comfort foods rank high on the menu at both grocery store deli counters and restaurants. Not only are meat loaf and mashed potatoes cheaper than many other foods, they also come with a subliminal message about returning to simpler, safer times. Nostalgia can sell fried chicken and pasta, but currently nobody is trying to sell the 1930s Depression-era lard sandwiches that filled lunch buckets back in the day.

In the regular grocery aisles, price remains a big part of the equation. Instead of buying frozen entrées, consumers are buying food they will cook at home. In the meat aisle, shoppers are buying chicken rather than beef or pork. Some are switching from more expensive boneless, skinless chicken breasts to bone-in cuts or whole fryers. Sales of flour and sugar are increasing. Frozen vegetables and fruits edge out more expensive fresh produce.

As they look for bargains, many shoppers discover that they don’t know how to cook their new choices, so grocers are responding with recipes and menu suggestions to provide easy alternatives in the kitchen.

Grocery stores are also looking for ways to cut costs and boost profit margins. Many of the largest food manufacturers (e.g., General Mills, Heinz, Kellogg) kept prices on name-brand products high, going into 2009. Business Week reported: “The strange thing is, those price tags never came back down, even when commodity prices collapsed in the fourth quarter of 2008.”

Big grocery chains are also moving to lower-cost “private labels” that yield a higher profit margin to the store. Rather than the déclassé “generics” that hit store shelves a few decades ago, these are higher-quality, lower-cost store brands. According to a Nielsen business survey, sales of private-label grocery items grew by 10 percent in 2008, and a large majority of consumers think they are just as good as name brands.

Like McDonald’s in the restaurant sector, Wal-Mart has profited from the economic stress. According to The Economist, “The secret of Wal-Mart’s meteoric rise over the past five decades has been its obsession with low prices.” Whether or not its grocery prices are actually lower than traditional supermarkets, Wal-Mart’s image has built its customer base during the recession, winning market share away from more traditional grocery stores.

Challenge: health and safety

For decades, health concerns have driven movements for nutrition labels, country-of-origin disclosure, and regulation of irradiation in food processing and hormone use in animal production. The frequent and serious food scares (whether melamine in Chinese milk or tainted peanut products from Georgia) have only amplified these concerns over the past several years. Recurring salmonella scares and concern over food safety, especially for food imports, are some of the most dramatic of consumer health concerns.

The heightened awareness of food safety has strengthened the already significant demand for “natural” and organic foods that has been growing at a rate of 20 percent per year since the early 1990s. Beyond individual health, organic food producers have raised broader issues and promote food production that is healthier for land, farmers, and animals. Closely related to the growing demand for organic food is the interest in locally-grown and sustainable food. Though the growth has slowed somewhat now, the steady, upward trend continues.

Alternative Production and Marketing Vocabulary
Community-Supported Agriculture (CSA)	A system in which members purchase shares in a season’s harvest, receiving a proportionate share of the food that is harvested.
Fair Trade	Based on principles of sustainable agriculture and emphasizes fair compensation for food producers.
Free-Range	Animals allowed relative freedom of movement and access to the outdoors, rather than being confined to cages or small pens.
Locavore	A person who chooses to eat food grown and produced locally.
Natural Food	An inexact term, usually meaning food not highly processed and not raised with artificial inputs, such as pesticides or hormones.
Organic Food	Food raised without conventional pesticides and artificial fertilizers. The USDA has regulated and defined organic food and certification since 2002.
Sustainable Agriculture	Food produced in a way that maintains a healthy ecosystem, minimizes negative environmental impacts, and provides fair treatment and compensation for farmers and other workers.

Grocer strategy: mainstream organics

Organic foods have escaped their two-shelf dungeon at the back of grocery stores and now claim more prominent space in regular aisles. Some chains feature organic foods on bump-out shelving. SUPERVALU, the nation’s number two grocer retailer, has created its own organic line, called Wild Harvest. In a 2008 survey nearly 90 percent of grocery retailers reported that they emphasized natural or organic products, and 85 percent reported emphasizing health and wellness.

Organic products command premium prices, which help win shelf space. The higher prices are also an incentive for developing organic store brands, so that vertical integration can maintain profitability even at a somewhat lower price point.

In addition to increasing the size of natural food sections, retailers have moved in other ways to address environmental and health concerns. Restaurants, food processors, and grocery stores have increased health labeling of products, especially in regard to sodium, sugar, cholesterol, and trans fat levels. Many foods are labeled as free-range, locally grown, or organic, both on menus and in stores. Even fast food restaurants offer more salads and vegetarian options. Most grocery stores offer low-cost, reusable grocery bags to minimize use of plastic and paper. Many restaurants emphasize that their packaging is compostable or eco-friendly.

Some of the original advocates for organic foods look with suspicion on the mainstream marketing of the natural food movement. They charge that big chains and the USDA have substantially changed the definition of organic or natural food, subverting their movement’s focus on how food is raised and on who raises it. In response to increasing industrial organic farming, many proponents have moved on to related issues, such as sustainable agriculture, locally grown food, or fair trade. The continued growth in co-ops, farmers’ markets, and community-supported agriculture demonstrate public support and interest that continues to run deep.

Producer strategy: “food with a face”

Janice and Denny Guldan raise vegetables and fruits on 25 acres in southern Minnesota. They sell directly to consumers at six farmers’ markets throughout the growing season, and business is booming.

“We are very optimistic,” Janice Guldan says. “Last year was our best year ever. People are yearning for food with a face on it. They want to support their neighbors, their friends, their communities. If their cash is tight, they want to spend it with people they trust and know. They have faith in the local food system, as opposed to things coming from other countries where the pesticide control isn’t as regulated.”

The Guldans are considering devoting part of their production to Community Supported Agriculture (CSA) sales, in which consumers buy shares in a farm’s production to receive food baskets of produce harvested each week of the growing season. Sustainable farming, locally grown food, farmers’ markets, and CSAs are all part of this recession-resistant sector of the food system.

Co-ops also take advantage of the close connection between consumers and producers. “We're hitting the mainstream,” says Tom Vogel, member services manager at Minneapolis-based Seward Co-op Grocery & Deli. “As conventional grocery stores were launching organic lines, we didn't have to do any restructuring—we were already doing it.”

Challenge: greening the industry

Environmental issues, from clean air and water to global warming and the carbon footprint, continue to grow as scientific and political concerns. For the food industry, that translates into a spectrum of short- and long-term changes. Environmental issues include concerns about pesticides and chemical fertilizers, and large feedlots and confined spaces for animals.

Strategy: selling green

The Red Lion Inn in Massachusetts features “locally grown and produced ingredients from small farms in the Berkshires and the surrounding region.” The Ganache Bakery & Cafe in Greensboro, North Carolina promotes its “seasonal local fare ... in line with the farm-to-fork movement.” Across the country, locally and sustainably raised food has become a selling point for restaurants. Salad greens are locally grown, beef is pasture raised, and eggs come from free-range chickens. Restaurants may list specific local producers, or national producers (e.g., Niman Ranch) with longstanding reputations for sustainable practices.

Commitment to green issues is not just for fine dining establishments. Burger King responded to animal rights concerns with a pledge to buy eggs and pork only from suppliers who do not keep animals in cages.

The Seward Co-op’s environmental concerns and commitment also extend to its purchasing practices. “We’ve had a 37-year relationship with a lot of local providers,” Vogel explains. “People are starting to do the math about how much it costs to ship apples from California, when we can say our apples come from LaCrescent. Our cheese buyer has assembled an amazing selection of cheeses, not from France but from Iowa, Wisconsin, and Minnesota.”

Locally grown foods appeal to consumers on many levels—fresher foods taste better, and by supporting local producers, they are also reducing carbon emissions from transporting food across the country. While price remains an issue for organic food, it is less of one for consumers who choose locally grown foods, especially if they have access to relatively inexpensive farmers’ markets.

Strategy: building green

With decades of commitment to environmental concerns, and the enthusiastic support of its membership, Seward Co-op in Minneapolis went all out to build the greenest possible new store in 2008. Cub Foods, a chain owned by SUPERVALU, is about as far from hippy-dippy, green co-ops as you can get. Yet Cub, too, built green in 2008, opening a new store. Both stores have set their sights on LEED Gold Certification. (LEED stands for Leadership in Energy and Environmental Design, and is a third-party certification program and nationally-accepted standards for building design, construction, and operation.)

Among the common elements in both stores are skylights and state-of-the-art systems to maximize use of natural light, energy-efficient refrigeration systems, and maintenance-free floors that minimize the use of cleaning solutions. Seward Co-op boasts a wrap-around rain garden, with roof and parking lot slopes calibrated to drain water into it. Cub takes pride in providing employees with showers, locker rooms, and bike parking lots to encourage them to bike or walk to work. Seward Co-op’s decision grew naturally from its long-term commitment to green issues and from increasing sales that made a larger space essential. Cub Foods’ new store exemplified a new direction, and a corporate belief that green building and marketing is a profitable direction for the future.

Both Seward Co-op and Cub Foods began construction plans before the recession accelerated last year, but even as the economy continues to struggle, both enterprises expressed confidence that they made good, long-term business decisions.

As St. Paul Mayor Chris Coleman noted at the Cub Foods store opening, “Smart investments can be good for neighborhoods, good for the environment, and good for a company’s bottom line. Environmental stewardship, living-wage jobs, and urban revitalization are not mutually exclusive goals.”