With the recession weighing down on the industry, only the fittest can bear the strain. But deep discounts and trusted brands mean grocery is muscling on. By Catherine Dawes

The outlook for this year was pretty bleak. If the global economic meltdown didn't leave you without savings, a pension or a job, then swine flu was going to get you. And for those of us who can't put everything we buy on expenses, food price inflation, which was running at about 10% in late 2008, meant that despite the recession all our food bills were going to be higher. Only the fittest could survive.

Under these circumstances, it would have been reasonable to expect consumers to have stopped spending and for volume sales to have plummeted. But they didn't. And they haven't.

Volume sales rose in more than half the categories. And average volumes, for the categories we have figures for, are up about 0.9% on value increases of 4.9%. There are many theories about what kept consumers buying, including dining in rather than eating out, increased comfort eating as well as heavy promotional activity. The general consensus is that it has been a combination of all three.

What is more clear-cut is the impact of cost price inflation on the value figures in our tables. "In the first half of the year, food inflation was still very high," says Jake Shepherd, director of marketing and communications at Nielsen. "It started to drop from March and dipped to about 2.5% in the second half of the year." The weakness of the pound was an issue for many suppliers, but the biggest single factor, according to Sainsbury's trading director Mike Coupe, has been the impact of hikes in commodity costs, including wheat, rice and fruit & veg. This was most keenly felt in canned vegetables (up 18.5% in value), rice (up 17.3%) and canned beans (up 15.9%), with value growth racing ahead of volumes. But what of volumes?

For a few very specific categories, swine flu has provided an unexpected boost with volume sales of facial tissues up 6.1% and liquid soap up 13%.

More generally, volume growth has been the result of good old-fashioned in-store promotions. "The big dynamic is that grocery is increasingly promotional," says Coupe. "It's manifest in the number and the depth of the promotions."

The increase was simply staggering: featured space promotions in the big four were up 37.3% [Assosia]. This increased by an even more vertiginous 44%, from 56,500 to 81,500, when the figures include other major grocery retailers.

Do these deals work? In the cider and cheese categories, which saw a 10.3% and 56.8% year-on-year rise in promotions respectively [Assosia], volumes have risen by 12.7% and 10.5%. But in several categories, the increase in promotional activity didn't translate into extra sales, simply shoring up volumes while eroding margin. And while most of the leading players felt obliged to participate, others chose to duck out, or curtail activity.

Own label
"Chasing a deal has become endemic," says Alex Waters, director of branding consultancy The Value Engineers. "Consumers are shopping around for the best deal." And with supermarkets simultaneously vaunting the cheaper prices of their private-label ranges, it had been assumed 2009 would be their year.

But own-label sales have underperformed, up 3.8% well below the total value increase of 4.6%; and own-label's share of the Top Product Survey categories dropped from 26.7% in 2008 to 26.5%.

Waters argues that in commoditised categories such as rice and pasta where own label has always performed well, it has strengthened its position. However, in areas such as personal care, where it has traditionally struggled, own label has fallen out of favour.

However, Coupe believes the slower growth of own label does not paint the full picture. He says the lower value sales increase for private label is due to consumers trading down within own label to the cheaper economy ranges.

"Basics has been hugely successful," he adds. "The lower value figures of Basics distort the picture. In volume terms, own label has performed significantly ahead of branded."

Heavy promotional activity helped the leading brands compete, significantly reducing the price differential between branded and own label and, in several cases, the market leader was able to increase its lead over category rivals. Among others, Strongbow maintained its lead at the top of the still rapidly growing cider and perry category with £40.4m growth, Activia sales were up £52.7m, Walkers crisps notched up a £38.6m increase, Coca-Cola sales grew by £31m, Dolmio pasta sauce was up £23.4m and Heinz Beanz rose £21.9m.

These top brands are performing well because they provide reassurance, says Waters. "The biggest weapon brands have in the fight against own label is the trust they have built up over the years." He argues that people are happy to spend the extra for that reassurance, and the brands that lose out, he says, are those further down the table. "The big brands are doing well, own label is doing OK. The middle is the real danger zone."

But the leading brands didn't have it all their own way, with Wrigley Extra gum and Gillette Mach3 razors two of the biggest losers, and the intensity of promotions meant there were eight categories with a new number one. Hovis, in particular, made significant strides to catch arch-rival Warburtons in the bread category, with sales rising £56.9m, while Foster's (up £53.4m) overtook Carling to take second place in the lager category.

With survival very much the watchword in the past year, many brand owners have taken a cautious approach, limiting NPD. "It was a case of battening down the hatches," says Coupe. "Innovation has mostly involved line extensions rather than new lines. The only significant innovation was Ariel Excel Gel and Wispa."

But while consumers have been happy to pay a little extra for a brand they know and trust, the incremental cost of organic products has proved a step too far, with sales of organic brands falling in a number of categories. "Ethical concerns have become less important to some consumers, particularly if it demands a premium," says Shepherd. "Organic is a good example, where consumers are not convinced they are getting good value." The only exception is in the babyfoods category (see p53), with organic increasingly seen as de rigueur.

New habits
Waters believes many shoppers have adjusted their buying habits even though their financial circumstances have not changed. "People with tracker mortgages, for example, have higher disposable income than before the recession and yet have still become savvier shoppers, because the deals are there to be had."

He believes these new shopping habits will continue after the recession.

"The shifts in buying behaviour are here to stay. People have re-evaluated what they want to pay for and what they don't. I don't think shopping habits will return to those of the boom time." If these predictions are correct, the recessionary strategies adopted in many cases hastily by manufacturers and retailers, need to continue. But Coupe sees some light at the end of the tunnel.

"After battening down the hatches in 2009," he says, "three of our top five manufacturers have told us they will be stepping up the NPD in 2010."

Three, two, one... heave!

Read more
Top Products Survey 2009
The lad delivers: Hovis is the Top Product of 2009 (19 December 2009)