Specialty Food Requires Special Attention

In her commentary featured in this issue, Liz Thomas cries the frustration specialty food manufacturers have long felt in dealing with supermarkets and other high volume retailers: That these big vendors, accustomed to dealing with other product types, over-price, and under-promote specialty foods.

In an age where all large volume retailers are fighting in the ‘commoditization’ of the business, it is a serious charge – and not a frivolous one.

Thomas’s piece is instructive to retailers, even if it is a manufacturer’s lament because it reminds retailers that consumer reaction is determined not just by the nature of the product or the actions of the manufacturer, but also by the actions of the retailer. If the high volume retailer overprices an item or doesn’t merchandise it prominently, the retailer can lose at an early stage of the product’s lifecycle a specialty food that, if priced well and nurtured along, could become a big winner.

Yet, there is something unsettling about Thomas’ stories. She tells a story about Hellmann’s being sold at minimal margins at 99 cents, while the wonderful Chalif line of flavored mayonnaise was sold next to the Hellmann’s at $2.49 – a price differential so vast that, Thomas believes, Chalif was forever relegated to a “special occasion” purchase.

But why should that be so? And is that a retail problem or the manufacturer’s problem? Indeed, is it a problem at all or does it tell us a “dirty little secret” about specialty food manufacturers?

First, the problem arises in part because specialty food manufacturers have gotten what they have wanted for decades – an integrated set. We could have taken the Chalif line and put it in a charming little “Ye Olde Specialty Food Shop” section. There the fledgling specialty food line wouldn’t have to worry about direct comparisons with national brands of mayonnaise. Of course placement in this little section, where the sign up above might as well say “expensive things here,” probably wouldn’t have helped the matter at all.

In fact, those loss leader prices on Hellmann’s are what drive traffic to the store and to the mayonnaise aisle, to begin with. Sure it was a bad break for Chalif that mayonnaise happened to be the big loss leader for that chain – but that is just the luck of the draw. If it had not been mayonnaise, so it would have been Welch’s grape jelly and the specialty jams would suffer by the comparison.

Besides, the price story Thomas tells would not be easy for a retailer to overcome. If, as Thomas states, Hellmann’s was marketed for 99 cents with a markup of 3% to 5%, and the Chalif products were being marketed at $2.49 with a 37% gross margin, then simple math tells us that even if the store also marked the Chalif line down and accepted the same 5% margin, the Chalif product would still cost over 50% more than the Hellmann’s.

And these prices refer to “units.” It is very likely that a comparison in ounces was even less favorable. Is it really likely that being only 60% higher priced would bring business rolling in? Besides, Hellmann’s really earned that lower margin. It is because of countless millions spent building the Hellmann’s brand that the supermarket chain viewed it as an effective loss leader.

Perhaps the more interesting question for the specialty food industry is why a price gap of a buck or two should really matter. Starbucks, after all, does not sell the cheapest cup of coffee, yet that hasn’t stopped consumers.

Thomas goes on to talk about Coryell’s Crossing from Berry Best Farm. This jam was an exceptional product that failed to sell. Why? Well, Thomas says: “…most consumers were reluctant to make such a costly purchase when they could obtain a satisfactory alternative such as Smucker’s for much less.” Ah-ha! There is the answer. The consumer does not perceive the value in many of the lines that wind up failing.

In other words, everyday consumers consider cheaper cups of coffee an unsatisfactory alternative to Starbucks – and that is why they pay the price.

Although it might seem that getting lower retail prices will help, and indeed it might help some, it is also true that it is the possibility of rich margins that attract supermarkets to selling these items, to begin with. If Coryell’s Crossing failed at supermarkets because the price was high, it is also true that it would have never gotten on the shelf if it didn’t offer good margins to retailers.

High volume retailers depend on specialty food far more than profits. They need these items, as they need fresh produce and meat, as a way to differentiate their stores and attract more profitable clientele.

Manufacturers, though, have to recognize that in working with high volume retailers, the manufacturer becomes responsible for a lot of the marketing that, at a store level, one can expect small specialty food stores to deliver.

So if the specialty food offering is to reach its potential in big box retailing, both retailers and manufacturers will have to take heed…business as usual, will produce usual results. Special attention will produce results with a truly special dimension.