IRI Report: 2006 CPG Year in Review.

IRI Report Explores Performance across Categories and Channels, Key Factors Influencing Growth, and What to Expect in 2007 and Beyond

CHICAGO -- Following a grueling 2005 that was marked by a devastating hurricane season and far-reaching new labeling regulations, the consumer packaged goods (CPG) industry took stock during the relatively calm 2006. According to the latest Times & Trends report, "2006 CPG Year in Review," from Information Resources, Inc. (IRI), there were a few reverberations from the events of 2005 that carried over into the new year. Gas and oil prices spiked, and sugar crops took a beating. This translated into fewer shopping trips for consumers and rising costs for manufacturers and retailers.

"Despite the challenges, CPG marketers worked hard to create growth opportunities," explains IRI Global Chief Marketing Officer Andrew A. Salzman. "Functional foods and life-simplifying products contributed to industry growth. Innovative retailing has also been at play. New formats and targeted marketing strategies were at the core of grocery efforts to stem channel share erosion. This IRI report is intended to help CPG manufacturers and retailers see market opportunities and risks by benchmarking their performance versus the industry."

Industry Performance Overview

CPG industry growth returned to a more historic norm in 2006, climbing 2.5 percent versus 1.6 percent in 2005. In the face of rising distribution and production costs, CPG manufacturers and retailers stepped up price increases to an average of 4 percent, which contributed significantly to industry growth.

Among channels, drug stores continue to outpace total CPG industry growth. Benefiting from an aging population and targeted marketing initiatives, including aggressive Medicare Part D outreach programs to reach seniors, the drug channel demonstrated strong performance in core categories, including healthcare and beauty/personal care as well as in food-related categories, such as deli, frozen and snacks, as drug stores increasingly fulfill consumers' quick trip needs.

After a virtually flat 2005, the grocery channel managed a slight up tick in growth for 2006, with sales climbing 1.1 percent. New formats gained traction while the competing supercenter channel showed signs of maturation.

Segment and Category Trends

Beverages continued to be CPG growth leaders in 2006, as consumers embraced products, such as energy drinks and ready-to-drink coffee/tea, that offer health and wellness benefits. Aseptic juices and shelf-stable juice/drink concentrates lost ground as consumers gravitated towards options perceived as healthier.

Driven by innovation, home care products also made a significant leap forward in 2006, up 4.6 percent versus 1.3 percent growth in the prior year. New product entrants in laundry care that offer both convenience and an array of new scents bolstered category performance and demonstrated the ability to unlock growth opportunities within mature categories.

Despite concerns regarding obesity and a long-standing fixation on weight among American consumers, "light" food and beverage products posted slow growth in 2006. This trend highlights an overall shift in consumers' orientation away from weight management and towards total health management. There is still a significant upside for lower-calorie and lower-fat products among select categories, such as indulgent snack and dessert categories, where light products are relatively undeveloped and light brands are enjoying strong growth. Future growth potential in the better-for-you space will likely be strongest among organics, products offering specific health benefits, convenient nutrition, and healthy products targeting kids. Sales of natural and organic products have been quite strong during the past several years, and the segment is expected to continue to enjoy double-digit to high single-digit growth through the end of the decade.

Healthcare product sales growth significantly exceeded total CPG industry growth, as the rising incidence of chronic disease among aging consumers drives expanded opportunity. Anti-smoking products and sleeping remedies -- both of which have an above-average purchase index among seniors -- experienced exceptional growth. Anti-smoking tablets, up 24.8 percent, and anti-smoking gum, up 17.3 percent, led the anti-smoking products category. The sleeping remedies category grew at nearly three times the rate of other healthcare categories, driven largely by sleeping aid tablets.

Trends to Watch

IRI Times & Trends expects the following trends to impact the CPG market throughout 2007 and into the next few years:

* Functional Foods & Beverages Hit Their Stride: With increased availability and greater consumer demand, functional foods and beverages, which offer health and disease prevention benefits beyond basic nutrition, are at the cusp of a major growth wave in the United States. Products delivering the following benefits are poised for growth: antioxidants, heart protection, digestive aids and weight loss.

* Growing Number of Gourmets: Take the immense popularity of the Food Network, add the increased availability of more exotic spices and ingredients and the newfound time among aging boomers, and you have all the right ingredients for a boom in gourmet products.

* Kids Rule: With more than 4 million babies born last year, the United States is officially in the midst of a new baby boom. There will be a huge focus on products, services, marketing and merchandising targeting younger children. Expect to see an explosion of healthier products targeting kids and manufacturer and retailer initiatives that will help parents and children select the right products to maintain a healthy diet.

* Environmental and Social Consciousness Increasingly Influential: Concern about the environment and fair treatment of employees of food producers has become a much more significant consideration in product and store selection during the past few years, and this trend will grow stronger. There will be increased focus among fair trade products, eco-friendly products, and sustainable packaging that is recyclable, re-usable, and/or made of biodegradable materials.

* Healthcare Emerges as the New Retail Battleground: Aging baby boomers facing rising incidence of chronic disease will drive demand for prescription and over-the counter remedies, foods and beverages offering specific health benefits and healthcare education and benefits. Watch for retailers to increase focus on onsite health clinics, online and in-store educational materials, and pharmacy marketing and promotion.

* Packaging Becomes a Powerful In-store Marketing Vehicle: The need to capture consumer attention and help them find the products they want inside the store will drive new packaging innovation aimed at standing out on the shelves. Expect bold colors, unique shapes and a consistent look and feel across products within a brand. In addition, packaging will be fully-leveraged as a mini-billboard for marketing messages.

About the Report

Findings presented in Times & Trends: "2006 CPG Year in Review" are based on extensive analysis of consumer data from IRI MarketInsight[TM] and IRI Consumer Network[TM] as well as retail point-of-sale data from IRI InfoScan[R]. For an in-depth view of the full Times & Trends report, click on http://us.infores.com/page/news/times_and_trends.

About Information Resources, Inc.

Information Resources, Inc. (IRI) is the world's leading provider of enterprise market information solutions and services for the consumer packaged goods (CPG), retail, and healthcare industries, empowering its clients to grow their business profitably in a complex marketplace. Driving the transformation of the industries it serves, only IRI provides a unique combination of real-time market content, advanced analytics, enterprise performance management software, and professional services. The company's portfolio of services, solutions, and technology enable leading retailers and their suppliers around the globe to see what they are missing, act faster with greater confidence and win at the shelf. Ninety-five percent of the FORTUNE Global 500 in CPG and retail leverage IRI to power their business. For more information, visit http://us.infores.com.