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Club stores welcome frozen foods, plan to increase space by 25-50%.

Some membership warehouses expanded and retrofitted to make room for larger frozen food sections and greater selection. Growing market now estimated to be worth $2.3 billion in USA.

"Our sales at Pace are growing at a rate of 40% a year," said Tom Renfrew of King & Prince Seafood Corp. The Brunswick, Georgia-based company is selling the membership warehouse chain items like flounder del rey and flounder primavera.

Sounds spectacular, and it is; but it isn't necessarily unusual. Industry sources report that membership warehouse chains, which offer deep discount prices to customers willing to pay an annual membership fee (usually $25), are expanding frozen food departments rapidly.

"It could be 25-50% more space for frozen food this year than a year ago," reported an industry factor. Some membership stores are being expanded, with some of the extra space being retrofitted for FF cabinets -- not to mention departments like bakery and produce.

Although most frozen food sales through membership clubs are still in the form of foodservice packs, aimed at "business" members who buy there because they can't meet the minimum orders for foodservice distributors, some FF processors are developing packaging specifically for the new trade.

Casa di Bertacchi, Vineland, New Jersey, for example, has developed a line aimed specifically at membership stores that includes cooked half-ounce meatballs in three and five-pound packs, cooked and sliced meatloaf in three-pound trays; ravioli, manicotti and shells in three-pound bags; and tortellini and jumbo beef ravioli in two-pound bags.

The firm recently signed with Monterey Marketing, Inc., Pacific Grove, California, a broker specializing in membership store sales. "Casa di Bertacchi regards club sales as an important emerging segment of our business," explained Alex Asselta, vice president of sales and marketing. "Monterey Marketing has a long track record of delivering successful warehouse club programs."

As of last year, total dollar volume at club stores in the USA was estimated at $29 billion by Packaged Facts, a New York-based research firm, with about eight percent of that -- or $2.3 billion -- in frozen food. In frozen food, as in other categories, club stores sell large sizes at small markups -- typically 8-10%, vs. the 20-30% that is traditional at supermarkets. Prices are thus about as low as they can get.

At Pace, for example, those King & Prince flounder entrees were seen recently in six-pound six-packs at $13.88. Catch of the Day had stuffed flounder in a 1.875-pound pack, at $8.99. Six-pound Steak-Umm sandwich steaks were $13.89 (But Price Club, a rival membership club chain, was charging $12.99 the same week). Hanover four-pound pasta primavera was going for $3.48, and Dutch Farms 24-count mini corn on the cob was offered for $3.41.

Membership warehouses emphasize large volumes on a limited range (typically 125 to 150 SKUs) of frozen products. At the same Pace outlet (Deptford, N.J.), one cabinet was devoted almost entirely to chicken products from Pilgrim's Pride, Dallas, Texas, including five-pound split breasts with ribs ($7.49), five-pound boneless breast fillets ($10.28), five-pound boneless skinless breasts ($11.68) and six-pound drumsticks ($5.21). A large section was devoted to Richwood Meat Co. 20-pound packs of quarter-pounder beef patties at $8.39.

Looking for Winners

Membership warehouses generally aren't pioneers or risk takers. "What they are looking for is products that already have a strong track record in foodservice or retail," King & Prince's Renfrew told Quick Frozen Foods International. "They may take a new product on 30-90 day trial, but if it doesn't sell, you have to come pick it up." At most Pace outlets, King & Prince sells modified foodservice packs (with bar codes for easy check-out) in standard masters; but for Canada, it has developed self-contained display masters with a promotional message.

"They have flip-up tops, for use by customers taking out heavy loads, and they reduce damage to the products, such as nicking bags with box cutters by store clerks opening standard master cartons." At most membership warehouse stores, including Pace, frozen food is displayed in upright glass-door merchandising format -- not the standard supermarket type, but walk-in units that can be serviced from inside. The coffin-type display cases at the Deptford Pace outlet were installed by Makro, a club operation later acquired by Kmart (parent company of Pace) and converted to the Pace banner without the equipment being changed.

Carnation Co., Los Angeles, California, similarly uses foodservice packs but "merchandises them a little bit differently" for club stores. Part of the Nestle conglomerate, Carnation sells potato products such as Oven Taters (seen in five-pound packs at Pace for $3.10). According to an industry source, potato products were once "unthinkable" at club stores, but are now one of the fastest-growing categories. Another example seen at Pace: Act II twister fries from Lamb-Weston, Kennewick, Washington, in five-pound packs at $3.71. Although the industry source sees potato products as being oriented to the retail market, especially at Pace, Carnation sees it differently: Doug Werts, national sales manager for segment markets, told QFFI that "mom and pop" businesses account for 70-80% of the sales.

Membership clubs distinguish between "business" members, who buy products for resale at restaurants or grocery stores, and "group" members (everyone else -- some still require individual members to work for the government, or be a member of a credit union or some other institution; others will sign up anybody with a driver's license and a checkbook). Business members typically represent only 10-15% of total membership of "mature" club stores, but account for 60-65% of the actual sales. But even the minimal requirements for "group" or individual members help reduce costs, and therefore prices, at membership stores -- the rates of shoplifting and bad checks are practically nothing compared to those at conventional supermarkets.

Despite their appeal to bargain hunters, however, club stores don't always have the lowest prices. A survey by Supermarket Business last December in Connecticut revealed that while frozen vegetables and pizza cost less at BJ's and Price Club, frozen juices retailed lower at Stop 'N Shop, Grand Union and Pathmark. The price picture was mixed for frozen lasagna. Other surveys have shown conventional supermarkets in the New York area underselling the clubs on some sale specials. A number of supermarkets, moreover, have started carrying club packs of their own, such as five-pound bags of frozen vegetables or french fries. These are usually integrated into the regular FF mix, although dry grocery and nonfood club packs are often displayed in special sections.

Another characteristic of club stores is that the leading brands there aren't necessarily the leading brands in supermarkets. At Pace -- in the Northeast, at least -- clubpack frozen vegetables are dominated by Hanover Brands, Hanover, Pennsylvania. "I think we saw the importance of club stores early on," explained Mike Brueckhart, director of sales and marketing. "We have been a partner with them for a longer period of time." Sales to membership warehouses are "a good part of our business, on a par with conventional retail sales," he added. Hanover has been able to sell regular foodservice packs, "customized to some degree," to the membership chains. Sam's Club, Bentonville, Arkansas, has put the greatest emphasis on frozen foods, he believes; Pace and Price Club a bit less.

Sam's Keeps Growing

Sam's Club, which had 208 units at the end of last year and rang up $9.6 billion in sales, is the largest of the membership warehouse operations -- and the fastest-growing. It is part of Wal-Mart, the largest retailer in the United States. Price Club, the oldest chain of its kind, is in second place, with 77 stores and $6.9 billion in sales; it is based in San Diego, California. Costco, Kirkland, Washington, has moved into third place, with 82 outlets and $5.5 billion in sales; while Pace, Englewood, Colorado, has 87 outlets and $5.3 billion. Three other membership warehouse chains are relatively small, and may not survive against the Big Four. In some areas, the number of membership stores has reached the saturation point, and they have begun to cannibalize from each other as well as from conventional supermarkets.

Investors have found membership chains a lucrative but somewhat volatile field: Price Club stock dropped 25% last year because growth of same-store sales had slowed -- not stopped or declined. Costco stock took a hit earlier this year because the chain had reached the saturation point with fresh meat departments, which had been accelerating same-store sales growth as they were introduced. But projections are that sales at membership warehouses will continue to grow rapidly: Packaged Facts figures they will reach $37 billion this year, $48 billion next year, and $82 billion in 1996. Grocery sales, especially perishables, will increase even faster: already, Costco is devoting 70 doors to frozen foods at its newest outlets, compared to 30 doors at those it first opened in 1984.

At a typical Price Club outlet in North Haven, Connecticut, last December, the frozen food count included 29 SKUs of miscellaneous prepared foods, 15 SKUs of fish and seafood, 13 SKUs of entrees and 11 SKUs of Italian foods. According to an industry source, hot new categories of frozen food at club stores include, besides potatoes, Mexican food and breakfast items -- including french toast, waffles and even breakfast burritos (which a lot of small restaurants want to have on their menus, but find inconvenient to prepare). Frozen pie sales, surprisingly, are continuing to grow despite the fact that most club stores are now also offering fresh baked pies in their bakery departments. Some club operations supply their own needs: Price Club has a subsidiary, Price Club Industries, that produces frozen hamburgers and other products. Costco is reportedly considering joint ventures with suppliers, under which special plants would be set up to produce items for Costco.

Judging from Alternative Store Formats, a study commissioned by the Food Marketing Institute, ordinary consumers (as opposed to business people) aren't exactly flocking to membership warehouses to buy frozen food. A survey of "alternative format shoppers," as the study called those who shop at club stores, indicated that only 19% buy prepared FF at clubs, whereas 84% still buy them at supermarkets. Club shoppers were more likely (23%) to buy canned goods at membership warehouses, and non-foods generally ranked higher than foods among items purchased there. Of those who do buy prepared FF at clubs, 39% had shopped there for more than three years, 38% for two to three years and 28% for a year or less.

Whoever buys frozen food at membership warehouses is going to buy more of it, in any case. James M. Degen, president of his own consulting firm in San Diego, Calif., told Frozen Food Report (house organ of the American Frozen Food Institute) earlier this year that FF sales for 1992 would be about $3 billion, 8.6% of a projected total of $34.7 billion (Degen put the 1991 percentage at about 8.2%). The same magazine quoted Jim Sinegal, president and CEO of Costco, to the effect that Costco has doubled its frozen food space since the chain was founded eight years ago; even so, FF accounts for only about six percent of total sales there -- with much of the volume in frozen chicken parts, chicken nuggets and juices targeted at the restaurant trade.

Supermarket operators are, understandably, alarmed at the growth of grocery sales in club stores -- especially if the club stores carry packs that aren't available to supermarkets. Dominick's, Northlake, Illinois, has announced that it will fine suppliers $10,000 for the first offense involving club packs or club deals not made available to it, and $20,000 for the second offense. Three strikes, and the supplier will be out -- no more sales to Dominick's.

Other chains figure that if they can't be beat the club stores, they can join them -- Meijer's, Grand Rapids, Michigan, and H.E.B., San Antonio, Texas, have started their own club stores.

Other conflicts may arise: Daymon Associates is in-house broker for both Price Club and a number of supermarket chains -- how will Price Club feel if Daymon develops private label club packs for supermarkets to compete with Price Club? Suppliers, meanwhile, may be caught in the deal crossfire as their accounts compete more directly -- as with Price Club invading Sam's Club territory in Texas, or Sam's Club moving in on Price Club's turf in California.

We're living in interesting times.
COPYRIGHT 1992 E.W. Williams Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Frozen Foods in North America: Retail Merchandising Trends; warehouse club stores
Author:Pierce, J.J.
Publication:Quick Frozen Foods International
Date:Oct 1, 1992
Words:2064
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