NEW YORK (Reuters) - Anielle Troyan, a call center worker in New York, shops at discount retailers such as Family Dollar for items like soap and detergent as well as groceries like Kraft macaroni and cheese and small-sized condiments.
It’s “expensive to cook for one,” she said. “I’m 25, I’m poor, I’m usually going to buy what’s cheapest.”
Customers like Troyan are one reason why Kraft Foods Group Inc KRFT.O reversed course after considering stopping the sale of single-serve packages of Velveeta cheese sauce, which wasn’t moving in traditional grocery stores. After another look at the numbers, Kraft found that shoppers on tight budgets at dollar stores were gobbling up Velveeta sauce in the affordable small size, and the food got a new lease on life.
The fall and rise of Velveeta shows how companies such as Kraft, General Mills Inc (GIS.N) and Campbell Soup Co (CPB.N) are following shoppers into dollar stores, which carry a host of private label and brand name products, typically priced between $1 and $10. As an improving U.S. economy still leaves some middle class customers tumbling towards the poverty line, food companies are searching for growth where lower income consumers shop.
“We’re in the business of feeding all American families, and that’s where consumers are going,” said Tom Lopez, vice president of growth channels at Kraft.
Packaged food sales were flat in 2014 as people increasingly avoided the brands typically found in the center aisles of grocery stores in favor of the fresher food found on the perimeter. But in other types of stores, such as dollar, drug and club, sales are growing faster than grocery store sales, prompting companies to expand distribution.
Dollar stores flourished during the recession and remain in the spotlight: Family Dollar shareholders in January approved the sale of the company to Dollar Tree Inc (DLTR.O) for about $8.5 billion in cash and stock and rejected a $9.1 billion all-cash offer from Dollar General, citing antitrust concerns.
An aging population is also driving the push by packaged food companies into dollar stores. General Mills says it’s seeing more baby boomers at dollar stores looking for smaller quantities, so it expanded its snack offerings there to include the Fiber One brand. Sales in dollar and drug stores rose 8 percent last year, company officials said.
At Kraft, sales at club, dollar and drug stores also rose 8 percent in the first three quarters of 2014, four to five times faster than sales in all channels.
Improving distribution to dollar stores could help Kraft reinvigorate sales in the United States, where it has struggled with flat sales growth and higher commodity costs. Since its split with Mondelez International Inc (MDLZ.O) in 2012, the majority of Kraft’s business comes from sales of North America grocery items.
“They have been for a very long period of time this kind of staple of the middle class,” said Robert Passikoff, president at Brand Keys, a brand consultancy in New York. “That doesn’t really seem to be the case anymore. If people are not flocking to those brands, you need to be able to look for other audiences and other distribution points.”
Since its spin-off from Mondelez, Kraft has appointed a 13-person team to focus on untraditional sales channels. Sales to dollar stores saw double digit percentage growth in 2014 from the prior year.
The strategy faces some challenges. Even with an improving economy and low gas prices, low income consumers remain cautious about their spending.
“While on paper, it appears that the economy is improving, the low to middle income consumer who is our core customer continues to look for ways to manage her budget as she works to prioritize her spending and she trusts that we are on her side to help her stretch her budget,” said Dollar General’s chief executive Rick Dreiling on the company’s earnings conference call in December.
Kraft operates an in-house kitchen, where it tests recipes that it hopes will appeal to budget conscious consumers and tries to figure out how families stock their pantries, said Robin Ross, director of Kraft Kitchens.
“There is no room for waste,” she said. “There is no room to choose products and recipes that won’t go over well in our families. We know that in some of these households there might be higher propensity to buy canned foods or vegetables because there is more of a guarantee that those products won’t go bad before it’s time for use.”
Shrinking package sizes allows Kraft to reach higher profit margins on products, though it won’t sell as many as it would in a larger store. For instance, a 12-ounce package of Velveeta Shells & Cheese cost $2.50 at the a Dollar Tree store in New York City. Meanwhile, a 2.4 ounce cup cost $1.25. That’s 21 cents an ounce versus 52 cents an ounce.
Not all brands work well in dollar stores, company officials said. Many health and wellness brands can’t compete on price in the channel, and food makers point out other limitations for more premium products.
A Campbell Soup spokeswoman says, for instance, that most stores have limited refrigeration space, which is needed for many of its Bolthouse Farms products.
Industry watchers expect more fresh products to eventually be available at dollar stores. “When you look at natural, organic, gluten-free foods, these are products that are demanded across all income classes,” said Peter Keith, an analyst at Piper Jaffray. “It is important for the dollar stores to shift some of the mix to those items. That’s where the broader population in the U.S. is moving.”
Reporting by Anjali Athavaley, editing by Peter Henderson and John Pickering