Grocery Shelf Squeeze Stymies Luiginos' Growth

Its Michelina’s brand items are being frozen out of some grocers’ shelves with growing acceptance of a retailing strategy that leaves consumers with fewer choices, according to critics.

As a result, Luiginos' revenue growth is locked in the deep freeze. The company is trying to break out with a new emphasis on television advertising.

The company employs 320 workers in Duluth and 1,385 overall.

Sales have been flat since last year, according to company statements filed with the Securities and Exchange Commission (SEC). Luigino’s posted 2002 sales of $295.6 million, essentially identical to the year earlier¹s $295.5 million.

That flat trend continued in the first three months this year with the company reporting $82 million in sales, compared with $81 million in the year-earlier quarter.

Luigino's is gaining ground in some categories. But a closer look shows it’s facing double-digit percentage revenue declines in its three top-selling Michelina’s “value brands,” frozen pasta and meat entrees priced under $2. While Luigino's still dominates the value niche with an 88 percent market share, growth is being stymied by what the company calls “the continued shift of retailers to a one-value-brand strategy.”

A Luigino’s spokesman said the privately-held firm declines comment on the information it supplies to the SEC, and on issues in the frozen food industry.

Supermarket retailing experts link the “one-value-brand strategy” phrase with the shift of more major grocery retailers to category management, a strategy promising more profits through a tightly-controlled product selection process. For instance, in the frozen entree aisle, store managers might stock only one expensive brand item and one bargain brand.

“The phrase ‘one-value-brand strategy’ means just what you might guess,” said Carol Radice, senior editor at Grocery Headquarters Magazine, a Chicago-based industry journal that tracks food retailing trends and strategies. “Typical supermarket brand strategies involve balancing national brands with those that are strictly value-oriented, including private labels, what used to be called ‘no-frills brands,’” she said. “It is a strategy meant to offer consumers choices between quality and price.”

Agreeing with her assessment is Neil Stern, a partner with Chicago-based retailing consultants McMillan Doolittle LLP.

“Every retailer is squeezing the number of brands carried, tending to focus on just one or two,” he said. “Frequently they¹ll go with a national brand on the more expensive price platform, and then a private label or house brand on the value side. If you¹re a tertiary brand, you¹re in danger of getting squeezed off the shelf.”

The underlying rationale is that supermarket owners can save money if they tightly manage prices and distribution of entire categories of products, such as laundry detergents, cereals, or frozen foods, rather than letting individual brands set their own prices.

A 1999 study on the practice by the University of Florida predicts about half the nation's retailers eventually will adopt this strategy. The study of category management found retailers choosing the best-selling brands in various categories, cutting brands that don¹t sell as well, then eliminating the competition between the remaining brands by taking price control away from the manufacturers.

The result: higher overall profits in a category than by specific brands, to the detriment of manufacturers like Luigino's. Ultimately, the practice makes retailers stronger and more competitive. But in the short run, it exposes consumers to slowly rising prices and fewer brand choices, the study found.

It also puts pressure on manufacturers, like Luigino’s, that aren¹t among the top two sellers in their categories. While Luigino's is dominant in its value niche, in the overall frozen food category, its Michelina's brands are Nos. 4 and 5, and have a 19 percent market share. It trails the top two manufacturers, ConAgra Inc. (makers of the Healthy Choice brand) and Nestle Holdings Inc. (Stouffer's and Lean Cuisine).

Stern said being No. 3 or No. 4 in a category “is a tough place to be. The retailer is saying, ‘I can get better deals if I carry only two national brands and a private label.’ These private label products produce higher margins and are definitely growing in just about every category.”

So, where is Luiginos' place in this changing supermarket environment?

Its financial statement shows promise for some of its newer product lines. For instance, its family of Homestyle Bowls entrees have had a successful debut, jumping from $422,000 in sales in 1Q 2002 to $7.8 million in the most recent quarter. And its snacks division that includes Michelina¹s frozen pizzas, was up 23 percent to $3.8 million in the quarter.

These gains helped offset first quarter sales losses of 10 percent each in the company's bread-and-butter “popular” and “economy” segments, which together make up 83 percent of overall sales. These include Michelina's Authentico, Yu Sing, Premium, Zap-Ems and Classics sub-brands. Worse was the 21 percent sales decline in the “signature” line, which produced 5.5 percent of total sales in the first quarter.

Luigino’s is countering with an emphasis on U.S. television advertising for the first time in its 13-year history to drive sales. In its latest quarterly statement, the company says it is making an “overall shift” away from a longstanding industry practice of making promotional slotting payments to retailers to ensure prominent shelf space, toward TV advertising. It’s an apparent strategy to confront the restrictive practices of category management.

The company said it spent nearly $7 million less on slotting fees in the first quarter. A few months earlier in its 2002 annual report, Luigino’s reported encouraging results from its “Hey, Michelina's” TV ad campaigns in five test market cities where overall sales jumped 30 percent.

One of the TV ads, which spotlight the Homestyle Bowls products, features quick cuts of a suburban mom, an attractive young aerobics instructor, a couple of college guys and others dancing to the Macarena song with new lyrics that extol the virtues of Michelina’s.

Another has a perky office worker doing a variation of the Macarena to the consternation of her stuffy co-workers after eating a Homestyle Bowl in the break room.

Whether the television advertising can give sales a permanent boost remains to be seen. But Luigino’s is steering considerable marketing resources in that direction, spending $4.5 million in the first quarter on TV ad buys and forecasting $6 million in TV expenses overall in 2003.