|
 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.
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CAUTIOUS SPENDERS
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)
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