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Arizona Food Marketing Alliance

2015, ISSUE 5

More Fresh

Less Sugar Navigating Disruption

The State

of the

GOP For the latest industry news visit www.cagrocers.com

www.afmaaz.com

AFMA

| Board of Directors

officers

DIRECTORS

Chairman Jeff Nelson Co-Sales Company

Treasurer Geoff Stickler Express Foods

Debbie Roth Arizona Food Marketing Alliance

1st Vice Chairman Edward “Trey” Basha Bashas’ Family of Stores

Tim McCabe Arizona Food Marketing Alliance

Frank Cannistra Safeway

Arnott Duncan Duncan Family Farms

Mark Manfredo, PhD Arizona State University

TJ Shope Shope’s IGA

Joe Cotroneo Crescent Crown Distributing

Clint Hickman Hickman Family Farms

Mark Miale Sprouts

Jim Tooms IGW L.L.C.

Shane Dorcheus Albertsons L.L.C.

Ray Kruckner 7-Eleven

Don Olsen Olsen Marketplace Stores

Tim Thomas The Arizona Republic

Shane Dorcheus Albertsons L.L.C.

Ken Kuwahara Fry’s Food Stores

Todd Schlief Nestle DSD

Gavin Zindel Circle K

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A RIZ O NA JO U RN A L

Products available at your local retailer

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CONTENTS

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F E AT U R ES

COLU M NS

Navigating the Disruption

President’s Message The Complexities of A Cap and Trade Program........................................4

Old habits need to be laid to rest if retailers and suppliers expect to succeed in the face of major industry disruption, says the director of retail insights for one of the nation’s leading research and consulting firms.

More Fresh, Less Sugar Are Driving Choices

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From The Chair Explore California’s Culture of Food.......................6 Viewpoint—Kevin Coupe Hunger Games....................................................10

Fresh foods and beverages are included at more meals now compared to a decade ago. But the consumer segments responsible for driving the increase may come as a surprise.

DEPA RT M EN TS

The Farmers Market Trend in Grocery

15 Minutes With.................................................18

The incorporation of farmers market sensibilities into the modern grocery store is a return to our food roots – part of a larger zeitgeist that values transparency, simplicity and responsibility in commerce.

Know the Law.....................................................14 AFMA News.......................................................22 Washington Report...................................... 30, 32 Advertiser Index .................................................88

What’s the Deal?

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For most organizations, attracting, retaining and engaging critical talent is often cited as a top concern that keeps many a business leader up at night.

arizona food marketing alliance President/CEO Tim McCabe General Manager Debbie Roth

Administrative Coordinator Raynetta Hughes

120 E. Pierce St. Phoenix, AZ 85004 (602) 252-9761 (602) 252-9021 Fax www.www.afmazz.org For association members, subscription is included in membership dues.

Feature Writer Steve Meissner For advertising information contact: Debbie Roth E-mail: droth@afmaaz.org

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Annual Subscription: $50

Editor Debbie Roth

A RIZ ON A JOU RN A L

Business Development Manager Tom Maloney

Arizona Food Indusstry Journal © 2015 Arizona Food is the official publication of the Marketing Alliance Arizona Food Marketing Alliance.

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P r es i d ent ’ s messa g e

The Complexities of A Cap and Trade Program Ti m M c C a be President

President Tim McCabe continues his review of key State legislative and regulatory issues and the impact – in “plain English” – that they have on your business. This month: the Global Warming Solutions Act. In 2006 the California legislature enacted Assembly Bill (AB) 32 the Global Warming Solutions Act, a comprehensive state mandate to reduce greenhouse gas emissions (GHG). Under AB 32, the California Air Resources Board (CARB) was required to develop various regulations and market mechanisms to reduce GHG emissions to 1990 levels by the year 2020.

The main funding mechanism for AB 32 is the market-based cap and trade emission auction.

Under this program the state sets a limit on the amount of greenhouse gases a business can emit, and reduces that amount each year. While this may be a laudable environmental goal, the business community by and large is directly on the hook for funding AB 32 reforms.

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The program covers primarily energy and petroleum producers in California, but will roll out to include suppliers of natural gas, pulp and paper manufacturing, glass production facilities and others—all the while generating billions of dollars in revenue for the state.

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The actual cap and trade auction is not what you might imagine. There is not an auction house jammed with traders nor are there phones ringing incessantly. Rather, the auction is held on-line, lasting three hours. Using what’s known as a sealed bid technique, bids are placed from companies across the country while state officials monitor the auction. Regulators acknowledge that there is a shroud of secrecy surrounding the auction and that secrecy is needed to maintain the auction’s integrity.

There are various ways companies can stay under the cap. Companies are able to purchase permits to emit GHG’s through the auction, modify operations to use energy more efficiently or pay for what are called “offsets” which allows

companies to go over the cap as long as they are investing in an environmentally beneficial project somewhere—even out of state. The offset system was put in place to allow companies sufficient time to modify their operations to adhere to the increasingly strict goals outlined in AB 32.

Cap and trade is hailed by some as the most advance eco-economic policies in the nation yet this “unique” way of attacking climate change has not caught on in other states as the proponents claimed it would. Proponents of a cap and trade program envisioned that this market-based system would quickly be adopted in other states but thus far not a single one has enacted legislation on par with these California specific mandates.

Moreover, there is some ambiguity about the legality of the program. Although the auction is public, revenues raised from the auction are (in part) placed in a newly established state fund used for state projects such as the controversial high-speed rail project—among other renewable projects. The California Chamber of Commerce contends that AB 32 violates Proposition 26 which states that all new taxes must be passed by a 2/3 majority of the legislature. AB 32 was passed by the legislature with a simple majority vote. Thus far, the state has survived its first legal challenge.

Cal Chamber’s legal appeal is currently pending.

Capital investment costs for manufacturers will continue to rise as the state continues to require lower and lower GHG emissions levels. So what does this mean for the grocery industry? In short, the price of goods will continue to rise.

Grocery companies will have to make their own independent business decisions on how to combat price increases, but it stands to reason that increased costs will have to be passed on to the consumer in order to remain profitable. n

F R O M T H E C H A IR

Explore Arizona’s Culture of Food

Jef f Ne lson AFMA Chair of the Board President/COO, Intermountain Co-Sales Company

Palm Springs is filled with beautiful golf courses, El Paseo upscale stores, senior citizen tap dance shows and most importantly the CGA Strategic Conference. The combination of our high-energy educational programming and business meetings with relaxed social events, cultivates an environment for genuine discussion and quality time with people in this unique food industry.

This year’s CGA Strategic Conference focus is California’s Culture of Food. What does that really mean? Is it just another cliché we often banter about, similar to labels such to those used to describe generational, ethnic and socio-economic groups – Baby Boomers and Millennials, Asian and Hispanic, wealthy and poor?

The lines are blurred between groups and food choices. Asians are not the only people eating sushi and kimchi. Seniors are ordering their groceries online. Digital natives living the high tech life reside in the city and walk to the corner store with all the other city dwellers that are blended together from different ethnic, cultural, generational and economic ingredients.

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As an industry, we all have unique cultures we must cater to. At Market Centre, we are constantly challenged with providing for these environments through a variety of retail formats and consumer profiles. For example, the needs of Mollie Stone’s Markets in downtown San Francisco are quite different than those of Vallarta Supermarkets in Whittier.

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Although many retailers provide products specifically targeted to one group, it is becoming more obvious that there is a crossing over of cultures seeking many of the same types of foods. As an example, customers from all groups consume sriracha sauce. Sushi, tortillas and almond milk are products sought in every neighborhood as well. Consequently, we in the food business must educate ourselves to the blending needs of our customers.

Our size, both geographically and demographically, cannot be overlooked in having a huge impact on the rest of the nation.

Trends are created here through the blending of

customers’ wants and values. In addition, it’s not only the people themselves, but also the way they live their lives. Time, convenience, local or organic, and health and wellness, all shape what’s placed in their shopping cart.

The speakers at this year’s Conference “Whiteboard Sessions” address many of these topics and therefore your customers, your employees and your success. Doug Scholz, who oversees the conference for CGA, has brilliantly pulled together professionals to speak about eating trends and center store, competing with restaurants, grocery personalization, inspiration from farmers markets and employment engagement and retail success. The facts and ideas presented will provide all of us with tools to adopt and share with our companies.

A true illustration of how blended our society has become occurred during a recent vacation with my wife Dolly to several national parks in a 39-foot recreational vehicle. We shopped at everything from a ShopKo-type chain to various truck stops along our journey. While shopping we met people from all parts of the country with varying backgrounds, expecting to find products to fit their comfort level. We found familiar products and discovered new and interesting items as well along the way. It was fun to see how each grocery store reflects the personality of the area, as well as a willingness to venture beyond familiar borders.

The culture of food is influenced by our customers, societal changes and current events.

In turn, our customers are influenced by the foods available on the shelves. Therefore, it is imperative that we in the industry keep up with the changing faces and behaviors of our society. n

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VIEWPOINT

Hunger Games KEV IN C O U P E

It made me very happy when I saw that the theme of this month’s issue — and AFMAs Strategic Conference — was “Arizona’s Culture of Food.” It is a subject to which the food industry actually pays too little attention.

Here’s a test.

Walk to the center of your store. Close your eyes. (You can close your eyes first and then walk if you want, but that might be a little more dangerous.)

Now smell. Does it smell like a food store?

Now open your eyes. Look around. Do you see anything that sparks your gastronomic imagination?

Finally, here’s the big question.

Does your store make you feel hungry?

I remember years ago writing a short piece about a company that specialized in “developing scents aimed at keeping customers inside businesses longer, giving them more time to spend money.”

They were coming up with all sorts of exotic scents, with names like “Lotus Flower” and “Enchanted Apple,” designed to enhance the shopping experience. Probably cost a pretty penny to do business with them, too.

I have my own theory about the kinds of scents that will get people to stay in the store longer and spend more money. They have names that are a lot more familiar and less exotic, and I don’t think it would cost that much to put them to work for you.

Here they are.

Chocolate chip cookie. Apple pie. Fresh baked bread. Bacon. Cajun seafood. Garlic.

I’ve been writing about food retailing for more than 30 years, and I think it is fair to say that the majority of foods stores that I’ve visited during that time have not cultivated what I would call a robust food culture within their companies — they simply don’t play the hunger game.

Often this is because companies have decided that they aren’t really in the food business, or that food is somehow incidental to their business. They’re so busy focusing on price, or transaction size, or sourcing that they are, in essence, in the business of selling boxes and bottles and cartons and jars and bags. But not food. Not really.

Years ago, I remember visiting with Shelley Broader, then the CEO of Hannaford-owned Sweetbay Supermarkets in Florida. She had redesigned the company’s employee application form so that every person looking for a job had to answer some very important questions: What is your favorite food? What six items are always in your refrigerator? What’s your favorite restaurant?

If the answer to this last question is McDonald’s, she told me, that person would not be hired.

Shelley used to say that she could teach a person how to be an effective retailer, but it was almost impossible to teach them to love food if they didn’t walk in the door with that inclination.

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(To be fair, Sweetbay was not Hannaford’s crowning achievement... and the division was sold several years after Shelley left. But it wasn’t her fault... it was damaged goods when Hannaford bought it, and she did the best she could with what she had. These days, Shelley is at the upper echelons at Walmart, which says a

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Maybe it’s just me, but I got hungry just writing those 12 words. Imagine what would happen if I walked into your store and smelled any of those things.

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VIEWPOINT

lot to me about that company’s ability to improve its food culture, if it so chooses.)

By the way... these days it seems like fewer and fewer people would be likely to say that McDonald’s is their favorite restaurant... and even those who would swear allegiance to the fast food experience might be more likely to talk about Chipotle. Why? In part, I think, is because Chipotle has a stronger food culture, and more than ever, Americans are responding to that. But I digress...

It made me very happy when I saw that the theme of this month’s issue — and CGA’s Strategic Conference — was “California’s Culture of Food.” It is a subject to which the food industry actually pays too little attention, I think ... even though we live in a world that in some ways seems obsessed with the subject.

There’s the Food Network, a seemingly endless supply of food travel and cooking shows, and a dizzying array of cookbooks and cooking magazines.

But in supermarkets... not so much. Or at least not nearly enough.

The thing is, when most people walk into a supermarket, they have food on their minds... if not exactly food on the brain (which is what I have, being one of those people who generally spends part of lunch thinking about what I’m going to have for dinner). So you’ve got a head start... and through savvy and persistent marketing, merchandising and sampling, you can get people to try new things, which more often than not will result in incremental sales.

While I’ve been doing this a long time, I can remember vividly some of the great meals I’ve eaten or purchased in supermarkets. I once was visiting a Lunds store in St. Paul, Minn., where I ate a sandwich made with smoked turkey, Jarlsberg cheese, a slice or two of bacon, topped with cranberry mayonnaise and served warm on toasted thick cinnamon bread.

Yum.

Yum, yum, yum.

I’ve always believed that the world can be divided up into two groups — people who eat to live, and people who live to eat. (Clearly, I’m in the latter category.) But even people who do not share my enthusiasms are susceptible to an enticing aroma or an eye-catching display.

In my summer job as an adjunct faculty member at Portland State University in Ore., one of the things I ask my students to do each summer is to write me a simple essay to begin the semester: Tell me about your most memorable meal.

The reason for this is that it is a great way to loosen them up and get them connected to the notion that food marketing is different, because many or most people relate to food differently. Everybody has a most memorable meal. (I bet you know exactly what yours was, where it was, who you were with, and why it was memorable.)

Since I started with a test, let me end with another one … except that this test is one you can give your prospective and existing employees.

Ask them what their most memorable meal was, and then get them thinking about the notion that your store has the privilege and responsibility of serving or selling the components of most memorable meals every single day.

Turn your store into a different kind of hunger game — a place where people on both sides of the counter celebrate food and connect with each other differently because of it.

A place where the minute you walk in, one thought immediately occurs to you: Yum. n

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Yum, yum.

Just recently, I had this amazing marionberry Greek yogurt sold from a service case in a Zupan’s store in Portland, Ore., and it also was in Portland that I became totally enamored with the ahi poke sold at the Whole Foods Market in the Pearl District.

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There was another sandwich I ate in a Ben & Bill’s deli in the Price Chopper store in Saratoga Springs, NY, stacked high with warm, melt-in-your-mouth corned beef and pastrami, served on thick homemade rye bread with mustard, and with an “old pickle” and store-made potato chips on the side.

Years ago, I had some of the best red-beans-and-rice of my life at a Rouse’s supermarket just outside New Orleans. There was this extraordinarily tasty grilled tuna sandwich I ate at a Dorothy Lane Market in Ohio. I still remember a hot dog I ate at a (now closed) store called Amarraca, outside Pittsburgh, in 1985.

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Kno w the law

Mergers and Acquisitions in the Grocery World Issues to Consider when Buying or Selling

While these business terms will dictate whether or not a deal should go forward, many buyers and sellers fail to recognize the legal and tax issues that can have drastic impacts on the business deal and its eventual success or failure. And, the earlier that these legal and tax issues are considered, the greater the chances for success, both for the deal and the operation afterwards.

Across all different types of businesses, deals will have a number of common legal and tax considerations beyond the business terms; namely deal structure, types and condition of assets, and contracts, licenses and approvals. But, a few types of businesses combine not only the common general considerations, but highly unique issues and circumstances as well, and retail grocery stores are among them.

Buying or selling a retail grocery store (or a number of them) requires knowledge of common acquisition issues together with an understanding of the specific and critical items that are unique to the industry.

Getting Started: Do Your Due Diligence!

Every purchase, whether a retail grocery store or other business, should begin with a thorough investigation of the business, its finances and operations and its assets.

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reviews the books of the company, and cleans up incorrect entries. Additionally, it’s critical to review the organizational documents and, at a certain point, the tax returns and books and records used to prepare the financial statements.

If anything looks awry here, it’s not a good sign of things to come.

When considering buying or selling a business, the parties almost always consider the business terms first.

Does the deal make fiscal sense? Will I make money buying or selling? What are the profits and losses, operating history and income, or value of assets?

Business and Financial Records: Audited or reviewed financial statements are always a great place to start. These contain a wealth of information on the business, its past practices and potential liabilities and issues.

But, remember that financial statements that are prepared internally could be inaccurate; the safest financials to review are prepared by a certified public accountant that audits or

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Condition of Assets and Liens: A physical inspection of the assets and business will begin to tell the story of how the business was run, how maintenance was performed and whether there will be any potential capital outlays after the deal closes; but, a comprehensive lien search (and title report if owned real property is involved) will give you the rest of the picture.

What assets are owned outright? What are the liens and who are the lienholders? Are there capital leases? Is there consignment inventory?

A lien search starts to clarify the answers to these important questions.

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Contracts: Every business relies (or should rely!) on written contracts for its operations. For a grocery store, the major ones will likely be leases (real property and equipment), and vendor and supplier contracts. There should be effectively written contracts in place that spell out the parties’ rights clearly, with hopefully no active or likely defaults under any of them!

Every purchase, whether a retail grocery store or other business, should begin with a thorough investigation of the business, its finances and operations and its assets.

General Considerations: Work Through Your Structure and Its Implications!

Once there’s a general sense of the business and the shape that it’s in, the parties can really start discussing structure. Although, there are a number

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met or the buyer may get stuck being liable to the creditors of the seller. Additional liabilities, taxes and other amounts due to governmental authorities may remain with the business or assets. None of these should be a surprise after a closing, so it’s critical to understand these liabilities, amounts due or past due and when

of ways to structure a deal, each being appropriate under different circumstances and each having drastically different tax implications, most grocery transactions are structured as either a stock purchase or an asset purchase.

A stock purchase allows a buyer to walk into the business as is. The buyer becomes the new owner of the entity that operates the business and, through the entity, inherits all of the assets and liabilities (whether known or unknown, truly ALL liabilities in the business) of the seller. An asset purchase allows a buyer to pick and choose the assets that it wants to purchase and the liabilities that it wants to assume.

For a retail business, especially one with a variety of inventory and asset, an asset purchase generally allows the parties to craft a specific deal for certain assets, contracts or lines of business without overly

Depending on your role in the transaction, a stock sale or asset sale (or any other structure) will

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they remain payable by a successor upfront. n

Contracts. Many contracts will require notice to or consent of the other party if the business is sold, otherwise the other party to the contract may be able to terminate. If the contract is an important part of the deal, like a lease, supply or vendor contract, make sure that any notice/ consent requirements are strictly complied with.

Also, if the contract is not part of the deal, make sure that is clear and that the seller takes care of properly terminating it.

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Licensing. The permits and licenses needed to conduct the business, including business licenses, environmental and health permits, liquor licenses, pharmacy licenses, PACA licenses, WIC and SNAP licenses may not all transfer to the new owner.

complicating the structure.

Depending on your role in the transaction, a stock sale or asset sale (or any other structure) will have significantly different impacts on the parties.

Generally, a stock purchase is more beneficial to the seller as they are taxed at capital gains rates and a buyer is unable to further depreciate assets. On the other hand, an asset purchase penalizes the seller as they pay tax (generally at ordinary income rates) on the profit on each asset (remember that depreciation reduces your basis), and a buyer takes a basis in the assets in the amount they paid and can then depreciate them.

It is important to understand the required

Grocery Specific Considerations: [Know Your Business and Think About What’s Important]

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Regulated Assets. Some types of inventory are heavily regulated and require special procedures or precautions to transfer. Liquor, pharmacy

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Bulk Sales Law and Successor Liability. If a large portion of the assets are sold, there are notice requirements and other items that must be

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Once you’re generally comfortable with the business and have decided on a structure, it’s time to dig into the details for grocery stores that can have significant impacts.

licenses, whether they are transferrable and how they transfer, and how long the process will take to transfer a license or obtain a new one at the relevant location.

Continued on p. 16

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Continued from p. 15

stock and patient profiles and information all require specific handling. n

Employee and Union Issues. Buyers should be mindful of how they intend to address existing employees and, in January 2016, the implications of AB 359, which will affect those decisions and be addressed in more detail in a separate article in California Grocer. If employees are terminated, the parties may also need to comply with requirements to notify the employees of terminations or they can be held liable for amounts due under federal or state law.

Also, how will the parties handle benefit and welfare plans or accrued PTO or vacation time?

Depending on the size of the business, these can be significant liabilities. And, if the business being acquired has a union, or employs people that belong to a union, there will be implications related to the collective bargaining agreement.

Purchasing a business obviously requires careful consideration of numerous factors, and those factors are often dependent on many variables. This article is meant to provide a cursory overview of some key issues to consider, and is not a comprehensive list of all of the important considerations a party should contemplate when selling or acquiring a business.

Although some transactions may seem too small to justify engaging an attorney experienced in negotiating and documenting commercial transactions, doing so will always allow a party to better protect its interests while at the same time provide a more comprehensive understanding of the transaction and potential issues.

Moreover, the initial investment in an attorney may save a purchaser tens (even hundreds) of thousands of dollars in taxes, fines or litigation expenses in the future. n

Legal and Regulatory Counsel to Retail Grocers and Suppliers

Dale A. Stern

Outside general counsel to CGA

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Retail Practice Group

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Joseph G. De Angelis John C. McCarron Leila C. Bruderer

downeybrand.com

Business Contracts • Proposition 65 Hazardous Waste Handling & Environmental Compliance Food Safety • Trespassing • Employment Worker Retention Ordinance Compliance Proposition 2 • Advertising Claims WIC, SNAP & ABC Compliance Mergers & Acquisitions Business & Real Estate Litigation

advancing your interests Sacramento I San Francisco I Silicon Valley | Stockton I Reno 916.444.1000

15 Minutes With‌

1 5 M i n u tes W i th …

Doug Rauch, President Daily Table Doug Rauch, former president of Trader Joe’s, has always approached business with a combination of passion and purpose.

Nowhere is this more evident than at the Daily Table, a nonprofit supermarket in the economically-challenged Dorchester neighborhood of Boston, that sells produce, grocery and other items donated by growers, manufacturers, supermarkets and wholesalers which are either past their prime, nearing their expiration date or cosmetically imperfect. And there’s a large instore kitchen for preparing healthy, ready-to-go meals Is this the answer to the country’s massive food waste and way to put people on a path to healthy eating?

Maybe! Next stop – California? Why not?

CG: When did you come up with the idea for the Daily Table?

Rauch: “When I graduated from Trader Joe’s I had a fellowship at Harvard’s Advanced Leadership Initiative. They asked me if I had the run of the college how I would tackle some major social ills.

“One was that up to 40 percent of the food we grow is never consumed and going to waste.

If wasted food were its own country in the world it would be the third largest generator of greenhouse gases behind the U.S. and China.”

But we’re not talking about food waste?

“No. That does a disservice to the food industry.

That’s for sanitation and composters to deal with.

The product wasted is wholesome, healthy food that’s going to waste. The idea is to use a problem to solve a second problem.”

How so?

And that’s the basis for Daily Table?

“Exactly. It’s an environment people choose because it delivers great tasting, affordable and healthy food.”

Why Boston?

“It’s home to world class medical education. We have nutritionists from the Harvard School of Public Health, Children’s Hospital. Eleven different groups and agencies helped us with nutrition guidelines. We look at this as a health care initiative masquerading as a retail store – a way to turn the tables on dietary-based epidemics like obesity, diabetes and heart disease.”

How long did it take to get your project off the ground?

“About three and a half years.”

How many people said it wouldn’t work?

“Lots of them – because it had never been done.

I’m a big fan of innovation for social challenges.

You can’t just keep doing the same thing and hope for better results.”

Maybe being a non-profit has something to do with the skepticism?

“As a non-profit we are attempting to break even outside of the cap-ex costs. We want to operate without the need for annual infusions of charitable dollars. Then the concept becomes easily scalable.”

How many suppliers are you getting products from?

“Hard to say. There are a lot fewer retailer suppliers. No one wants us to sell their label for a huge discount when they’re right down the street.

Continued on p. 20

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“Partly. Another challenge facing hunger relief agencies is dignity and self-respect. Many people

So it’s what mainstream supermarkets are doing?

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“Well, hunger in America is not like anywhere in the world. Obesity is the face of hunger in America. Most people who are food insecure are not struggling with a shortage of calories, but with a shortage of nutrients. The solution is affordable nutrition.”

don’t use food banks and pantries because they feel it’s demeaning.

“The idea is to have a non-profit that’s run like a retail store where people can choose products and you’ve got to earn their patronage.“

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1 5 M i n u tes W i th …

Continued from p. 19

So we work with suppliers like Stonyfield, Cedars, Hain Celestial and other local manufacturers and wholesalers.”

How does it work?

“A company like Cedars, for example, can’t ship products to grocery stores with less than 30 days code. But to us 30 days is an eternity. So, I’m telling your readers, if they’ve got product with enough shelf life to go cross-country, or plants on the East Coast, we should talk.”

How big is the store?

“It’s 10,000 square feet. About 4,000 square feet is retail space and half of it is really a commercial kitchen. We learned in focus groups that no one has time to cook, particularly in economically challenged areas. They want grab-and-go meals.”

Everything at prices that don’t break the bank?

“Right. We’ll have organic avocados at two for $1, bananas for 29 cents per pound and fresh apples at 40 cents a pound. A one-pound tray of chicken and brown rice is $1.49 and meat dishes are from 1.99 to 2.99.”

Are you concerned about supply issues?

“Only every day. I count on the law of large numbers to save us. One supplier may only have something once every three months. But there are a lot of companies with products that aren’t selling. We’re also counting on the goodwill of the industry.”

What’s your transport situation?

“We have a refrigerated truck that makes pickups across New England. Some companies drop product off at the store. We just try to be nimble.

We’re not a 40,000 square foot supermarket.”

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What about legal issues?

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“Under Bill Clinton, the Good Samaritan Act protects nonprofits. Also, we haven’t sold any expired foods, but I hope we will after getting the community’s trust. The Boston Health Department is one of the toughest in the nation and they’ve banned the sale of expired food even though state law allows it. However, we are working with them to set up scientific protocols

“I love retail but at this point I’m fully engaged. We may fall flat on our face but we’re going to give it our best shot.” that will give them confidence that this food is healthy and safe.”

It might be educational for retailers, too?

“It’s surprising how many people in the food industry don’t know that, aside from baby formula, expiration dates are not federally regulated and the sell-by date is a peak quality, not a safety issue.”

You’re looking for a second site in Boston?

“Yes. But it’s a tight market and costs are prohibitive. We are also looking at where we go next. California is a main contender.”

Could you develop a coast-to-coast supplier network?

“We could but it takes time. It’s the same as private label was at Trader Joe’s in the 1970s.

There were only a few stores and it was hard to get some products if you didn’t have volume.”

Do you ever thing about getting back into mainstream retail?

“I love retail but at this point I’m fully engaged.

We may fall flat on our face but we’re going to give it our best shot.”

If you weren’t doing what you doing now. What job would you like the most?

“That’s a tough one. I wouldn’t mind being a lifeguard in Hawaii. On the other hand the real joy in life comes from doing things that are meaningful, by engaging in something larger than yourself.”

How about an ocean view Daily Table in Honolulu?

“That would be sweet.” n

Your federal elected officials returned to Washington and a full legislative agenda after Labor Day and a much-needed month at home in the real world.

There are a number of issues that impact your businesses that we wanted to make sure you have on your radar.

Upon their return to Washington, the Senate immediately took on the Iran Nuclear Agreement, which is certain to again heighten tensions between the President and Senate Republicans and even some Senate Democrats who feel like they were left out of the negotiation process.

Once again, we are three quarters of the way through the tax year and we still do not have a resolution on which of the various tax extenders Congress will allow to exist in 2015, much less 2016. Along a similar track, Congress and particularly Ways and Means Chairman Paul Ryan, have been focused on trying to get some part of comprehensive tax reform over the finish line and if that sounds like an oxymoron, it should. The focus is on international tax reform, which may be a snoozer to some folks only operating domestically, but we can’t snooze for fear of finding ourselves the victim of being used as a “pay-for” with no accompanying tax win in areas such as the elimination of LIFO accounting.

And it may seem like Groundhog Day that we still do not see a clear path forward to funding the federal government when the current FY2015 funding expires on September 30 th. Speaker Boehner in particular has said there will be no government shutdown, but an agreement will have to be reached among enough of the factions to reach a majority, which could prove to be challenging particularly given the limited time for negotiating.

We are hopeful that the Senate will follow the House’s lead in eliminating country of origin labeling (COOL) for meat to avoid significant penalizing tariffs from some of our best trading partners. Canada and Mexico charged that the COOL rules were an unfair trade barrier, and the WTO agreed in a recent decision.

We are also urging the Senate to follow the House’s lead and pass legislation requiring the FDA and USDA to establish a federal labeling program for non-genetically engineered products that would provide consistency, preempt state/municipal regulations, and avoid confusion for customers. We are working through the challenges in Vermont of trying to comply with a law that would require multiple SKUs for the same product in five states by June. The complexities will be tenfold if another state creates yet another different program.

Jennifer Hatcher Senior Vice President Government and Public Affairs, Food Marketing Institute

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We also are nearing the end of the authorization of the Child Nutrition Act (September 30), which authorizes the WIC program and the school lunch program. While we are no longer expecting any comprehensive reworking of the program, we are hoping to get some improvements in licensing.

Anyone who has gone through the process for WIC (and for SNAP) will know how much can be improved in this area.

Washingto n report

The Washington End of the Year Sprint Began in September

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Data Breach: It’s Not “If,” but “When” We’ve all heard the warning, “it’s not about if a data breach will happen, but when,” and while data breaches grabbed headlines late last year – a year that was dubbed “the year of the breach,” data security incidents can happen to businesses of all sizes, from all industries.

Cyber attacks and breaches have a huge impact on both consumers and business owners.

include any changes in a company’s duty to report a breach to government agencies.

Sixty percent of small businesses that suffer a breach go out of business within six months, and although that number is staggering, most consumers might be surprised to learn that data breaches occur more often in the financial services industry (13%), than the retail industry (8%), according to a 2015 Verizon Data Breach Investigations Report.

The National Grocers Association believes the following fundamental principles will strike the right balance to form the foundation of effective data security and data breach notification legislation.

Despite the bad headlines, there are reasons to be encouraged that the goal of data security can indeed become reality.

Second, protecting consumer information and payment data must be a shared responsibility among all those entities in the payments ecosystem, including merchants, banks and credit card issuers.

Companies are investing in additional resources to find solutions and are going to great lengths to provide a more secure shopping experience for their customers. This energy, in turn, is fueling innovation to counter the complex strategies of hackers.

But, cybercriminals are becoming increasingly sophisticated and innovative solutions alone won’t solve the problem; we need federal legislative solutions aimed at protecting consumers and stopping cybercriminals.

Third, retailers who suffer a breach should be provided with multiple avenues to provide notices to consumers.

Lastly, new chip and personal identification number (PIN) technology, which, according to the U.S. Federal Reserve, makes transactions 700 percent more secure than the current signature method, should be implemented.

The use of personal identification number and chipenabled credit and debit cards has been successful in Europe and Canada during their shift to Europay, Mastercard, and Visa (EMV) payment standards.

Protecting consumers’ personal and financial information – and ultimately maintaining the integrity of a customer’s trust – is of utmost importance to community-focused, independent supermarket operators.

We look forward to working with Congress to move legislation that establishes uniform national data security and breach notification standards for stakeholders in the payments ecosystem. n

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Peter J. Larkin President and CEO, National Grocers Association

While cybersecurity is expected to be addressed

by Congress this year, it is likely that any proposed legislation will only tackle the issue of inter-company information sharing, and at the time of this writing, remains unclear whether such legislation would

First, we need a strong national data security and breach notification standard that strongly preempts the current patchwork of state laws.

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N av i g at i n g the D i s r u pt i on

BY len le w i s

Na igating the

Disruption

There’s a saying that “Old habits die hard.” it’s certainly the case in retail with operations, formats, products and promotions that have been the norm for decades and just refuse to die.

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But old habits need to be laid to rest once and for all if retailers and suppliers expect to succeed in the face of major industry disruption, said Mike Paglia, director of retail insights for Kantar Retail, one of the nation’s leading research and consulting firms.

“They are also incorporating digital into their purchasing decision – often before going to the store,” he explains. “They also have different expectations about the features and benefits of food whether it’s gluten-free products, vegan or non-GMO.”

“There’s a whole array of disruptors out there within and outside the supermarket industry that need to be watched,” he said. “Within the industry, we have the continuing growth of online grocery, which is really shaking up the way everyone does business – whether it’s home delivery or click and collect models.”

However, this doesn’t mean that traditional supermarkets are dead in the water, unless, like A&P that went bankrupt this year, they are unwilling to adapt. He noted that other companies like Kroger, Publix and HEB are doing a great job adapting to change.

On top of that, Paglia said, there are third party platforms like InstaCart throwing its weight around.

“Frankly, all the disruption in the market is forcing retailers to elevate their capabilities in business and on new ways to connect with shoppers,” he said.

Additionally, the growing prevalence of Amazon is not to be ignored, particularly around center store products sold through Amazon Prime and other programs.

“Essentially, this takes items off the shopping list that consumers would have gone to a store to purchase – things like paper towels or a 50 -pound bag of dog food,” said Paglia.

At the same time, another potential disruptor is Walmart’s Neighborhood Market concept.

“Make no mistake,” Paglia warns, “this is a supermarket format that’s got the clout, efficiency and buying power of Walmart behind it. And all the signs point to heavy investment in this format.”

Outside of the supermarket channel is where disruptions really gets interesting, according to Paglia, emphasizing that the focus on consumer demographics is more important than ever.

“It’s all about specific shoppers,” he said. “There’s enormous disruption in terms of income and generational polarization. We are seeing Millennials entering the family formation stages, but doing so in a different way than baby boomers, which, by the way, are still a target demographic for retailers and suppliers.

“But, Publix saw the writing on the wall and knew they would have to accept technology if they wanted to maintain relevance with shoppers. It has given them enormous insight into segmenting stores, assortments and promotions,” he said.

Paglia added that, Publix is being very purposeful and cautious in how it rolls things out, adding it is adamant about putting shoppers at the center of everything it does.

HEB already knows its shoppers very well.

“What makes them a disruptor is a willingness to operate outside their comfort zone,” Paglia said.

“You can see it in their diverse portfolio of stores – everything from the foodie-based Central Market to the Joe V Smart Shop, a discount operation that was modeled after Aldi.”

Kroger has really been the uncontested champion of the industry for some time by taking the long view of the industry and using its long-term relationship with Dunnhumby to revolutionize U.S. retailing.

“The chain made deliberate efforts over the years to tie Dunnhumby data into all their strategic decisions,” Continued on p. 46

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Asked about key demographic differences, Paglia said Millennials are buying smaller homes and are either not having children, having fewer children or having children later than their predecessors.

“This may seem to be a small step, but it was a watershed moment for Publix,” he said. “This is a company that has traditionally been very averse to incorporating technology into its overall value proposition.

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“The longer we continue to think of shoppers as an homogenous group, the greater the liability becomes,” he added.

Publix, which has a bit of a reputation for being slow to accept change, according to Paglia, has launched a digital coupon program.

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co ntinue d

Paglia said. “Now,t hey are ramping up their digital and online capabilities to accentuate their leadership.”

According to Paglia, there’s a tendency (in business) to look at things quarter by quarter and making the numbers and it’s the same view taken by Wall Street.

But these chains are okay with investments that may take an extended amount of time to yield returns.

Most companies don’t have that kind of patience.

“It’s easier to respond to a short-term threat than to invest in a long-term opportunity,” he said. “People are slowly starting to realize that the short-term view of growth isn’t as fruitful as it used to be.”

Looking outside the industry, he said, the industry should continue to monitor Amazon.

“They’re disrupting the entire retail industry,” he warned. “It’s reminiscent of what Walmart did several decades ago when many people dismissed the chain’s approach to efficiency and productivity.”

Now, Paglia said, it’s Amazon that’s disrupting things like assortment, fulfillment and shopper engagement.

However, Amazon is at a point where it has to decide whether it wants to be a tech company, or a retailer.

Turning to other disruptive channels of trade, Paglia noted that dollar stores remain the fastest growing class of brick and mortar trade in consumables that Kantar tracks.

“We expect them to grow 6.6 percent annually between now and 2020,” he said.

On the other end of the discount spectrum are the warehouse clubs whose growth has been tracking in excess of 5 percent annually. Over the next five years, this segment will grow faster than the entire marketplace, he noted.

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“Both segments are business models that don’t play by the same rules in terms of demand for standardization of case packs and mass distribution that conventional retailers and suppliers have been playing by for decades,” Paglia said.

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According to Paglia, dollar stores want small pack sizes that some suppliers aren’t set up to produce in their current facilities. Conversely, the clubs want totally unique items that no one else carries and, given the current infrastructure, can be costly to produce.

Mike Paglia is a presenter at this year’s CGA Strategic Conference in Palm Springs.

“Both were the beneficiaries of the great recession and that’s when they began to shine,” he said.

“Everyone was laser focused on value and spending.

As value became more mainstream, these discounters were able to meet everyone’s needs – not just low income shoppers.”

On another front, Paglia warns not to underestimate the disruptive power of online retailers over and above Amazon.

“It’s been very transformative,” he said. “I’m not just talking about purchasing, but even before that in terms of how people consume media and how they interact with brands. Essentially, retailers and suppliers need to think about new ways to connect with shoppers.”

Paglia said some companies cling to the attitude that the way things have always been done will continue to yield growth. But the world has changed at a pace that hasn’t been experienced in the past. At the core, retailers and suppliers must be willing to find growth in uncomfortable places including different shopper groups, additional channels of trade and different product categories.

“We have to rethink the role of the store,” he suggested. “It’s no longer just a place where a truck drops off goods, and products are put on the shelf for shoppers to buy. The store is meant to be a more experiential environment where you’re engaging shoppers on a more personal, or emotional level.”

How personal can stores get? That’s anyone’s guess, according to Paglia.

Fifty years ago, the level of personalization now would have been unthinkable.

“Everyone just put out FSIs and it was a good day if you got a 1 percent redemption rate,” he said.

“Similarly, what we are doing now may be obsolete in 20 years.”

has implications for the types of products sold and how much space categories receive.

It boils down to how retailers and suppliers go to market, he said, noting the development of a Kantar’s framework called Reconfigure Retail.

“For a long time there was a power struggle between retailers and suppliers,” he said. “In the past decade, power has shifted to shoppers and they will decide where and how they want to spend their money.

Companies that want to grow need to seek out mutually beneficial relationships with each other.

“Basically, it focuses on the need for companies to reconfigure their approach to value, engaging shoppers, store formats, and the very nature of commerce,” Paglia said. “All these things are on the table. Retailers and suppliers will have to address all of them if they want to succeed in the future.”

Re-engaging shoppers means understanding that what’s relevant to one may not be to another. It’s about having meaningful conversations with them and providing what they need instead of trying to convince them they need what you are selling.

In terms of format, it’s a willingness to operate stores that are more differentiated and shopper centric,” he added. “That may mean a smaller format, but it also

Many top tier companies do that now, but a lot of small firms still look at things from a transactional view,” Paglia concluded. “We need to develop more symbiotic relationships going forward.” n Len Lewis is editorial director of Lewis Communications, Inc., a New York-based editorial planning, research and consulting firm. He is a contributor to several retail publications and trade groups in the U.S. and Europe and has been a speaker and moderator at numerous industry events. He can be reached at lenlewis@optonline.net or via his website www.lenlewiscommunications.com

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