One hot afternoon in the summer of 2002, Victor Bevilaqua, Vice President of Marketing for Manischewitz, sat in his office deliberating over his strategic marketing plan for the coming year and beyond. He was indeed challenged by many unique marketing issues. Just a couple of hundred feet away, workers were busy baking matzo, unleavened bread that commemorates the biblical account of the Israelite exodus from Egypt, for the next year’s Jewish Passover holiday. As this all too familiar scent wafted through the window, Victor reflected on Manischewitz’s rich history as a long time producer of kosher food products. He knew that it was this focus on tradition that was the source of Manischewitz’s past success. But Victor also knew that if he were going to grow the brand and keep it relevant into the twenty first century, he had to focus on the future instead.
On the one hand, kosher sales nationwide were exploding. There was clearly a demand for kosher certified products. That was the good news. On the other hand, however, much of this new growth was coming from sales of mainstream products and brands that have been certified kosher in recent years. Mr. Bevilaqua wondered whether to focus his efforts on the Jewish market, or the general consumer. With the bulk of Manischewitz sales made in conjunction with the 8 day Passover holiday, how could the company leverage its brand equity, and excess capacity, throughout the year?
Meanwhile, Manischewitz’s parent company, RAB, was facing financial troubles, as its corporate bonds were being traded for only 18 cents on the dollar. RAB was thus putting tremendous pressure on Mr. Bevilaqua, as the holding company’s shaky financial situation necessitated immediate results from Manischewitz.
In 1888 Rabbi Dov Behr Manischewitz opened a small matzo bakery in Cincinnati, Ohio. His bakery soon evolved into a successful business, innovative and prosperous, while adhering to strict Jewish dietary rules. By the end of the century, demand for his matzo had become so great that Rabbi Manischewitz turned to the use of gas-fired ovens, replacing the older coal stoves being used by other Jewish bakers. The newer ovens allowed for much more careful control of the baking speed, insuring a consistent and standard quality to the matzos. He also introduced portable traveling-tunnel ovens, and was the first to package his matzos for shipment to places beyond the immediate neighborhood of his bakery. He even began shipping his matzos overseas, to such diverse places as England, Japan, France, Hungary, Egypt and New Zealand. His bright, clean bakery would become a model for future kosher bakeries, both in America and abroad.
In 1932, the company built a second factory. Located in Jersey City, New Jersey, the plant quickly became the model for all new machine-made matzo bakeries worldwide. Closer to a much larger Jewish population than that of Cincinnati, the new factory also made distribution of the company's product more efficient and quickly enlarged its customer base. The Manischewitz label was soon dominant in ethnic grocery stores and delicatessens in the larger east coast cities. Thanks to the technology and efficiency of the New Jersey factory, Manischewitz was able to close down the Cincinnati facility altogether.
In 1940, Manischewitz produced its first non-matzo product, the Tam Tam cracker. Meanwhile, in a licensing arrangement, Manischewitz wines began to be sold throughout the country. In 1954, the company purchased a processing plant located in Vineland, New Jersey. The Vineland facility manufactures all of the company's canned and jarred products, including old, familiar favorites like gefilte fish, chicken soup and borscht. The plant is primarily a hand-pack processing operation stressing careful attention to quality and flexibility. Workers there pack about 2,000,000 lbs. of fish and 1,000,000 lbs. of beets each year.1
Since 1998, The B. Manischewitz Company, LLC has been a subsidiary of RAB Holdings, a private company, which owns and operates the company (see Exhibit 1). Although the world's number one baker of matzo, Manischewitz produces hundreds of other kosher foods, including baked goods, pastas, and soups (see Exhibit 2). Under the Manischewitz, Horowitz Margareten, Goodman's, and Season names, the company sells its products to food distributors in the United States, Canada and throughout the world.
WHAT IS KOSHER FOOD?
The dietary laws which govern which foods are kosher and which are not, are derived from passages in Deuteronomy and Leviticus, books of the Old Testament. Collectively known as "Kashrut," these laws have been followed for over 3,000 years. Today, there are over 30,000 different food products on the American supermarket shelf that are certified "kosher." The "kosherness" of a food is indicated by a little symbol representing a particular agency's certification that the food has been processed in accordance with the Jewish dietary laws. Manischewitz certification comes from the Orthodox Jewish Congregations of America. For a list of their and other certification symbols found on the packaging of kosher food products, see Exhibit 3.
Kashrut deals with what foods may be eaten, what foods may be eaten together, and how those foods are to be prepared. All foods are divided into three categories: Dairy, Meat and Pareve. Dairy: Milk and milk derivatives are considered dairy and may not be mixed with meat products. No food item that is dairy in nature can be eaten at the same meal as meat is served, and vice versa. Meat and dairy products, especially those that are not packed or that are unsealed, should be separated on a constant basis to avoid mixing.
Meat: Meat must come from a kosher animal, as outlined in Deuteronomy chapter 14. An animal is kosher if it has split hooves and chews its cud such as cows, sheep, goats, etc. Certain birds, which are not bird of prey, are also kosher such as chickens, turkey, duck, geese etc. Other special rules govern the entire processing of meat.
Pareve: Pareve foods are those which are neither milk nor meat. Eggs, fruits, and vegetables are pareve and may be eaten or cooked with either meat or dairy.2 During Passover, Jewish law forbids the consumption or possession by Jews of all edible fermented grain products (Chametz) or related foods. Therefore, even foods which meet the strict, year-round dietary regulations, and are considered kosher, nevertheless often require special preparation for Passover use in order to be kosher for Passover. Most processed foods and beverages require special rabbinical supervision for Passover use. This additional, costly, supervision ensures that production facilities and products are free from Chametz. Kosher Passover products are usually marked with a “P” next to the certifying agency’s normal kosher symbol.3 CONSUMERS
Despite the fact that Jews account for only 20% of kosher consumers, they continue to drive this market. A survey released by the United Jewish Communities (UJC) in October 2002 showed a US population of 5.2 million in the US down from 5.5 million in 1990. Of the more than 5 million people that make up the American Jewish population, only 2 million are considered kosher consumers.
Within this segment further sub-segments can be identified:
“Only-kosher” consumers: it is estimated that around 800,000 Jews eat kosher foods 365 days a year. In particular, studies show that Orthodox Jews - having larger families and observing the Jewish Sabbath and holidays - spend on average around $10,000 annually per family on kosher products. Supermarket executives believe that Orthodox Jews are the ones who propel kosher sales.
Regular kosher buyers: an estimated number of 1.2 million Jews buy kosher foods on a regular basis. The return to kosher by these consumers is largely attributed to the availability of kosher products in a large number of supermarkets across the country.
Geographically, the Jewish population is largely concentrated in the Northeast (43%). The regions with the fewest Jews are the Midwest and the South. For an analytical distribution of the Jewish population by metropolitan statistical area in 2001, see Exhibit 4.
The Jewish population is aging and younger Jews are getting married and have fewer children later on in life. There are 2.9 million Jewish households. The average number of people in a Jewish household is 2.3 which is less than in non-Jewish households (2.6). Also, 30% of Jewish households consist of one person (26% for the general population), 38% have two people, 13% consist of three people, 12% have four people, and 8% consist of five or more people (11% for the general population). Additionally, 24% of Jewish adults have received a graduate degree and 55% have a bachelor’s degree (5% and 28% respectively for the general population). The majority of employed Jews (59%) work in management, business and professional/technical positions compared to 46% for non-Jews. 68% of Jewish men are employed vs. 56% of women. Median household income is around $50,000 vs. $42,000 for non-Jewish households.4Other religious groups
Approximately 2.4 million kosher consumers or 24% of the total 10 million kosher consumers are believed to be Muslims, Seventh Day Adventists and members of other religious groups. Around 10 million Muslims may be buying food under special certification. However, kosher distributors contend that about 25% of Muslims buy kosher while the rest buy “halal foods” (“halal” is a Quranic term which means allowed or lawful).
Vegetarian and lactose intolerant individuals
Around 2.5 million Americans that are vegetarian and/or lactose intolerant are also considered kosher consumers. They buy kosher foods because they can find the type of non-meat, non-dairy products identified as “pareve” necessary for their diet.
The Vegetarian Resource Group’s (VRG) 2000 Zogby poll showed that American vegetarians are most likely to be women who reside in big cities located in either of the two coasts. Vegetarians are found mainly among the ages of 18 - 29 and according to certain vegetarian food manufacturers the best markets are situated in the West, Northeast, Florida, and the Rockies. Around 97% of volume sales are equally divided between supermarkets and natural foods stores with the remaining 3% going to mass merchandisers, drug stores, and convenience stores.5 The main drivers to follow a vegetarian diet are health, weight control, a sense of well being, ethics, care for the environment, and animal welfare.
Health and quality conscious consumers
The last segment of kosher consumers consists of Americans who perceive kosher to be a healthy and quality product, the kosher certification being the standard of higher quality.
Other Influential Groups
Ethnic groups, non-family households, one-parent households and unmarried couples are also important for the food industry. It is predicted that these groups with their growing number and purchase power will influence future food trends.
Ethnic groups: This group spent $142 billion on food at home in 2000 generating 37% of super- market sales. Hispanics spent $54.4 billion, African Americans $51.5 billion, Asian Americans $25.3 billion, and all other ethnic groups combined spent $10.8 billion.6 Sales of ethnic food are growing by 9% annually, compared to 1% - 3% for the food industry as a whole.7 The Kosher industry has already began to target this group by introducing products such as kosher tortillas, salsas, tofu and Asian sauces.
For ethnic groups in the US, food is associated with family gatherings and ethnic traditions. Cooking, usually from scratch, is a social occasion that brings back memories and nostalgia for the countries of origin. They shop for these products in either large chains or mass merchandisers who have adapted to the needs of this segment by expanding their ethnic sections or in ethnic food stores. Price is important but the quest for quality prevails. Convenience food is not preferred. See Exhibit 5 for a list of foods that appeal to each of the above mentioned groups.8
Non-family households, one-parent households, and unmarried couples: In 2000, married-couples represented 52% of all households down from 75% in 1960. One third of all households in the US are now considered non-family units. The percentage of one-parent families was at 27% of all families in 2000 up from 24% in 1990.9 These trends combined with the two-income lifestyles have increased the demand for convenience and easy-to-prepare food.
KOSHER FOOD MARKET Food marketing associations estimate that kosher foods account for $50 billion of food sales each year. More than 8,100 companies nationwide manufacture more than 36,000 kosher products. While overall food sales are growing by about 1% to 2% annually, the kosher market in the US has been growing about 12-15% annually.10 In addition, the fastest growing segment of the US wine market is kosher wine. Sales have increased 15% a year since 1995.11 The kosher food market is very seasonal with the Passover season representing nearly 40% of annual sales of kosher foods.12 The USDA reports in its conclusion notes: While Jews form the core of the market for kosher foods, the greatest potential for growth lies in the non-Jewish population, which, for reasons of religion, health or food safety, purchases kosher food. Kosher shoppers, like shoppers in the mainstream market, seek convenient meal solutions along with a wide variety of groceries, meats, fish, poultry, and dairy products, as well as trendy and popular foods and beverages.13 Additionally, they care about health and nutrition, and are among those adults who are concerned about the safety of the food they eat.
Changing Consumer Tastes14
In the early post-war years, kosher marketers were used to target the generation of aging Jews who grew up with Manischewitz sweet wines and couldn't fathom a festive meal without the traditional chopped liver and stuffed cabbage. They typically bought their fish fresh from the fish market and meats from the kosher butcher. Many bought Mrs. Adler's or Rokeach's Gefilte Fish in the jars and cans. Pastries were obtained from the kosher bakery.
The baby boomers presented new challenges as a relatively affluent generation demanded more than the classical kosher items, setting the stage for the huge explosion of kosher foods, which increased from about 16,000 kosher certified packaged goods in the '70's to over 75,000 today. The astronomical growth of the Orthodox Jewish community in the 70's and '80's created some of the enormous opportunities that made kosher a leading specialty food in the US food industry.
The largest group of kosher consumers, the 18-40 age group, generally consists of people with families. A significant number of those that fall into this group have 5 or more children (10-15 children not uncommon in many circles, particularly amongst Chasidic Jews). There is also a significant group of single kosher buyers that have a considerable amount of disposable income. These consumers are demanding more diverse products. "They simply want everything that can be kosher to be kosher," says Menachem Lubinsky of IMC, publisher of Kosher Today. "Eating well is part of the new lifestyle that goes with living well and it, of course, all has to be kosher."15 There are some lifestyle nuances that are also worthy of note for the kosher companies. The conventional wisdom, for example, is that many younger women work to bolster household income and thus the focus should be on convenience foods. While there is a great deal of merit to this logic, the evidence is that even the working kosher housewife also likes to prepare meals at home, covets recipes, and is increasingly buying some of the growing roster of kosher cookbooks. See Exhibits 6 – 10 for charts pertaining to the kosher market.
Despite the relatively small size of the kosher food market, Manischewitz faces stiff competition from numerous sources. These competitors include small companies who offer their products locally in addition to the much larger national firms. Over the last several years, as the demand for kosher foods has increased, so has the number of competitors.
Manischewitz has several main competitors including Rokeach, Streits and Kedem. These companies, along with Manischewitz, are considered the traditional national kosher brands and hold a large share of the kosher market. All of these companies offer hundreds of food items, in addition to special Passover foods that are offered once a year.
Rokeach is considered Manischewitz’s main source of competition. Founded over 125 years ago by Israel Rokeach, the company has evolved from a soap company to the largest manufacturer of kosher food. It has a 200,000 square foot production and warehouse facility in Newark, NJ, and offers the broadest variety of kosher items year round including a well established line of candies, chocolates and baked goods. Additionally, Rokeach is the largest manufacturer of kosher for Passover foods and stocks over 1000 kosher for Passover food items alone. Along with the Rokeach brand, they own and operate the Mother’s, Mrs. Adler’s, Grandma’s, Tradition and Heritage labels. Although Manischewitz views Rokeach as a competitor, the company has forged various co-packing agreements with Rokeach, as well. Under these agreements, one company manufacturers a product for the other based on capacity and demand variables. The thinking behind these agreements is that it will help solve excess short-term capacity issues while being a source of profits.
Founded in 1883, Streits is similar in its size and scope to Manischewitz. A national brand that is growing rapidly, the company employs about 1000 people and offers most kosher food items. Jack Streits, the founder’s son, still presides over the making of all of the foods to ensure his foods meet the highest standards. Like Rokeach, Kedem offers many kosher products under numerous labels including Kedem Grape Juice, Yehuda Matzo, Alprose Chocolates, Avvio Spices & Dips, Carmel Grape Juice and Oppenheimer Chocolates. It is considered the smallest of the national brands, but is actively seeking to grow its product line to fuel the company’s growth.
New appreciation for Israeli foods over the past several years as result of the unstable and often bloody Middle East situation has propelled Israeli kosher labels such as Elite, Zoglos and Osem. While still not nearly as big as the established US national brands, these companies are gaining traction primarily because of the heightened interest in Israeli foods and unprecedented support of Israeli products, not only by Jews but also by ordinary consumers. “They seem to want to express their solidarity with Israel by buying Israel” says one New York retailer. Additionally, these companies also receive subsidies and grants from the Israeli government. This leads to lower prices on the store shelves, which provides another competitive advantage to them.
In addition to these direct competitors, Manischewitz competes with other niche players such as Biscotti and Company, Shick’s Bakery and Brent and Sam’s Cookies, serving only a few kosher products in certain geographical areas. While these operations are hardly of the same size and scope of Manischewitz, they fragment the kosher market, nonetheless, and take away market share and presence from Manischewitz.
On a much broader level, national and international brands such as Coca-Cola, Maxwell House and Heinz do not specifically target the kosher market, but their foods have been certified kosher, thus presenting another kosher alternative to anyone who keeps kosher.
FOOD AND THE NON-ALCOHOLIC INDUSTRY IN THE US16According to the United States Department of Agriculture (USDA), total food expenditures were $844.2 billion in 2001, representing an increase of 3.8% over those in 2000. Products for consumption at home accounted for $443.9 billion in sales and away from home spending totaled $400.3 billion. Average per capital food expenditures were $2,964 during this period, 2.8% higher than the 2000 average. Away-from-home meals and snacks spending continue to rise. This category accounted for 47% of the U.S. food expenditures in 2001, an increase from 45% in 1991 and 40% in 1981. See Exhibit 11 for a breakdown of food sales per category.
Retail food prices for both away from home and products for consumption at home purchases increased by 27.0% over the last 10 years (1991-2001). Away from home food prices rose 26.1% and retail food store prices increased 27.7%. During this same period, the prices of all goods and services in the Consumer Price Index climbed 30.0%. See Exhibit 12 for a breakdown of US spending on Food Products in the at-home and away-from-home categories.
As of year end 2001, the top ten publicly traded U.S. food and beverage producers were responsible for $170.7 billion (20.2%) of the total sales in this category (includes international sales). Although large food manufacturers do have a great deal of power, the market continues to remain fragmented. According to US Census data from 1997, there were 21,835 registered establishments that manufactured food, beverages and kindred products. Similar to the overall food industry, the U.S. packaged food industry is for the most part highly fragmented. The average manufacturer that operates in this area is small and produces a limited product offering for regional or specialized markets. It is also common for regional firms to produce private label goods for grocery store chains. Baby Boomers
The rising average age of the US population is affecting the product offerings of food manufacturers. Baby boomers account for close to 77 million people, 30% of the U.S. population, which are now between the ages of 37 and 55. Typically, people in this age category become more concerned with nutrition and weight management since their metabolism is slowing down and their bodies have a reduced ability to digest food and absorb nutrients. This shift in consciousness is not as apparent for the baby boomers since increased work and family obligations have reduced their time available for exercise. This dilemma has created a demand for new food products that can address these needs.
Food Production Costs:
According to the USDA, 81% of the consumer spending on US farm products is used to pay for marketing costs. These costs include, but are not limited to, labor, packaging, transportation, energy, advertising, and promotion. Raw material costs of agricultural commodities accounts for the remaining 19%. Marketing costs have increased over time due to higher labor costs, transportation, food packaging materials, and other necessary inputs. The rising volumes of food and increases in services have also contributed to increased costs in this area. Over the ten year period, 1990 to 2000, marketing costs for farm products have risen by 57% to approximately $538 billion. Packaged food companies are less sensitive to changes in raw material costs since their businesses focus on value added activities at both the packaging and marketing level. This makes it easier to maintain margins. These companies also frequently use hedging techniques that allow them to limit their exposure to fluctuating commodity prices. Marketing costs for packaged food companies account for a high proportion of the total input costs, but are generally stable. Private-label products
Lower priced unbranded products known as private-label or “store brand” goods are a constant threat to branded products in terms of shelf space and sales. The competition between these products is amplified during times of economic weakness. Private-label sales in supermarkets increased from 1995 to 2001 in both sales and volume. Private-label sales in supermarkets equaled $40.8 billion in 2001, an increase of 5.3% from the previous year. During this same period, private-label sales in drugstores and mass merchandisers (excluding Wal-Mart) totaled $3.3 billion and $1.7 billion respectively.
Private label supermarket sales volumes accounted for 20.7% of all units sold in supermarkets, and 12.5% of the unit sales in drugstores. For the combined volume sales of supermarkets, drugstores, and mass merchandisers, private-label sales accounted for 19.2% of total unit sales for 2001, a decrease from 19.6% during the previous year. Savory Snacks
The US dominates the global snack market (Exhibits 13 and 14). In 2001, the savory snacks market was growing at a strong rate of 6.8% reaching $21.6 billion, though down from the previous year. The main drivers of this market are heavily seasoned products and the desire for convenience. A strong interest by consumers in healthy snacks also contributed to growth, however, interest has moved away from a low-fat focus to one involving functional benefits and/or organic ingredients. Chips and crisps are the leading sector accounting for 23% of value sales in 2001 and achieving the second fastest review period growth. Though a mature sector, potato chips recorded strong growth mostly through the introduction of robust, powerful flavors. Cookies/Biscuits and Crackers Food Category17
As of 2001, the market size of the cookies, biscuits and crackers category was valued at $10.6 billion. This represents a 1.2% increase from the previous year. Percentage growth in sales in this area has declined over the last four years by approximately 4%. Many companies in this industry have been focusing on industry integration programs as the result of recent merger and acquisition activity over the last year.
Increases in baked goods and bakery product sales can be partially explained by a significant enhancement of the in-store bakery retail format. This category has also benefited from the development of healthier biscuit products which have become increasingly sophisticated in recent years, with a new emphasis on product fortification and vitamin content.
The cookies, biscuits and crackers category consists of sweet cookies and savory biscuits. As of 2001, the sweet biscuits sub-sector represented 59.1% - the majority of this category. Savory biscuits sales benefited from the increasingly fast paced lifestyle in the U.S., which during the bullish market years of the late 1990s forced consumers to rely upon portable foods in order to meet their food needs through snacking.
This category is highly consolidated and therefore very competitive. As a result, companies must fiercely compete for shelf space through means such as retail slotting fees. Five companies/brands control 68.4% of the market.
Sweet cookie consumption is highest among men and women 35 to 44 years in age. This age group is less health conscience and therefore flavor is an important attribute. Marketing efforts related to sweet and savory cookies target younger consumers as purchasing decisions in this area are often influenced by children’s preferences. In addition, consumer research has shown that health conscience consumers often do not consider price to be a significant factor in purchasing decisions. Due to the higher price and specialty focus of health products, they are more attractive to affluent and better educated consumers. (See Exhibits 15-19.)
The cookies, biscuits and crackers food category is expected to increase sales by around 2.4% ($10.8B) in 2006. The sweet cookie sub-sector is expected to remain consistent with its current share of the market and will continue to account for 59.0% in 2006 with a value of $6.4 billion. Relative to sweet cookie growth, the savory biscuits and crackers sub-sector is expected to grow at a faster rate, increasing 0.9% in value from 2002 to $4.4 billion in 2006.
SPECIALTY FOOD MARKET
The National Association for the Specialty Food Tradedefines gourmet and specialty foods products as foods, beverages or confections that are of the highest grade, style or quality in their category. However, it is now recognized that specialty foods encompass a much broader category than the traditional definition. Traditionally, it has included: specialty baked goods and cereal-based products; specialty sauces, dressings, vinegars and oils; specialty cereals and pulses (rice and beans); specialty meats; specialty dairy products; specialty beverages (herbal teas, specialty juices, nutritionally fortified drinks); herbs and spices; and ethnic foods. Packaged Facts, estimates that the U.S. gourmet and specialty foods market segment will exceed $54 billion in sales by 2002.18 The United States is becoming increasingly multicultural, with large and diverse ethnic populations in most major cities around the country. The specialty food sector is profiting from this diversity. Companies and consumers are exposed to ethnic cuisine and different products. As specialty foods suppliers add these products, they create a demand that extends beyond the traditional neighborhood niche that existed a few decades ago. Middle Eastern foods are expected to grow in popularity in the same way Asian and Mexican foods, flavors and sauces have in the last few years. The growing cultural diversity of the U.S. population has resulted in greater demand for diverse ethnic foods, many of which fall under the broad umbrella of specialty foods.
Specialty foods that emphasize health awareness are also becoming more common. However, retailers have found that these products must still advertise themselves as having good taste, in addition to their healthy attributes, in order to succeed. Specialty foods promoted as being "fat free" or "low fat" are still widely perceived as being poor tasting. In general, products are selling on the basis of flavor and indulgence, even as the health factor becomes more significant factor. Products which emphasize convenience, great taste, and diversity are shaping the growth of the specialty foods market. A growing number of specialty food retailers are offering easily prepared or preheated meals in order to compete with restaurants and supermarkets who offer these products.
Even as the U.S. economy slows, competition in the food industry will increase. This is particularly true for the specialty food segment, which continues to outgrow the industry as a whole. The U.S. specialty food market is mature and constantly evolving. Domestic and foreign competition must both fight for limited shelf space and consumer loyalty. The introduction of a new product often results in the displacement of an existing one. As a result, distributors and retailers have significant bargaining power.
The nature of the specialty foods market is such that there are numerous small players offering distinct product lines. These players frequently focus on regional or cultural segments of the market, or focus on one distribution channel (e.g. grocery stores but not gift shops). In some cases, food products that are considered specialty foods in one store or region will be considered a staple product in another area. (See Exhibit 20.)
The U.S. market comprises an estimated 50 million "heavy buyers" of specialty foods. These buyers can be found in all regions of the country, particularly in the 21 largest metropolitan areas. The National Association for the Specialty Food Trade (NASFT) has categorized these heavy buyers of specialty foods as affluent, educated consumers, typically in the late fifty to early sixty age bracket. In addition, the NASFT found that 55% of U.S. consumers buy their gourmet foods in supermarkets rather than specialty food stores, although the heaviest buyers tend to frequent specialty food stores which offer a broader selection of goods. Typically, customers who buy specialty foods spend more money and purchase more items per shopping trip. They also tend to make special trips for specialty food products.
FOOD DISTRIBUTION IN THE US Manischewitz generally uses middlemen distributors to sell its products to retailers. The pricing for this distribution system is based on three levels of gross margins. The manufacturer (Manischewitz), the distributor, and the retailer each take 30% gross margins per item. Manischewitz has contracts with many distributors including RAB’s Millbrook. While many of Manischewitz’s competitors use distributors as well, some also sell directly to retailers thus cutting out the middleman and attracting consumers with the resulting lower prices.
The food distribution industry consists mainly of the following types of retail outlets19:
By Store Format
Conventional Supermarket - The original supermarket format, offering a full line of groceries, meat, and produce with at least $2 million in annual sales. Conventional stores will realize 9% of their sales in General Merchandise and Health & Beauty Care (GM/HBC). These stores typically carry approximately 15,000 items; offer a service deli and frequently a service bakery. An example is Kroger’s.
Supermarkets have consistently accounted for about 80% of all food store sales. However, during the last several years, supermarkets lost sales to drugstores, discount stores, and warehouse clubs. To meet these competitive challenges, supermarkets changed their merchandise mix by dropping duplicated product lines and allocating more shelf space to fast-moving, non-food items and promotional items. Some supermarkets also have revised their marketing strategy, shifting some of their advertising dollars from weekly newspaper inserts to direct mail circulars.
Food/Drug Combo - A combination of superstore and drug store under a single roof, with common checkout counters. GM/HBC represents at least one-third of the selling area and approximately 15% of store sales. These stores also have a pharmacy. An example is Duane Reade.
Convenience Store (Traditional) - A small, higher-margin store that offers an edited selection of staple groceries, non-foods, and other convenience food items, i.e., ready-to-heat and ready-to-eat foods. The traditional format includes those stores that started out as strictly convenience stores but might also sell gasoline. An example is Seven Eleven.
Convenience Store (Petroleum-Based) - The petroleum-based stores are primarily gas stations with a convenience store. An example is Mobil Mart.
Hypermarket - A very large food and general merchandise store with approximately 180,000 square feet of selling space. While these stores typically devote as much as 75% of the selling area to general merchandise, the food-to-general merchandise sales ratio is typically 60/40. An example is Walmart.
Wholesale Club - A membership retail/wholesale hybrid with a varied selection and limited variety of products presented in a warehouse-type environment. These 120,000 square-foot stores have 60% to 70% GM/HBC and a grocery line dedicated to large sizes and bulk sales. Memberships include both business accounts and consumer groups. An example is Sam's Club.
Mini-Club - A scaled-down version of the wholesale club. The mini-club is approximately one-fourth the size of a typical wholesale club and carries about 60% of the SKUs, including all of the major food and sundry departments and a limited line of merchandise (soft goods, office supplies, and opportunistic, one-time buys). Some of these stores do not have membership fees and often operate as a "cash & carry." An example is Smart & Final.
Supercenters - A large food/drug combination store and mass merchandiser under a single roof. The supercenters offer a wide variety of food, as well as non-food merchandise. These stores average more than 170,000 square feet and typically devote as much as 40% of the space to grocery items. An example is Super Target.
Internet - An Internet-based grocery distribution operator. Included in this format are all Internet operators who use the Internet as the primary means of accepting grocery orders for home delivery or pickup. Also included are major food retailers that generate a portion of their sales through Internet-based sales. Internet suppliers typically offer 12,000 SKUs or more for home delivery. An example is FreshDirect.
Other - The small corner grocery store that carries a limited selection of staples and other convenience goods. These stores generate approximately $1 million in business annually. (Exhibits 23 and 24)
Distribution of Cookies/Biscuits and Crackers
In 2001, Supermarkets and hypermarkets which accounted for 79.9% of the total market were the most important retail distribution channel for cookies and biscuits products. Though the discounter category continues to be a small player in this market, it gained market share and made up 7.9% of market value in 2001. Discounters’ importance has increased over the years due to the involvement of such players as Wal-Mart and Kroger’s Fred Meyer division. Independent grocer’s share of the market has continued to fall for the second year in a row because of lower prices in supermarkets and a shift in consumers’ habits towards out-of-town shopping centers. Internet retailing, once considered a viable threat during the late 1990s, has not turned out to be a significant sub-sector in the U.S. with several of the leaders such as Homegrocer and Webvan going out of business
For further detail pertaining to US distribution, see Exhibits 21 and 22.