Supermarkets Dial Up Savings

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We're becoming a nation of scroungers. Small cuts in tax rates helped boost after-tax incomes 1.6% in May, and consumers squirreled that money away into their bank accounts. At the same time, the nation's savings rate surged to 6.9%, the highest level since 1993. Economists worry that all this saving won't stimulate the economy, so how can investors make money if consumers won't spend?

We're pinching our pennies so hard these days, they're practically screaming -- especially in the supermarket checkout line. Consumer-goods companies such as Kraft (NYSE: KFT) and General Mills are enticing price-sensitive consumers to their products with coupons, and according to NCH Marketing Services, shoppers are responding. The use of coupons for consumer packaged goods rose 16.7% in the fourth quarter of 2008.

For the 12 months ending this past February, says Nielsen Online, more than one-third of the $133 billion in sales at food, drug, and mass-merchandiser stores in the U.S. were sold on promotion.

No more ink-stained fingers
With the decline of the newspaper industry, however, marketers have had to develop other means of offering discounts. Nielsen says visits to online coupon sites increased 42% between December 2007 and December 2008. The advantage to companies such as Kellogg and Procter & Gamble (NYSE: PG) is that online interaction more deeply engages consumers. According to Nielsen, consumers associate savings more strongly with online coupons than their print counterparts.

Dialing for dollars
But supermarkets are becoming the real leaders in the next generation of coupon-clipping. Kroger (NYSE: KR), for example, launched an innovative delivery system that transmits coupons from General Mills, Colgate-Palmolive, and Kimberly-Clark (NYSE: KMB), among others, directly to shoppers' mobile phones.

To get the coupons, consumers download an application from privately held Cellfire to their mobile phones. With the program, they can search for coupons, create shopping lists of sale-priced items, and have the discount taken at the register. Once the coupon is used (or expires), it's automatically deleted from the phone. Kroger, which began with just a 200-store demonstration project last year, expanded it in December to include all of its supermarkets. Cellfire also just teamed up with Safeway (NYSE: SWY) to bring mobile coupon-clipping to its 1,500 stores.

That commitment to technology and customer satisfaction helps explain why Kroger continues to dominate the grocery channel. Compare its 3%-4% increase in non-fuel sales -- generating a 13% increase in profit in the latest quarter -- to that of SUPERVALU (NYSE: SVU), which warned last week that profit would be well below analyst expectations. Kroger has a reputation as a low-cost operator that appeals to price-conscious consumers, allowing it to stave off encroachment by Wal-Mart Stores (NYSE: WMT). SUPERVALU is only lately meeting shoppers' low-price expectations, and it's had to cut prices substantially in some areas to stay competitive.

Some private time at checkout
Online and mobile coupon-clipping might just become a matter of survival for consumer-product companies. For retailers, though, mobile coupons not only establish stronger ties with their cost-conscious shoppers, but also get customers in the door to see the retailers' own private-label brands.

Kroger has the most developed private-label program around. Its private-label brands accounted for 35% of items sold in the first quarter, and they're growing at double-digit rates. That growth has even attracted the attention of Wal-Mart and Costco, which will begin boosting their own in-house brands.

A no-lose proposition
With 94% of consumers using coupons at least occasionally, according to NCH Marketing, consumer-products companies need to keep shoppers tied to their brands by making it easier for them to try and buy their products. But as customers seek out the lowest prices to stretch their dollars, retailers who establish customer-loyalty programs that extend beyond passcards at the checkout line will be even more likely to benefit from shoppers' newfound frugality. By delivering coupons to customers' doorsteps, inboxes, and mobile phones, grocers will cement a relationship that grows mindshare and market share alike.