Premium products give retailers a boost

By Rina Chandran

LONDON (Reuters) - Rising competition, higher costs and an uncertain economic climate are prompting retailers to push premium products to increase margins, top officials said at the Reuters Consumer and Retail Summit.

"There is a focus on price by the consumer, but there is also growth in the premium sections," said British Retail Consortium Director-General Kevin Hawkins.

Tesco's (TSCO.L: Quote, Profile, Research, Stock Buzz) 'Finest' range of higher-quality food products has done consistently well, and it is a similar story in the United States.

Premium grocery chains including Whole Foods Market Inc. (WFMI.O: Quote, Profile, Research, Stock Buzz) and privately held Trader Joe's had significantly more "promoters" -- or customers who spend more money and recommend stores to their friends -- than detractors, and rated higher than the sector, according to recent research by Bain & Co.

"It's an industry where it's very hard to differentiate ourselves as we're all selling very similar gear," said Andrew Higginson, finance director at Tesco, Britain's largest retailer.

"We are seeing some belt tightening as interest rates tick up, and you have a cautious consumer ... who is still prepared to spend on holidays and treat themselves now and then," he said.

Organic food sales, which made up less than 2 percent of the U.S. grocery market in 2003, has been growing at about 20 percent a year since 1990 as consumers focus more on health and wellness. They will often pay more for these items.

"There's a definite growth in premium products like top-of-the-range foods and the healthy option foods," Hawkins said.

"Whole Foods products are priced at an absolute premium compared to other grocers, and it's done very, very well," he said.

Mainstream retailers have also responded; Wal-Mart (WMT.N: Quote, Profile, Research, Stock Buzz) is doubling its offering of organic foods, while Safeway Inc. (SWY.N: Quote, Profile, Research, Stock Buzz) has a store-brand organics line.

"It's a question of what people choose to spend their money on: they may also opt to buy cheaper food and spend on flat screen TVs or other gizmos," Hawkins said.