Lifestyle stores providing a lifeline for Safeway in a recession.

Could organic products help insulate mainstream grocers from a recession? Private label organics at mainstream grocery outlets such as Safeway (NYSE: SWY) and Supervalu (NYSE: SVU) are nothing new, but they could bring new and unexpected benefits to the companies in a recession.

According to a recent forecast published by the U.S. Department of Agriculture (USDA), the Consumer Price Index (CPI) for all food is projected to increase 3.5 to 4.5 percent in 2008, as retailers pass on higher commodity and energy costs to consumers.
With household budgets feeling pressure in all areas, Safeway’s better designed, health-focused Lifestyle stores and popular private-label organic lines and Supervalu’s (NYSE: SVU) new commitment to sustainability could help the grocers capture shoppers trading down from the more expensive natural foods stores, even with increased competition from low-cost giant Wal-Mart (NYSE: WMT). 

A report released in March 2008 by Citibank Global Markets revealed a section of the market hesitant to shop at Wal-Mart despite its low prices. While 72 percent of customers surveyed in the report named Wal-Mart as the lowest-priced grocery provider, 36 percent said they still preferred to shop elsewhere. The report’s author, retail analyst Deborah L. Weinswig, also pointed out the popularity of private-label products—both organic and conventional—in her report, listing Safeway and Kroger (NYSE: KR) as the stores best positioned to gain share from national brands.

Meanwhile, as food-at-home purchases outpace food-away-from-home purchases for the first time in six years, prepared foods could boost sales for mainstream and natural foods grocers alike. An improved selection of prepared foods is already part of Safeway’s Lifestyle stores, and Whole Foods (Nasdaq: WFMI) is set to launch its Whole Foods Express line of prepared-food-centered mini-stores in former Wild Oats retail sites by the end of 2008.

Both are closely watching the fate of British grocery giant Tesco’s Fresh & Easy chain, which launched in California in 2008 with a focus on healthy, reasonably priced prepared foods and a neighborhood market feel. According to a report by UK-based Piper Jaffray analyst Mike J. Dennis, the stores are not performing according to Tesco’s projections. Dennis estimates Fresh & Easy is running 70 percent below budget on U.S. sales. Whole Foods is banking on better trans-Atlantic luck as it attempts to further protect itself from domestic recession with an expansion of its UK presence. The company acquired the UK-based Fresh & Wild chain in 2004, and opened its first Whole Foods-branded store in London in June 2007. CEO John Mackey has said the chain will expand in the UK under the Whole Foods name rather than Fresh & Wild, and reports from British media suggest the company has enlisted the help of two commercial retail agencies in London to search for new retail sites in and around London and throughout the UK.