Optimism is in fashion this season, judging by the outlooks of several industry chief executives for the year ahead.
In interviews with SN, many of these retail and wholesale company leaders said their businesses performed well in 2005, and they expect that to continue, despite increasing competition from nontraditional players and the threat of ongoing fuel-cost pressures.
Independent supermarket operators and their wholesalers are especially upbeat about their prospects, citing, among other factors, their ability to tailor their marketing and merchandising to suit the needs of the individual communities they serve.
"I think you're seeing a better operator out there today," said Martin Arter, president, Affiliated Foods Midwest, Norfolk, Neb. "They understand the community better than the big-box stores."
Some executives said the threat that high fuel prices pose to the economy and to the cost of doing business make them more cautious about the prospects for the industry, however.
"We are expecting fuel costs to go up," said Tony Schiano, president and chief executive officer, Giant Food Stores, Carlisle, Pa. "It doesn't look like a good thing for consumer spending or in terms of underlying costs, such as petroleum-based packaging products."
Rich Parkinson, president and CEO, Associated Food Stores, Salt Lake City
Consolidation is inevitable as the need for economies of scale becomes more evident, and that will require more companies to realign with larger systems. That's becoming particularly important to retail-owned businesses because we have to look at ways to share costs and savings, and I think we'll see that increasing. We've already experienced some of that through the Western Family group [a private-label consortium], where we are consolidating more buying on various commodities - such as seasonal general merchandise and red meat - that give us a great lift.
For our company, the competitive challenges will include the Albertsons situation, which is still so undefined [See Page 1]. At this point I'm not sure if that will be a challenge or an opportunity.
Another opportunity for us in 2006 will be tuning up our corporate stores in accordance with our market-segmentation program, in which we've gone into each geographic market area and identified the opportunities that can enhance each retailer. We've implemented some programs in a couple of areas, and we're seeing double-digit increases in sales and profits at those stores. We have 450 retail outlets to deal with, and we expect to implement changes at 50% to 60% of them by year's end.
Tony Schiano, president and CEO, Giant Food Stores, Carlisle, Pa.
There will be a lot of challenges in 2006 that we have to deal with, starting with the energy situation and where prices are going to go on fuel. That will have a big impact on our business and the economy. We are expecting fuel costs to go up. It doesn't look like a good thing for consumer spending or in terms of underlying costs such as petroleum-based packaging products.
You see the consumer moving toward a value position. Because of the high energy costs, there will be trip consolidation on the consumers' part. It will be interesting to see how they divide their trips over different retail channels, and who are the winners and the losers.
Taking care of the customer better than anyone else will differentiate companies going forward, even though that sounds kind of trite. Our objective is going to be to work on all aspects of our business to help us understand the customer better than anyone else, and use that information in merchandising, in our advertising, and in our formats, so we are doing the most to provide the customer with solutions they want in their everyday health and nutritional needs.
Robert Spengler, president and COO (retired as of last week), Save Mart Supermarkets, Modesto, Calif.
The industry looks very healthy right now. There have been changes throughout my 46-year career and there will always be changes and challenges. In the year ahead, the biggest challenge will be continued growth of competition. But that isn't anything different, although competition appears to be a little sharper today.
At Save Mart we've been honing our skills to be one of the survivors, and that's our goal. Right now our biggest challenge is people. We have growth planned, and we think we need more depth in terms of personnel. We've always operated a little thinner than most, but as we continue to get bigger, we need to focus more on training.
Save Mart is an opportunistic company, and we need to always be ready to seek out new store sites or acquisition opportunities that come along. With that in mind, we've been watching the news on Albertsons because we're always interested in looking at any new opportunities.
I think the consolidation trend among smaller regional operators will continue because of the increasing pressures on margins and cost controls. Consumers today are pickier and brighter and they know what they want, and supermarkets need to give them what they want when they want it or else face tremendous pressure to survive.
Jack Brown, chairman and CEO, Stater Bros. Markets, Colton, Calif.
The economy is a concern because it has some question marks going into 2006, particularly in the auto and construction industries and as a result of the effects of Hurricane Katrina, which will continue to be with us for a long time, and not in a positive way. The hurricane required billions of investment dollars, and with a lot of food manufacturers in the affected areas, it will take a while for that business to build itself back up.
For Stater, one of the biggest challenges in 2006 will involve entering another tough round of negotiations with the retail clerks [whose three-year agreements with the Southern California industry expire at the end of the year]. Given the indictment of Ralphs, the unions may take the position that their losses in the 2003-2004 strike-lockout were the result of illegal activities by some retailers. The union took quite a hit in that round of contract negotiations, and they could come back with a vengeance.
The other challenges facing us are coming from the growth of Hispanic stores and of supercenters. We will also be involved this year with getting our new distribution center ready to open in 2007 and testing systems and setting up cube requirements. Our goal for the year is to be in operation with the 2.2-million-square-foot distribution center by early 2007.
Rick Roche, CEO, Roche Bros. Supermarkets, Wellesley Hills, Mass.
I think sales will continue to be a struggle, in 2006 and we will need to find new products and categories that consumers will find unique to our stores. As every retail outlet, gas station, drug store, and now even home-furnishing stores are getting into the food business, we need to find offerings to keep our customers interested in returning to our stores.
New chains are establishing themselves as some of the older ones leave. Hannaford is moving into our trade area. We will have to watch and see what kind of offering the new players will have and be sure we give our customer what they have come to expect from Roche Bros., which is the best service and quality anywhere.
The trend toward consolidation may begin to reverse itself now that some of the large chains are discovering that competing with Wal-Mart is better done by differentiating than by trying to win at a game they invented.
Jack Clemens, chairman, president and CEO, Clemens Markets, Kulpsville, Pa.
I feel optimistic about next year. Business seems to be coming back from where it had been, but competition is very stiff, too.
People are back into home cooking more than we have seen in past. Our prepared food areas are doing well. People are eating more than they have been at home. That's what I see. Retail prices are staying down, and that is not profitable, of course, when prices stay down.
We have one new store competing against us, but that is all - a lot less than we have had in the last few years. It's an independent - Hennings Markets, which will build a ground-up store that will probably open next year.
It is tougher for independents than it used to be with all the big-box retailers. Everybody seems to be selling food these days - not just supermarkets. Food is in almost every retail outlet you can find, including Lowes and Home Depot.
A lot of people are scared of Super Wal-Mart's aggressive expansion plans. Plus profitability is much tougher to continue to invest in capital projects and expand.
Steve Michaelson, president, FreshDirect, New York
Coming off the New York mass transit strike where this company stayed in business and served our customers extremely well, the outlook is strong for us to do well in 2006. This was something thrown at us that the company handled well.
The outlook is good because the combination of products and services we have meets the needs of busy customers in New York. I have a heartfelt belief that retailers who know who their target customer is and work on serving them have a chance to do really well. They have a chance to differentiate and be in charge of their own gross margins and have a chance to have a customer base that is highly loyal.
This Internet-based business model, where we deliver to your home, can do that very well. The overall growth of the Internet and uses of the Internet appears to be strongly growing. That is a win for us. The more transactions and time spent on the Internet, the more buying groceries and fresh foods on the Internet looks like a reasonable idea. That is a trend that gives us great comfort here.
I don't see an [initial public offering] on our radar screen in 2006 because we don't need it. We are doing well in growing our business in New York. This year we went into Hoboken and Jersey City, N.J., and southern Westchester County, N.Y. Next year you'll see more FreshDirect trucks in Manhattan, Brooklyn, Queens - our core geography - and you'll see us continue to expand at the fringes. We expect to grow our business next year in strong double digits.
In the fall we implemented a 95-cent per order fuel surcharge based on all the different kinds of energy costs. People think about our trucks, but gas, electric, lights impact us - all of those energy costs needed to operate our large facility. That [surcharge] seemed to go pretty well with customers. They understand because they face raising energy expenses from different places. As energy prices have come down, we recently lowered the surcharge to 79 cents. It is a continuing concern for us.
Jim Buchanan, CEO, Laurel Grocery Co., London, Ky.
I think 2006 will be a lot like 2005. It's going to be tough like every year, but overall I think the industry will be healthy. Last year was a pretty positive year, so we're positive for 2006.
In the states we operate in, Wal-Mart has planned a tremendous amount of expansion, especially in Ohio and Indiana. By the end of 2007, 100% of the stores we service will be impacted directly by a Wal-Mart. Going into last year it was 53%, and I'd guess we're at 70% now.
We've rolled out a new test program for independents called the strategic marketing initiative, designed to help the independent get their Center Store sales back. We're seeing independents today with sales increasing in the perishable departments but losing market share in center store to mass merchandisers and category killers. This program is designed to grow those sales back, and so far preliminary results make us really optimistic. The sales in the center store in all the test stores have increased. So in February we'll start to bring this to all our retailers.
In my opinion, the small regional guys are the guys most impacted by what's going on today. I think the single store or three-store independent can find their niche and do just fine. But I do worry that the regional chains will be impacted.
Martin Arter, president, Affiliated Foods Midwest, Norfolk, Neb.
I think 2006 is going to be very positive for the independent grocer. Obviously the struggles and tribulations will continue with regard to supercenters and box stores, but individual independents have an opportunity to capture their niche.
I think you're seeing a better operator out there today. They understand the community better than the box stores. They understand tying in their community rather than an overall canned environment. They just have a better feel for the consumer and the community as a whole.
2005 was really above expectations. I'd say overall growth is going to be good in 2006; however, some independents in rural areas will have a difficult time keeping up if they don't increase margins and pass on energy costs. They'll have to be sharp.
The biggest challenge is that supercenters continue to saturate our marketing areas.
For us, I look for 2006 to be pretty robust. I wouldn't say double-digit growth, but high single digits.
We'll be going live with complete infrastructure software.
Aside from that, I'd like to see the distribution centers and cooperatives collaborate together. Whether its purchasing, or logistics, or just serving independents from one distribution center or another, we have to do a better job of communicating with one another. Five or 10 years ago there wasn't much cooperation. Today if we're at an event with a competitor, we'll sit down and talk and share our business philosophy. We've all been brought together with the same challenges, and there are still a lot of opportunities.
John Catsimatidis, chairman and CEO, Red Apple Group, New York
It continues to be problematic - sales are still being eaten away by other non-supermarket entities.
The health of the supermarket industry is not great. The big stores, the Wal-Marts of the world, are stealing away the food dollar, as are the Whole Foods of the world, and now every drug store you go in has 30% to 40% of the space devoted to food.
The drug stores just carry the dry stuff, they don't carry the perishables that carry a lot of labor. And they can build a drug store for $400,000 or $500,000, but a supermarket - with all the fancy refrigeration stuff - can cost $3 million or $4 million dollars. The capital expenditures difference between supermarkets and drug stores is day and night, and if they are selling 30% to 40% of what we sell already, and they are non-union, we've got a problem.
Occupancy costs in New York are ridiculous - approaching 10% of sales, energy costs are up, and I don't think the unions realize the deep doo-doo that the industry is in. The question is, are supermarkets going to have to transform into something else, and what do they want us to transform into?
Dale Riley, owner, Fresh Seasons Market, Minnetonka, Minn.
I think it will be a good year for the supermarket industry. I think people are gravitating back toward the neighborhood supermarket. The Costcos and Sam's Clubs are nothing new anymore. They're still growing and still do a great job, but I think the novelty is wearing off a bit.
The No. 1 reason people choose a supermarket is location. So if it's close to their home and presents quality products at a fair value, then I think people will make the decision to spend their money in their own neighborhood.
We're one little store, and we just opened up, so our goal is just to meet our objectives, make sure we're offering customers the selection and quality they're looking for and prices at a fair value.
Our competitors are Kowalski's and Lund's and Byerly's on the high end, and Cub Foods and Rainbow in the box-store category. We also have some Sam's Clubs and Costcos in the territory. Most people would consider us upscale because of the quality merchandise, service meat, seafood and deli and we carry groceries to the car. But we present a different approach than other upscale retailers in the Twin Cities because our pricing is more competitive, and consequently, we offer a different value proposition.
J.H. "Jay" Campbell, president and CEO, Associated Grocers of Louisiana, Baton Rouge
I think the industry is always going to have the challenge of making each individual retail outlet relevant to the consumer.
I think retailers will have to focus on providing more nutritional information and health-related information, because people are becoming very sensitive to that, which might broaden product selection and variety. I think that's where the independent really excels, if the independent is willing to provide that breadth of choice for the consumer.
We're in such a unique environment here where you've had so many displaced people coming from new and different markets. Right now it's a guess to see how many people stay in these markets, vs. return to where they are from, which is the hurricane-affected areas. We do believe there will be an attrition of people going back into those markets, but the good news is that we have stores in those markets as well. We've been fortunate from a business standpoint, but the human tragedy is very real. The state is really going to have to grapple with how they cope with people out of work, how they cope with businesses gone, how they cope with various problematic issues.
Calvin Miller, president, Associated Grocers of Florida, Miami
Down here, things are very positive. We're growing, and people are moving in all the time.
Florida is a wonderful market right now. I see a lot of growth potential. We're all holding tight to see what happens [with Winn-Dixie]. I hate to see anyone go under. They are struggling, but maybe they will be able to pull it off. Florida has always been a strong market for Winn-Dixie - if they lose Florida, then they are done.
Our customers are doing well. Albertsons has just about pulled out of here. 2005 was the best year we've ever had since we've been in business. It came both from new business and growth from existing customers.
Wal-Mart is continuing to grow here, and they have some Neighborhood Markets coming down to southern Florida. We're growing so fast, however, I don't think it will bother us much.