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FILLING OUT THE BOTTOM LINE

CHICAGO -- The industry's zeal for efficiency drove operators to record net earnings last year despite signs that sales adjusted for inflation continued to fall off.Companies using Efficient Consumer Response initiatives enjoyed the most bottom-line success, according to data released during last week's annual Food Marketing Institute convention here.According to the State of the Food Marketing Industry:

CHICAGO -- The industry's zeal for efficiency drove operators to record net earnings last year despite signs that sales adjusted for inflation continued to fall off.

Companies using Efficient Consumer Response initiatives enjoyed the most bottom-line success, according to data released during last week's annual Food Marketing Institute convention here.

According to the State of the Food Marketing Industry: Speaks '97 presentation, earnings were strongest among companies using category management and electronic data interchange, "which suggests that many companies are finding ways to make ECR pay off."

FMI said the industry achieved a profit margin of 1.2% for the 1995-96 fiscal period -- the highest figure recorded by the organization since it began tracking income in 1972 -- reflecting an improvement over the prior year's return of 1.14%.

Operating income also rose, to 3.05%, compared with 2.68% a year ago; and earnings before interest, taxes, depreciation and amortization increased on an industrywide basis to 4.75%, compared with 4.70% a year ago. The data indicated that 36.7% of companies surveyed are utilizing EDI to speed ordering and 35.9% are implementing category management for merchandising, while 16.4% are using activity-based costing and 13.4% are using continuous replenishment. "

Many inside the industry postulate that the reasons for the strong earnings performance are efficiency improvements driven by ECR initiatives and improved use of technology to eliminate formerly wasteful practices," FMI pointed out.

Looking at the industry's top line, FMI data showed overall sales up 3.8% -- down slightly from last year's increase of 4%, which was down from 4.4% in 1994.

But when the numbers are adjusted for inflation, sales growth in real dollars declined for the third time in the past four years to 0.1%, compared with 0.7% in 1995 and 1.5% in 1994, FMI pointed out. It also noted that sales in real dollars have slumped for all but two years during the 1990s.

The data indicated that same-store sales improved last year at a better rate than during the prior year, FMI said -- up 3.2% for the year, compared with an increase of 2.9% in 1995. In real dollars, however, same-store sales fell 0.5%, compared with a drop of 0.4% a year earlier.

"There is simply no denying that throughout the 1990's our business has been losing real sales," Michael Sansolo, FMI group vice president of education, industry relations and research, said during the Speaks presentation.

He said most of the lost sales have gone to food purchased away from home, noting that consumers spend only 53 cents of every food dollar at the grocery store today, compared with 62 cents in 1976. "Imagine if the industry's sales had remained at the 1976 level -- with an extra 9 cents out of every food dollar, industry sales last year would have been more than $60 billion higher," Sansolo pointed out.

While average transaction size fell from $19.40 per customer in 1995 to $19.20 per customer last year, other general productivity measures showed gains over the previous year, with median weekly sales per square foot of selling area rising to $9.78, compared with $9.27 in 1995 and $9.18 in 1994, and median sales per labor hour increasing to $111.79, compared with $111.40 in 1995 and $106.50 in 1994.

FMI said 45.3% of industry operators offer frequent-shopper programs, and are enjoying higher sales and improved margins as a result, with average transaction size for frequent shoppers hitting $36 last year, compared with a regular transaction average of $22, and average gross margins of 25% on frequent-shopper purchases, compared with 23% for regular transactions.

The term "frequent shopper" may be a bit of a misnomer, however, since those with cards tend to visit stores 1.96 times a week, compared with 2.2 visits by regular customers, FMI noted. However, frequent shoppers are more loyal, with only 18% defecting to other competitors last year, compared with 21% of regular shoppers, FMI said.

Other data released during the Speaks presentation included the following:

Median average total store size in 1996 was 38,600 square feet, compared with 37,200 square feet in 1995 and 35,100 square feet in 1994.

The number of stores constructed and closed during the year was about even -- 3.8% of stores constructed and 3.7% closed -- with 8.1% of stores remodeled.

The median cost of building a new store in 1996 was $54.68 per square foot, or $2.8 million for a store of 52,000 square feet (the median new-store size last year), while the median investment to remodel was $876,000 per unit.

In ranking competition, 40.4% of executives surveyed rated existing supermarkets as their top concern; 28.9% named new supermarkets, and 17% cited supercenters.

Asked how they make their stores stand out from competition, 87.6% of respondents said they expand perishables offerings; 74.7% said they try to tailor individual stores to local conditions; 74.1% said they add prepared food; 71.8% said they place greater emphasis on private-label offerings, and 68.2% said they target specific types of customers.

Frequent-Shopper Programs

Average Transaction Size

Frequent-shopper transaction $36

Average regular transaction $22

Average Visits Per Week

Frequent-shopper visits 1.96

Average regular visits 2.20

Average Gross Margin

Frequent-shopper gross margin 25%

Average regular gross margin 23%

Average Defection Rate to

Competitors Per Year

Frequent-shopper defection rate 18%

Average regular defection rate 21%

Source: Food Marketing Institute, Washington, "Electronic

Marketing Survey of Food Retailers, 1996."