CHICAGO -- The food retail industry continues to benefit from a strong economy as it posts solid financial performance numbers.
But increasing competitive threats and slow growth after discounting for inflation are warnings that big challenges remain.
That was the scenario laid out by Michael Sansolo, senior vice president of the Food Marketing Institute, Washington, during the FMI's annual convention here last week.
In his Speaks 2000 presentation, Sansolo said 1999 was a banner year for operators. The industry showed its resourcefulness last year by turning a potentially devastating crisis -- the Y2K phenomenon -- into a sales bonanza, he said. That boost was enhanced by strong consumer confidence in the midst of a still-soaring economy.
"Americans are feeling good," Sansolo said. "So Y2K wasn't a disaster, it was great. People threw extra items into the market basket. Consumers are feeling the effects of the good economy and are optimistic things will get better. So there's been optimism on top of Y2K."
Unveiling statistics for 1999 operating results, Sansolo said industry sales rose 5.1% overall and 3.2% after adjustments for inflation. Those numbers were the best for the 1990s in those categories.
Same-store sales advanced 2.7% in 1999, roughly the same as in the prior five years. That rate fell to 0.8% after taking inflation into account -- still one of the better scores for the decade even though it signifies a flat revenue-growth picture.
Sansolo stressed that Y2K was the catalyst for much of last year's sales gains and noted that consumer Y2K-related buying affected many other financial measures.
Among those, the median sales per transaction advanced 7.2% to $23.04, and the median weekly sales per square foot of selling area rose 10% to $11.17.
One of the few not-too-welcome increases was in median store-labor expense as a percent of sales, which edged up to 10.5% in 1999 from 10% the year before.
But "it's harder and harder to find people," explained Sansolo, noting the increase is likely due to higher expenses for recruitment and retention.
Sansolo tempered the overall upbeat economic review by reminding retailers that "Y2K is a once-in-a-millennium phenomenon."
He said the flatness in inflation-adjusted store sales is a clear sign that the industry isn't growing overall.
The static growth is precipitating unprecedented levels of industry consolidation. Sansolo pointed to a Deloitte Consulting report that said in 1999 the Top 8 supermarket chains accounted for almost half of every dollar spent in supermarkets, and the Top 10 accounted for more than 50% -- nearly double their share at the start of the 1990s.
"And the consolidation isn't over yet," Sansolo stressed. "If you compare the share of market of the Top 5 U.S. companies with those in Europe, you'll see the U.S. remains one of the least consolidated countries. So it can go further here. As long as the sales pie is flat, consolidation is the only way to grow sales."
There's strong evidence that mergers are creating more profitable entities, according to Sansolo. Post-tax net profit last year was above the historical average for the fifth year in a row. "So the surviving companies are wringing new efficiencies out of systems," he said. "Consolidation, mergers and acquisitions are part of the survival of the fittest."
Speaks also included two panels of food-industry executives and experts reacting to Sansolo's figures. Phil Lempert, editor of The Lempert Report and contributing editor at USA Weekend, said the competitive battle will be won by formats that understand consumers best.
"Supermarkets are a great business," he said. "They need to make stores entertaining and customer-service oriented and listen to consumers better than ever before. That way the other threats don't happen."
Jeff Noddle, executive vice president and chief operating officer of the Wholesale Food Cos. of Supervalu, Minneapolis, said the consolidation picture isn't as negative for many independents as some believe.
"Through all this consolidation, the opportunities for the entrepreneurial independents are as good as ever," he said. "Creativity and entrepreneurship will be one of the dominant characteristics of growth in the future."
