Hurt by high interest rates and low inflation, food distributors around the nation see the costs of doing business as the biggest obstacle to profitability facing the industry and their own companies in 1995, according to an SN survey.
While a variety of operators expressed concerns about the lack of qualified employees, growing supercenter competition and overregulation, it is the challenge of coping with escalating costs that appears to be causing the most anxiety for retailers and wholesalers in the new year.
"High interest rates will affect business more than anything else in the next couple of years," said Mark R. Williams,
president of Carr Gottstein Foods, Anchorage, Alaska. "Anyone who understands business understands that when interest rates go up by more than 250 basis points, as they have in the last 12 to 16 months, every company that runs on cash flow or that's highly leveraged is affected because interest rates have a dramatic impact on cash flow and capital expenditure potentials." Joseph Azzolina, president of Food Circus Supermarkets, Middletown, N.J., also pointed to high interest rates, which he said will "stymie growth for retailers and hurt their financial position. And it's a new cost we have to add on to our prices just as we're coming out of a recession." He added that higher rates "also affect the amount of money consumers will have to pay for what they buy, and that takes money away from them, which ultimately hurts everyone as well." Struggling with higher costs, and finding ways to reduce them, was also cited as a major challenge by R. Randall Onstead, president and chief operating officer of Randalls Food Markets, Houston. "The entire industry is looking at ways to remove costs from their operations, and we're looking at every part of our business, trying to use technology to help us become more competitive in our markets. We have to find ways to take nonvalue-added costs out of our business to become more competitive at retail," he said. Anthony Rego, chairman and chief executive officer of Riser Foods, Bedford Heights, Ohio, said the absence of inflation is making it difficult to lower costs. "When we look at expenses, we see that other costs are going up, but there's no inflation hedge to take care of that," he said. "So if you're not taking costs out of the business, you have problems." Harry Janson, president and chief executive officer of Harvest Foods, Little Rock, Ark., expressed similar sentiments. "We hope we don't continue to see food deflation," he said. "That's been a real problem for the industry as we've continued to move more product for less money." Donald H. D'Amour, CEO of Big Y Foods, Springfield, Mass., said he is concerned about managing costs as his company seeks to expand its store base. "Our challenge is meeting our very ambitious growth plans over the next two years [including 10 new stores and major remodels], which will require a lot of money, plus personnel and management costs, and it's hard to manage all that without sacrificing our basic mission, which is to fill all our customers' expectations." Jack Brown, chairman, president and CEO of Stater Bros. Markets, Colton, Calif., is hoping Congress will provide tax incentives to give retailers some relief. "The industry needs an investment tax credit to assist us in expanding, but the Democrats wouldn't bring it out of committee," he said. "Now the Republicans are already talking about reviving the idea of a tax credit to stimulate the economy in terms of creating more jobs. "We also need Congress to take a longer look at corporate tax rates with an eye toward lowering them." Brown said. "The Republicans are aware of how the real world works, and they know that the more pretax funds business has to use, the more money that will go right back into our businesses to create more jobs." Retailers also pointed to other major challenges facing them in 1995, including the following:
A SHORTAGE OF STORE LABOR: "With unemployment rates so low, it's hard to find qualified people to start with," said Darryl Wikoff, president of Dierbergs Markets, Chesterfield, Mo. "And then, if you spend time and money training them, it's hard to retain them before they move on to some other job." Pat Petitti, president of Eagle Food Centers, Milan, Ill., was also concerned about hiring. "Trying to find people is really tough," he said. "With fast-food restaurants and mass merchandisers doing a lot of hiring, there's a big demand for people who are willing to work at the bottom rates, and nonunion employers have an advantage over us."
COMPETITION: "One of our biggest challenges is the onslaught of supercenters and our ability to keep up with them and come up with the right format to combat them," Rego of Riser Foods said. "But you can't do it with price -- you can't fight these huge monsters on price. The answer is to give people a reason to come into your stores by offering more variety and convenience and whatever they want, so they won't have to go elsewhere." Carr Gottstein is also seeking the right formula to meet new supercenter competition. "We've been competing with Wal-Mart and Kmart for about a year," Williams said, "and it takes that long to go through all the seasons and understand what you need to do. "As we've progressed through the year, we've been learning how to remerchandise our stores and adjust our mix to compete more successfully by discovering how seasonal changes affect us and our customers."
VENDOR RELATIONSHIPS:Carr Gottstein's Williams said he believes supercenter operators are changing the equation in vendor relationships "because the mass merchandisers bring their national relationships with vendors into the picture on a regional basis, which puts regional operators in a position of scratching to get what they can," he explained. "As a result, the things we've done over the past 10 years are not going to work anymore. We've got to find ways to work better with suppliers on a regional basis."
REGULATION: "Many federal agencies are funded solely by the fines they collect," said Azzolina of Food Circus. "So instead of helping you correct whatever is wrong, they come in like the Gestapo and harass retailers and impose fines. "They see the retail industry as a lucrative arena, and this takes a lot of valuable time away from serving customers."
EFFICIENT CONSUMER RESPONSE: "We see wholesalers scrambling very hard as they look at ECR in an effort to come up with new ideas and ways for smaller operators to create efficiencies," said Wikoff of Dierbergs. "They haven't found the total answer yet, and it will be a tough learning curve, but it's a solvable problem."