One of the most intract-able problems facing the food distribution industry is that of over-storing - the situation that in many parts of the country there are too many food retailers chasing a stagnant or declining pool of consumer dollars.
Too many stores sprouted for a couple of reasons. In fast-growing parts of the country, such as the Sun Belt, at one time it was possible and advisable to build supermarkets in advance of population, while land values were low, and wait for population to fill in.
That tends to be a far less successful strategy in most areas now that growth rates have slowed, suitable land is filling and the population is aging. The last factor, concerning demographics, is important since as the proportion of elderly population grows, fewer new houses in remote areas will be required. Elderly people who are mobile tend to move to denser areas, not new suburbs. Not only that, but they tend to spend less on food.
Another reason for over-storing is the quick rollout of Wal-Mart Stores' food retailing assets. Until recently, Wal-Mart seemed to be an unstoppable juggernaut that threw out stores at a fast rate, sapping the sales of incumbent supermarket retailers. Now, though, even Wal-Mart has hit some obstacles and is running out of friendly territory in which to plant stores, and is facing some over-storing issues of its own as a result.
Over-storing has a simple and obvious cure, namely the removal of retailing assets. That's happening now in various ways. Many stores were closed or sold because of the long-running bankruptcy of Winn-Dixie Stores. The sale and apportionment of Albertsons will have a similar effect.
Several other chains are being sold, which will shake up the mix too. Some are being shuttered. In many instances, stores will go dark, be converted to other uses or go to indirect competitors, such as Whole Foods. The failure of supermarkets is never good news, but the removal of overcapacity is a long-term good. But there's still ample room left for further retail store reduction.
Much of this was pointed out by securities analysts who were participants in SN's annual Financial Analysts' Roundtable conducted recently. See Page 1 for results. Let's take a look at what a few of them said about this issue. See the report itself for more and to see who said what:
"Wal-Mart is fairly up front about the fact that it's adding less incremental capacity where it already has a strong position, and that helps everybody, like Kroger."
"Winn-Dixie has closed a lot of stores in the Southeast; it really did help and other operators have benefited. But we haven't seen quite enough of that reduction in capacity nationally."
"We want to see more asset sales, upgrades or market exits by companies that can't be dominant and more redeployment of capital where they can be dominant. It's a way of addressing overcapacity."
"We're coming out of the era of self-help, where all the companies have been cutting prices for almost three years in a row and into a period where there's a healthier approach to return on invested capital - where companies are deploying more money for remodels and less for expansion of capacity."