Skip navigation

REPORT CARD

The Thanksgiving Day holiday is starting to slip into the past and year's end is now in full view. There's no better time than this to take a look at the overall financial performance of food retailing to see what's been going on, and to think about what's next.One good, top-line view of the industry's financial status is provided by an annual report issued each fall by the Food Marketing Institute.

The Thanksgiving Day holiday is starting to slip into the past and year's end is now in full view. There's no better time than this to take a look at the overall financial performance of food retailing to see what's been going on, and to think about what's next.

One good, top-line view of the industry's financial status is provided by an annual report issued each fall by the Food Marketing Institute. This year's edition is titled "1996-1997 Annual Financial Review." The quick summary of the report is that median sales increases of all stores, whether measured in current or real dollars, dropped during the most recent reporting year, as did net profit and operating income. But in each instance, decreases were slight and the measures actually were near historic highs. And, in each case, the numbers underlying these measures have an interesting tale to tell.

As for median sales of all stores, the increase for the most recent reporting period was 3.8% in current dollars, or 0.1% in real dollars. The median sales increase for identical stores (those open more than a year) was 3.2% in current dollars, or -0.5% in real dollars.

These numbers show that the general direction of sales in recent years continues on a slight downward march. The decline in sales is probably the product of low food-price inflation, a situation that has only grown more pronounced in recent months. Some economists had predicted that prices would start to turn up by now, but there's no reason to think that will happen soon. Exacerbating the sales decline is the continued erosion of food dollars away from the supermarket channel to providers of food away from home. Consumers are now deploying about half their food dollars to nonsupermarket venues. Some of these sales may start to return to supermarkets in years to come as the industry becomes more proficient in prepared-meal offerings.

As for net profit margins, the most recent period was at 1.08% of sales, off from the previous period's 1.20%. Operating profits were at 2.80% this period, down from the previous level of 3.05%. These measures probably were down because of the effect of sales declines coupled with increases in interest expenses. Interest costs likely are on the rise owing to the cost of acquisitions and steady increases in general capital expenditures. It's likely this type of expenditure will continue to increase for a while, putting further pressure on profitability.

There are increasing signs, though, that the industry is generating sales in a more efficient fashion -- that the industry is learning how to use assets better to produce sales. One measure of that is called "asset turnover." The measure has been rising for the last couple of reporting periods and may be an indicator of the results of the many efficiency initiatives undertaken by all companies, but especially by larger companies. Efficiency is also promoted by successful acquisitions.

Another optimistic indicator concerns the amount of cash companies had on hand at the close of their fiscal years, as compared with cash on hand at the start of fiscal years. The measure shows that during the most recent period, cash flow increased as compared with the previous reporting period, and was well above levels seen in the periods of 1992-1993 and 1993-1994.

In sum, this report card shows that the industry is fundamentally sound and well positioned to reap profit increases if the top line can be improved somehow. The challenge of finding ways to increase sales in this flat market is probably the one that should be top priority for the coming new year. There's no better place to start than by looking at how to return the fun to food shopping.