The supermarket industry has a New Year's resolution: It's going to cut down on its habit of building new stores.
Some of the major publicly traded food retailers have reduced their capital expenditure plans for 2003 from 2002 levels as they struggle to cope with a difficult operating and competitive environment. Analysts said one of the areas where they expect retailers to rein in their spending is new-store construction.
"I think you're seeing a clear shift away from new stores and toward remodels because they just cost less," said Jason Whitmer, analyst, Midwest Securities, Cleveland. "Rather than building out, people are building in.
"It's smart because with today's saturated business you don't want to add square footage, you just want to take what you currently have and fine-tune it," he said.
He said he expects capital expenditures to be down in the range of 5% to 10% for the supermarket group as a whole, with some companies -- including Safeway, Pleasanton, Calif. -- cutting cap ex even further.
A handful of operators is expected to increase cap ex in the year ahead to fund the rollout of successful retail concepts, including Wal-Mart Stores' supercenters, Supervalu's Save-A-Lot and Whole Foods Market's natural foods supermarkets.
But the overall trend will be to cut back, predicted Chuck Cerankosky, analyst, McDonald Investments, Cleveland.
"I think the chains are being more careful about the capital dollars allocated to new-store construction," he said. "It seems the trend in dollars is down, and that means less square feet likely to be built in 2003 compared with 2002."
He said retailers might be setting higher standards for their return on invested capital -- demanding 17% for example, where perhaps they previously accepted a 15% return.
"They're cutting out the riskier project, or the lower-return project," he said. "Everybody's taking a harder look at new-store projects, and I think that includes expansions as well."
Mark Husson, analyst, Merrill Lynch, New York, said he expects 2003 cap ex for the supermarket industry to be down about 20% from 2002 levels. He said the major chains appear to be collectively backing off from aggressively adding square footage to build market share.
"It's one of those things where it's a bit of an arms race -- if your competitors are opening 100 stores a year, you feel that you are going to be crowded out of the marketplace unless you open a similar number of stores," he said. "If they all take a deep breath and take a few steps backward, relatively you haven't lost any share of voice in the market."
Analysts disagreed on whether spending on technology would be down -- some said they expected it to remain about even with last year's levels, while others said they see signs that chains could be cutting back their investments on things like self-checkout systems.
"Technology spending usually has a longer-term payback, and it's an easy thing to cut," said Gary Giblen, analyst, C L King Associates, New York. "But even [information technology] spending that has a fast payback, like self-checkout, is largely being forgone for the year."
The cutbacks in new-store construction could allow the companies to invest their cash in other vehicles to generate returns for shareholders, such as launching a dividend or buying back stock.
"The nice thing about this is that once they cut their cap ex, the cash flow becomes readily available to use for other means," said Whitmer. "I think there's a lot of pressure from Wall Street for these companies not to continue to spend out, and spend so much more than the depreciation rate. Given the rate of growth for this business, it's just not very lucrative."
Expansion by the major grocery chains into new markets is expected to be limited, analysts said.
"It's just not a very good use of shareholders' funds," said Husson.
Whitmer pointed out that some companies are pursuing a rational approach to entering new markets, such as Kroger's effort to roll out its Food 4 Less warehouse-style banner in the Chicago market.
"They are opening a lot of those stores in existing buildings," he said. "They are opening in old Builders' Square and places like that. They are not building new stores."
He said he thinks Kroger could end up buying some of Safeway's Dominick's stores in the Chicago market for conversion to Food 4 Less, which he described as a "less risky venture" than trying to build from the ground up. "It would not behoove any company to go into a new market and start building," said Whitmer.
Safeway last year said it would seek to find a buyer for its 112-unit Dominick's Finer Foods chain after reporting that profits had slipped at the division and after failing to negotiate a more favorable labor contract.
Whitmer said he thinks the trend of closing stores may continue into 2003 as companies look to improve their return on assets by shedding unprofitable locations. Delhaize America, Salisbury, N.C., said earlier this month it would close 41 Food Lion stores and one Kash n' Karry. Last year Albertsons and Winn-Dixie shuttered dozens of locations as they exited from certain markets, and A&P continued to close stores in the highly competitive Northeast.
As stores continue to close, analysts expect the major supermarket companies to continue to selectively buy small groups of stores, although none said they expected any major acquisitions in the year ahead.
"There will probably be some mid-tier acquisitions, but I don't think you'll hear about Safeway buying Kroger or anything like that," said Whitmer.
Following are cap-ex plans for some of the larger food retailers.
WAL-MART STORES, Bentonville, Ark., said it would spend about $11 billion on cap ex in the fiscal year beginning on Feb. 1, up about 10% from year-ago levels. The company said it would open about 200 to 210 supercenters in the year ahead, including about 140 expansions or relocations of existing discount stores.
The company opened 183 supercenters and had cap ex of $6.9 billion through the first nine months of fiscal 2003, an increase of 13.1% over year-ago levels. Most of next year's construction is expected to take place in the first three quarters, the company said.
In addition, Wal-Mart said it would add about 20 to 25 new Neighborhood Markets in the coming year, after opening 19 in the fiscal year that ends this week. Earlier this month, the company opened its first Neighborhood Markets in Utah and Florida.
Analysts said the supercenter construction could be expected to take place around the markets where the company is building food-distribution centers. In addition to the 25 it currently operates, the company plans to add six new food DCs in Alabama, Arizona, Nebraska, Ohio, Texas and Virginia. Analysts said each DC could support 70 to 100 supercenters within about a 300-mile radius.
In May, the company said it would open up to 40 supercenters in California during the next few years, and many of those are expected to be conversions of some of the 125 traditional discount stores it already operates in California.
KROGER CO., Cincinnati, projected capital expenditures of $1.9 billion for the upcoming fiscal year, although the company declined to provide details about the number of planned new-store openings and remodels.
During the current fiscal year, which ends next month, Kroger's cap ex was trending lower than last year, at $1.44 billion in the nine months through Nov. 9, 2002, vs. $1.54 billion in the prior year's nine-month span, a decline of about 6.5%.
Kroger's cap ex for the year ending in February 2004 "could go down to $1.5 billion, theoretically," Whitmer said.
At least part of next year's cap-ex budget will be spent in central Tennessee, where Kroger this month said it would invest $120 million during the next two years on new, expanded and remodeled stores. The company said the investment marked "one of the largest building programs in the markets where Kroger operates."
About 40% of that will be allocated for building or acquiring supermarkets, while the rest will be invested in adding auxiliary features like fuel centers, drive-up pharmacies, one-hour photo labs and natural foods departments. At least one location will be at the site of a former Albertsons, which exited from the market in 2002. Extensive remodels are planned for Kroger stores in Hickory Plaza, Brentwood, Goodlettsville, Hendersonville and Hickory Hollow.
The move follows the recent entry into the Nashville market by Lakeland, Fla.-based Publix Super Markets, which acquired seven shuttered Albertsons there and reportedly plans to expand rapidly in the market.
ALBERTSONS, Boise, Idaho, exited from four markets last year, but said in October that it planned to invest $1.7 billion during the next 12 to 18 months in new stores and remodelings in several other regions as the company rolls out its dual-branded combo stores with both supermarkets and drug stores under the same roof.
Among the markets the company said would see additional investment are the Southwest division, with $500 million during the next three years; Dallas-Fort Worth, with $184 million during the next two years; and Austin, Texas, and Oklahoma with $100 million each during the next four years.
Albertsons said its cap ex for the 39 weeks ended Oct. 31, 2002, totaled $1.05 billion, vs. $1.12 billion in the preceding year, a decline of 6.25%.
"I would expect them to be down about 10% [for the upcoming year]," said Giblen of C L King.
Albertsons is expected to give guidance for the upcoming fiscal year in March.
"Until I hear a firm number, I would say they are at risk to come down," said Whitmer.
The company could not be reached for comment on this story.
SAFEWAY, Pleasanton, Calif., said in November that its cap ex for the year ahead would be about $1.3 billion to $1.5 billion, down about 25% from the past year.
"It's a scale-back, not an elimination of spending," said Vasant Prabhu, senior vice president and chief financial officer, Safeway, in a meeting with analysts in November.
The company had projected that its cap ex for 2002 would be $2.1 billion when it filed its 10-K annual report for 2001 with the Securities and Exchange Commission in March of last year. At that time, it planned 80 to 85 new stores and 250 remodels. Seven months later, the company revised its projections downward, saying that it would spend $1.9 billion, open 75 to 80 new stores and complete 200 remodels.
Through the first 36 weeks of 2002, the company reported that it spent $1.2 billion in cap ex and opened 55 new stores, while closing 35.
"Safeway has a lot of challenges," said Giblen. "They've got acquisition indigestion, and they are divesting Dominick's. Safeway tried a lot of breakaway initiatives to drive same-store sales, some of which were systems-driven and capital-driven, and the problem is the breakaways didn't break away, so they are calling them off."
Safeway could not be reached for comment on this story.
SUPERVALU, Minneapolis, increased its cap ex in the past year, funding the growth of its Save-A-Lot limited-assortment chain and investments in technology. Cap ex through Nov. 30 totaled $263.5 million -- which included the acquisition of Deal$ - Nothing Over a Dollar -- vs. $139.7 million in the year-ago time frame, an increase of 53.1%.
Analysts said they expected Supervalu's cap ex to total about $465 million for the year ahead.
Yolanda Scharton, vice president, investor relations and corporate communications, Supervalu, declined to provide specific predictions for cap ex spending in the coming fiscal year, but she said the company anticipated that the increase in square footage of its Save-A-Lot limited assortment stores would be comparable to the 9% increase that the company reported in its third quarter.
"We are a firm believer in price-impact grocery retailing, and we think that is going to be the format du jour of the future," she told SN.
Some of the increase in square footage this year came form the acquisition of the Deal$ - Nothing Over a Dollar stores, she said, noting that the company will be emphasizing the growth in the coming year of combo stores incorporating both dollar merchandise and everyday-low-price foods.
Giblen said Supervalu could be expected to increase cap ex both to roll out more Save-A-Lot stores and to invest in the acquisitions of new customers from other wholesalers.
"They have an opportunity to take customers away from [rivals]," he said. "There's definitely customer fallout, and it takes some capital sometimes to pick up some of these leases and extricate them from their existing wholesalers."
A&P, Montvale, N.J., said cap ex was running about 3.5% above prior-year levels in the 40 weeks through Nov. 30, 2002, totaling $182.3 million vs. $176.2 million in the preceding-year period.
In the fiscal year ended February 2002, A&P had cap ex of about $300 million, which included investments in the company's new technology initiative. At that time, the company predicted that it would "continue with similar levels of capital expenditures in fiscal 2003 and several years thereafter," but that level of spending is expected to drop off, analysts said, as the company copes with a highly competitive market in the Northeast and attempts to remodel existing stores to its Food Basics banner rather than build new stores.
"I expect them to be down, certainly," said Giblen. "They are closing stores, they are done with the bulk of their IT project, and they are in a deep retrenchment mode."
DELHAIZE AMERICA, Salisbury, N.C., parent of Food Lion, Hannaford Bros., and Kash n' Karry, recently announced plans to shutter 42 stores this month, although the company also is planning to open 45 stores and remodel more than 100 others in 2003.
The company previously projected cap ex of $500 million for 2002, with an increase in square footage of 2.5%. In the 39 weeks ended Sept. 28, 2002, Delhaize had spent about $333.4 million of that total on 26 new stores and 92 remodels, vs. $293.5 million in the preceding year on 40 new stores and 117 remodels.