Although the economy is likely to remain in good shape during the second half of the year, consumers are apt to remain cautious in their spending, top supermarket industry executives told SN. Most of those interviewed said they are cautiously optimistic that business will continue to be strong during the balance of 1996, with interest rates remaining fairly stable and food inflation anticipated in the range of 1% to 3%. Interest rates peaked in June but have declined since, while food inflation has been running at a modest 1% to 2% during most of the year. Despite the robust economy, consumers in some areas of the country do not seem to be in a spending mood, retailers pointed out. Several indicated that they anticipate tax increases after the November elections, regardless of who wins. Consumer confidence may slip a bit during the second half of 1996 if the economy slows down, according to Roger Friou, president of Jitney Jungle Stores of America, Jackson, Miss. "The confidence consumers have in the economy is good -- a lot better than it's been for a while -- and that's reflected in the sales growth that a lot of chains have been experiencing," he told SN. "But we think we'll see a leveling off of sales between now and the election. We've had a good run for a while, but we think [the economy] will be tightening up," Friou said.
Shoppers likely will be less inclined to open their wallets and pocketbooks as the year winds down, said Robert Mariano, president and chief executive officer of Dominick's Finer Foods, Northlake, Ill. "Consumers will continue to be very frugal in how they spend their money because their personal debt loads are at record heights," he explained. "And as we get closer to the election, they will probably get more pessimistic in their spending because they know that, after the election, it's likely taxes will be raised." Robert E. Stauth, chairman and CEO of Fleming Cos., Oklahoma City, also said he expects politics to have some effect on the food industry, although he said any changes are more likely to occur early next year than during 1996. "Historically, there are typically not too many strong moves until after we see who wins, and those changes should come in the first quarter of the new year," Stauth said.
Despite an upswing in the local economy, shoppers in southern California are more apt to seek out bargains than to spend freely, said Greg Mays, chief financial officer for Ralphs Grocery Co., Compton, Calif. "We're not sure customers in southern California are convinced by all [the] positive signs because they're still very promotions-oriented and 'smart shoppers' in their shopping patterns." Nevertheless, Mays is enthusiastic about the direction the economy is taking. "All economic indicators are very positive," he said. "It makes us comfortable to see that no one is projecting a recession or deflation and that all expectations are more optimistic than they were a year ago." Customers at Kash n' Karry Food Stores, Tampa, Fla., are not showing any reluctance to buy, Ron Johnson, chairman and CEO, told SN, adding that he does not foresee any change in the near future. "Consumers have been buying, and they've been buying more than they did last year. And we expect that to continue through the second half of the year," he said. Johnson noted that he is optimistic about Kash n' Karry's fortunes as the company converts more of its stores to a perishables-oriented format. "We're seeing a shift in the business to more prepared foods and food service, and we're very pleased with that. And we're feeling very upbeat about the remainder of the year," he said. Dave Morrow, chairman and CEO of Delchamps, Mobile, Ala., also expressed optimism about the economy. "The economic outlook for the industry is good," he said. "We see earnings numbers improving almost without exception and better control over expenses, and sales are beginning to firm up this year after five years of disappointing turns. So we think the economy is headed for a strong performance in the next two to three years."
Gary Hirsch, chairman and CEO of Penn Traffic Co., Syracuse, N.Y., said he doesn't anticipate "anything meaningfully different in the second half than we've seen in the last six to 12 months." Here are the complete second-half outlook comments from industry executives interviewed:
Jitney Jungle Stores of America
The economy will be slowing down a bit during the second half. We've had a good run for a while, but we think it will be tightening up. The ability to generate sales will remain difficult, and the rate of profits that food companies will report will slow down a bit. And when the economy slows down, you usually see a reduction in hiring and a general belt-tightening by consumers. And despite what we keep hearing, we still don't see any inflation. We keep reading that it's out there, but we're not having it at all. The cost of products like corn and meat is going up, but the rate of inflation in food is still very slight. And we think it will remain that way, at least until the election. The confidence consumers have in the economy is good -- a lot better than it's been for a while -- and that's reflected in the sales growth that a lot of chains have been experiencing. But we think we'll see a leveling off of sales between now and the election. I'm not sure how important the election is to the American consumer. I think the consumer will continue to do his own thing, and maybe it's a good thing that Washington doesn't have control of so many things. Our business has experienced good sales, and consumer confidence remains high. And we think our business will remain good along with that of the rest of the industry.
president and CEO
Dominick's Finer Foods
We look for the economy to be steady for the rest of the year. The economy will continue to perform as it has been, and we don't look for any outstanding growth. Consumers will continue to be very frugal in how they spend their money because their personal debt loads are at record heights. And as we get closer to the election, they will probably get more pessimistic in their spending because they know that, after the election, it's likely taxes will be raised. Because if experience teaches the public anything, it's that taxes are usually raised just after an election. Regarding inflation, clearly we've seen significant increases in butter, milk and bacon, but there have been drops in cereal, coffee and some cheeses. And when we ran an internal index on prices of the top 20 items, we saw increases of only three-tenths of 1% at the retail level, so we're not sure what real inflation is like. Economists have been ramping up forecasts about food inflation, but the unanswered questions are whether those increases occur and, if they do, whether manufacturers and then retailers will pass them along. We think manufacturers will try, but retailers will resist because passing those increases along will result in consumer resistance. Interest rates are reasonably stable, and they are not affecting our business in any material way. If interest rates do go up, it could have an impact on the fourth quarter as consumers with adjustable mortgages adjust the amounts they spend on food, which is what happened in 1990 and 1991. The Chicago economy looks good, and there seems to be no additional issues or negative economic news to affect our business. Our business is good and slightly ahead of last year.
Robert E. Stauth
chairman and CEO
During the second half, inflation will probably be low. Internally it's been running 2% to 3% through the first half, and we think that's typical of what it will be through the year. We've seen cereal companies lower their everyday low cost, which has deflated the impact on our internal numbers as well as LIFO, but that will be offset by some perishable commodities that could go up. But overall we expect inflation to be in the 1.5% to 2% range. In the short term, the Olympics will have a positive impact on food at home, and we anticipate a short-term gain from that. Then politics will capture America's attention, and I think we'll see a lot of political moves that could have some kind of impact, though historically there are typically not too many strong moves until after we see who wins. And those changes should come in the first quarter of next year. But for the second half, there will probably be no major impact on groceries. Interest rates are not going to change. They will remain fairly steady between now and year-end. When the new administration starts next year, regardless of who wins the election, I think economic policy will drive interest rates up. As for Fleming's business, we're not looking for much change. We have a broad base of customers, so we're immune to geographic ups and downs, though we anticipate more competition at the wholesale level.
chairman, president and CEO
Stater Bros. Markets
The southern California economy is moving along well, but we're still trying to adjust to the closure of two major air bases in our area and the downsizing of another facility, which accounted for more than 30,000 jobs.
chairman and CEO
Penn Traffic Co.
We don't see anything meaningfully different in the second half than we've seen in the last six to 12 months, and we're not making any changes based on any fundamental changes in our operating areas.
chief financial officer
Ralphs Grocery Co.
We are cautiously optimistic about the economy during the balance of the year and the first half of next year. All economic indicators are very positive. The unemployment rate in southern California has dropped from a high of 9.2% three years ago to approximately 7% in late July, and that's a very positive signal. And when you look at housing starts, those are also very positive, especially in San Diego. And our sense of what the industry is doing is also very positive. However, we're not sure customers in southern California are convinced by all these positive signs because they're still very promotions-oriented and 'smart shoppers' in their shopping patterns. We've found that customers respond to ads, pricing and other promotions. But all the indicators are there to make us feel that a turnaround is happening. Inflation has been running about 1% to 2% in southern California, and that's always a positive in our industry. So much of our cost of goods is driven by climate and commodities, and right now we're seeing higher food inflation in grain due to the Midwest drought. But produce is below where it was a year ago, and we see a consistent net inflation of about 1% for the balance of the year. But taking the economic climate of all the forecasts and trying to apply that to our business, all the news is positive, though it's hard to convert that into projecting its impact on profits and loss for the balance of the year. However, it makes us comfortable to see that no one is projecting a recession or deflation and that all expectations are more optimistic than they were a year ago.
chairman and CEO
The economic outlook for the industry is good. It's as competitive as it's ever been, and overbuilding goes on and on as it has for years. But we see earnings numbers improving almost without exception and better control over expenses, and sales are beginning to firm up this year after five years of disappointing turns. So we think the economy is headed for a strong performance in the next two to three years as compared with the last five. We're very upbeat about the balance of the year. We expect our same-store sales to improve because the economy is strong in our area. We're reporting a same-store sales increase of 7% for the year, which is not normal, and we don't think we'll maintain that, though we should see increases of 3% to 5%. The high comparisons are a result of lowering prices a year ago, combined with a significant advertising campaign to hype sales from a drop of 3% a year earlier, and we also renovated over 40 stores. So these were one-time shots in the arm that we won't have again, but we believe the improvements we're making in recruiting and training people will help us out this year. We will probably also get some help from food inflation of about 2% to 3%. But we don't see any increase in interest rates and, besides, we have a low debt.
chairman and CEO
Kash n' Karry Food Stores
I've been surprised by the negative impact the Olympics has had on sales because it goes against all the trends we've experienced lately. Consumers have been buying, and they've been buying more than they did last year. And we expect that to continue through the second half of the year. In Florida, the economy is very strong, and unemployment is down a few points and stable. And the growth of population moving into west-central Florida and the west coast of Florida is still very strong. So we truly look at the second half of the year as having strong trends for us. Converting our stores to a perishables format seems to be working, since we're seeing a shift in the business to more prepared foods and food service. And we're very pleased with that, and we're feeling vey upbeat about the remainder of the year. What's happening to grain could be inflationary, and we expect inflation of 1% to 2% in grain products. But we will be careful how we pass that on to consumers because we operate in very competitive markets.