This summer has been a busy time on Wall Street, with the market taking a big walk on the erratic side.
But that didn't prevent a group of securities analysts who specialize in food-retailing and wholesaling stocks from taking some time out to meet at SN's editorial offices in New York to chat with several SN editors about where the industry is at the moment, and about where it may go.
This is an important exercise because these analysts represent standout Wall Street firms that play a large role in making markets for the industry's equity issues. You'll see a report on this roundtable discussion on Page 1 of this week's SN. It continues to several inside pages.
The way the roundtable worked is that participants were asked by SN to take a look at industry sectors and the dynamics that will move them. Each participant was encouraged to interact with the others.
Here's a quick look at what the analysts talked about:
Wholesaling: There are conflicting movements driving this business segment, the analysts pointed out. At once, there is a move on the part of many midsized regional chains to become self-distributing, and, at the same time, others are doing just the opposite by disbanding distribution centers and engaging outside wholesalers. But there is a reason for this: When the latter occurs, it generally is because a chain has come upon labor or financial woes. The net effect probably is toward self-distribution, not the reverse.
Meanwhile, though, opportunity for wholesalers may open as they win deals to supply slow movers to financially robust chains. In a similar vein, wholesalers are repositioning themselves as service and technology providers. As an example broached by SN, Supervalu has a cross-docking facility that affords that wholesaler a chance to offer to chains a specialized service.
Retailing: The lack of food-price inflation, or actual deflation, may drive the retail side of the industry into more and more consolidation, some analysts said. That's because as retailers find it increasingly difficult to find profit increases, they may find that uniting with others is a good use for capital.
The point about fairly weak sales in the supermarket sector is certainly valid. This wasn't part of the roundtable, but a report consulting-firm Management Horizons derived from some U.S. Department of Commerce numbers shows it has been about a year since monthly sales have shown material increases. In July, for instance, grocery sales grew just 0.9%, marking the fourth straight month when year-to-year increases were less than 2%.
The impulse to consolidate may also be driven by the fact that the industry has successfully obtained some long-sought efficiencies. That means a good upside may exist for an efficient company to acquire a less efficient one, then install systems to improve profitability. What companies might be positioned to do this? Analysts mentioned Ahold, Albertson's, Quality Food Centers, Food Lion and others.
As for product changes, analysts predicted there will be continued growth in private labels. They mentioned that companies such as Kroger and Pathmark already drive about 25% of grocery sales from private labels, Some analysts predicted the percentage could grow to as much as 40%. That, however, was a minority opinion; others predicted the percentage wouldn't go above 30% or 35%.