Supermarket and wholesaler chief executive officers interviewed in recent weeks by SN predicted a continuing economic recovery in 2004, which they see translating into more consumer spending.
However, competition from non-traditional formats will continue to put pressure on conventional food retailers. That will affect retailers' ability to raise prices and force them to continue to look for ways to control costs. Labor and health care costs in particular will remain major challenges for retailers in 2004.
We are hopeful the current signs of economic recovery will continue, signaling renewed growth in the communities Food Lion serves. Many of the areas Food Lion serves, however, have been among the hardest hit anywhere in the U.S. during the recent economic downturn. Ultimately, it will be job growth -- not yet fully realized in this current recovery -- that determines economic growth in markets in which we compete. "Generally speaking, one of the industry's biggest challenges is to find good employees. As the service sector becomes increasingly automated, it is more critical than ever that companies hire, develop and retain highly qualified and talented people to serve customers and lead the business.
"In 2004, specifically, our challenge will be building consistent, profitable sales. In 2003, we saw our momentum shift for the positive, and we need to continue our efforts aggressively. Better processes, improved execution, targeted applications of technology, and a zeal for improved efficiency while re-investing in price are critical components of our plans to confront this important business need."
Brown said he believes the economy will be "good and strong. What we're already seeing, nationally and in California, is a rebound. When people feel good about themselves, it's reflected in feeling good about the economy, which results in a tendency to do more entertaining at home, which is a good thing for supermarkets."
Brown said the most important issue facing the industry in 2004 is human resources. "We're seeing a loss of experienced managers at all levels, and that's been increasing as Wal-Mart opens more supercenters and pirates experienced people away from the traditional supermarket industry," he noted.
Another challenge is the effort to reform health care and related costs across the country, Brown added. "We need to reduce workers' compensation expenses. Despite the election of Arnold Schwarzenegger in California, we've seen no reforms so far, though it's still being discussed in Sacramento and it may take six months to get a program together."
For Stater Bros., Brown said the biggest challenge will be the move of Wal-Mart Supercenters into California, with the first one scheduled to open early in February in La Quinta, just a mile from one of Stater's stores. "I don't think it will have much impact on Stater Bros., but it will impact the marketplace, and how Albertsons, Ralphs and Safeway react is something we'll be watching to ensure that we keep our competitive edge as the low-price merchant," he explained.
I think the national economy is really starting to kick in, [although] I think manufacturing is really in a lull. So, many manufacturers have moved to other countries because those countries afford them low labor costs, and they have no environmental laws, and they don't have the lawsuits that we have in this country.
"In Louisiana, unfortunately, we are heavy in manufacturing in the chemical industry. Because the price of natural gas is so high, we don't have too many chemical plants that are even operating. They have moved their production overseas. That is impacting our economy. We're having to transition away from those types of jobs to other things, and that takes time.
"To me the biggest challenge for retail is something that's always been there, and it has just accentuated itself, and that is remaining relevant to the consumer. How does a retailer maintain his relevance and appeal as a shopping alternative for the consumer? I think any retailer constantly fights that battle of being relevant to the consumer and meeting consumer expectations, and unfortunately, those expectations shift quite frequently from price to quality to variety to selection to convenience to service to friendliness. There are a lot of moving characteristics that the consumer hones in on at any particular point in time.
"I think the retailer has got to be very adept at recognizing what his core customer desires, and meeting that expectation at that moment in time."
According to Washington, [the economy] is going to be gangbusters. I am a little more reserved. I don't think it will be worse than '03, but I don't think it will be that much better. We've cut back our capital expenditures for next year to see where we are going.
"Nationally, you'll see continued problems with the Wal-Mart factor and how to compete against it. I am very much surprised to see the confrontation that is going on with the UFCW and that the union doesn't recognize the problems the industry has in the big picture." Catsimatidis said he doesn't anticipate he'll face any labor problems, however.
"We've had some added competition from online grocers in the city, [but] we are wondering how long that will last. We also went into the online business about two weeks ago, and started XpressGrocer.com. It services Manhattan, and we are doing it with existing bricks and mortar and existing inventory. It's doing very well."
"I would visualize some ticks upward in the economy. I think all of us have faced a very strange economy. We've lost four decades of inflation. It's just a little now, and we're used to a bunch, and we've just got to get used to the fact that inflation is going to be softened up.
"The biggest threat out there is how retailers adapt to Wal-Mart. They are marching like Sherman through Atlanta. They are marching through the Northeast. We are able to compete, and we think we'll continue to do that. Like any other supermarket, you have to be prepared to handle the initial impact and work your way out of it over a period of time -- which we have been able to do -- so that whole issue is a big one for a lot of us.
"I think facing the pricing message and adapting to the changing environment is important for the industry. Keeping costs in line is important. Labor costs and insurance costs and all those things keep going up. Those things are going to continue to grow and be a problem for all retailers, and that's just something we're going to have to deal with. I think our efforts over the past number of years are toward sharing those costs with certain associates on a very fair basis.
"We're very optimistic about our future, and we continue to seek opportunity wherever it presents itself. I think we're going to continue to grow at a handsome rate.
"We've got a lot of tough competition out there. The marketplace is not strewn with all the weak guys now. Now it's all the good guys, so it becomes tougher."
"We believe 2004 will be a somewhat better year than 2003 on the economic landscape, though the 'good old days' may never return. I tend to agree with the results of a recent survey by the Business Roundtable in which CEOs were clearly optimistic that the U.S. economy will continue to strengthen in the first half of 2004. The survey certainly is another strong indication of broad economic improvement.
"While we still face difficult challenges to return the economy to so-called normal levels, a larger percentage of executives indicated they will hire more workers, although they continue to worry about rising costs, particularly in health care, pensions, litigation and energy.
"At Albertsons, our major challenges include restructuring and invigorating a great company as we move toward our ultimate goal of being No. 1 or No. 2 in both food and drug in every market in which we operate; streamlining our cost structure to allow us to be more competitive with all competitors, union or non-union, traditional or non-traditional; and working harder, smarter and faster than anyone else in this ever-changing marketplace."
We're seeing signs of it here. I certainly think there are indicators throughout the economy that indicate it will strengthen, [but] the unique volatility of the world today makes it imperative for retailers to be prepared for a downturn at a moment's notice. No one could have predicted through looking at market cycles and various other economic indicators what would have happened after 9/11. But one day in time created an economic downturn that lasted quite some time, so we all have to be ready for the next downturn whenever it may come, whether it's cyclical or immediate. I think if there's a lesson to be learned there, it's that we should resist the temptation to let our guard down during the high times.
"I think most of the issues that the industry will face will have to be addressed by the individual companies, not by the industry itself. And so there are more community challenges and individual market challenges. However, there are some big-picture issues that will have some importance to us. Certainly, food safety is going to be an issue that will create challenges. The country-of-origin issue is a good example of the kind of change we may be confronted with because of food-safety issues.
"Another major issue that will be in the forefront of a lot of markets is the changing demographic of our country. An aging population in many parts of the country and the influx of people from different cultures is creating some exciting marketing opportunities -- and also some challenges.
"I don't see how the industry can solve the very large issue of rising health care costs. I do think the industry does have an obligation to be fully informed and educated and to help our leaders in Congress understand the ramifications of any actions they may take.
"We certainly have seen an increase in the cost, and we have -- like many companies -- tried to develop programs that help our employees make good decisions on their medical care."
"Clearly, we're seeing an exceptionally strong economic recovery right now, and well we should because we've had extraordinary levels of physical and monetary stimuli over the past year. I think for the economy the two variables are how quickly this recovery translates into meaningful job growth because at the end of the day, what people are really concerned about is the impact on their ability to find jobs for them and their families.
"The challenges we have today are the same as what we've had the last several years: the opportunity as related to Wal-Mart. The industry as a whole has some labor issues it has to work through, which while it doesn't affect all of us directly, certainly it does filter through to everyone in the industry. What's happening [with the strike-lockout] in California reflects a broader issue. Specifically, it reflects how health care costs are just way, way out of control. How we deal with that in an industry that is not experiencing significant growth, where there's a tremendous amount of pressure on margins, is going to be a challenge."
"We anticipate gains in the stock market, and a presidential election year usually ensures a strong economy. And the decisions made in previous years on tax cuts will fuel the economy. But job growth will be slow as many companies that invested in technology before 2000 will see those investments pay off, and they become more efficient. But overall, the economy will grow at a pretty healthy clip.
"For traditional retailers and wholesalers, finding growth will be the key challenge, woven in with the growth of non-traditional operators and the challenges of benefit costs that affect sales in the longer run. But sales will be the most important issue we face.
"We're seeing a lot of effort by retailers to make themselves distinctive, and that's a good thing because we don't believe consumers shop only where they find the best pricing, which can change from week to week or month to month. What they ultimately look for is a market that has variety and quality and where they can find the best shopping experience, and that will lead the industry to seek more creativity in merchandising and marketing.
"In the past few years, there's been a lot of emphasis on cost controls in a low-sales-growth, deflationary environment, so companies and the overall industry have become more efficient. But the time has come for more creative entrepreneurial merchandising and for finding more distinctive ways to serve customers."
For Supervalu, Noddle said the primary challenge will involve sales growth and getting a handle on the rising costs of benefits. "Health care costs are rising into the double digits -- into the teens -- and that will continue in 2004," he said. "So, we've got to find more creative ways to deal with benefit-related costs such as health care, insurance and workers' comp."
"I think what looks like it might be improving for all of us is the economy. People have to eat, but they certainly can change the way they eat. Customers are feeling a little bit better about the economic environment; that's going to be good for all retail, and even in the grocery sector.
"Certainly, labor is going to be an issue for all independent operators and chains as they learn to compete against operators that have a different set of economics when it comes to benefits and labor rates as a whole.
"I think that the issues that most of the conventional supermarket operators are facing today really have not changed that much in the last several years."
Competition from non-traditional formats "will continue to be an issue," he said, "and just continuing to differentiate along lines that traditional supermarkets can differentiate against mass."
Parkinson said he expects to see "a little bit of improvement" in the economy. "We see things on the horizon that will stimulate the economy more. For example, sometime in the second quarter, the effect of the tax changes will start to hit consumers and give them more discretionary income, and that will relieve people of some concerns and stimulate spending."
Parkinson told SN the biggest challenge facing the industry involves health care costs. "What's been happening in California is disturbing in terms of opportunities for peaceful coexistence between employers and employees," he explained. "It's been disruptive enough that it's caused everyone to review his company's health care status.
"We're a non-union company, but health care costs get everybody stirred up, and that's not productive for the industry. We had a 24% cost increase in 2003, and that means either reducing our coverage or sharing more of the costs, and we're taking the latter approach, which means spreading the pain among everyone affected. The company is taking an increase in the share we pay, and we're changing the employee deductible and the payments they make."
The biggest challenge for Associated, according to Parkinson, is to continue its initiatives to help members achieve greater differentiation. "We're going through a massive effort to identify unique opportunities for individual retailers to optimize the markets they serve by pinpointing particular opportunities other competitors may not offer."
Plamann said he sees "a bit of strengthening of the economy" in 2004. "The idea that we are not generating jobs is false. We're generating new jobs, but many of them involve service-oriented businesses involving one, two or three people offering very basic services -- car repairs, nail services -- that aren't necessarily being measured."
Plamann said he also sees some pickup in higher-margin products "when people are feeling better off. Just as we see buy-downs when the economy moves south, we will see strength in higher-margin produce and upscale offerings."
He said two of the industry's challenges in 2004 "that will add retail stress without adding revenue growth" will be country-of-origin labeling and food safety. "Country-of-origin labeling is certainly not a popular issue, but I believe food safety will take on more of a front-page aspect with a real impact this year," he told SN in an interview before the first U.S. case of mad cow disease was discovered.
"There is evidence that the public is very concerned with food safety. What's happened with beef in Canada and the ongoing sensitivity to the genetic modification process in food could add pressure to put country-of-origin labeling in place. And I believe people in general are getting more sensitive about food safety and about the quality of food handling in the food-service business, so the industry will have to deal with food safety in a more aggressive way, and rather than waiting for the government to do it, we should take up that banner ourselves."
The biggest issue facing Unified besides food safety, Plamann said, is the economic situation in California "and the impact on retailers of escalating costs of health care and workers' compensation.
"There are several things we must do to keep costs under control, including continuing to realize more productivity in our warehouse and transportation operations, making sure we have the services in place to offset cost increases, finding ways to generate new revenue through sales growth, and considering price increases."
Roeder said he has mixed feelings about the outlook for the economy. "On the one hand, it's clear from almost all metrics that the economy is starting to do well. But the budget deficit hanging over the federal government raises questions about what the future holds -- whether the upturn can be sustained as we focus on the war and reconstruction in the Middle East.
"But industry seems to be experiencing a major uptick that indicates a strengthening of the market for the first time in several years, though there's still the anticipation of a loss of jobs and increasing unemployment, so there are a lot of questions hanging over the economy."
He said the biggest challenge for the industry in California is "the general business environment. Maybe the new governor can change things, but Gov. Davis passed a lot of rules and regulations with an anti-business flair, which have increased costs dramatically in terms of unemployment insurance and workers' comp, and that is certainly the most significant problem we face."
While I realize there are indications that the national economy seems to be improving, those indicators have not translated into additional spending by our customers at Pathmark. That being said, Pathmark will continue to offer sales programs that help our customers stretch their dollars. We'll also continue to work on reducing expenses through initiatives like our 'focus store' and 'best ball' programs. And we'll continue to improve our great service scores and sanitation scores to differentiate ourselves from our competition.
"Rising health care and pension costs are large issues for Pathmark. The rate of increase in providing health benefits has far outpaced the increase retailers are realizing in sales. We have made some initial progress by successfully negotiating second-tier benefit programs for new hires with some unions, as well as pension annuities in two contracts. That said, much more work needs to be done -- and done quickly. My goal is to work with Pathmark's labor relations team to continue making inroads in controlling benefit costs.
"One of the most pressing issues that the supermarket retail industry will continue to face in 2004 is the increasing number of non-traditional retail venues venturing into increasingly higher-quality food offerings. The growing emergence of wholesale and warehouse clubs, mass merchandisers, drug stores, and convenience and dollar stores entering the food business continues to provide customers with price-conscious options to perform their food-shopping tasks in addition to, or outside of, our supermarkets.
As an industry, we must continually refine our supply chain methodology to lower the cost of goods, merchandise in a way that differentiates our stores from mass retailers, and remain proactive in anticipating customer needs and lifestyle changes, including a focus on total wellness and healthy eating."
"We feel things will improve. There are a lot of positive signs in the economy. In Richmond, we have a very thriving economy. Our region has continued to do well because we've done some really good work on economic development. We're not really dependent on one or two industries.
"Keeping health care costs under control continues to be a big challenge. There is also the challenge of the many choices that consumers have out there to buy food and food-related products. You've got convenience stores continuing to build. There is more square footage for people to buy products that used to be only available in food stores. Because people have so many choices, building the top line will continue to be a challenge.
"In this year you will continue to see an increased emphasis on healthy living. Our pharmacy business has continued to grow. We have had a lot of growth in our natural and organic business. We made that an important part of our business.
"Because of the things we've been working on, we feel pretty well positioned to be where our customers want us to be and help provide them healthy alternatives."