As the stock markets rebounded from a two-year slump in 2003, shares of publicly traded food retailers and wholesalers sat mostly on the sidelines.
Shares of some food-distribution companies exceeded the sluggish growth rates of their peers in 2003, but the stock of the three largest traditional supermarket companies -- Kroger Co., Safeway and Albertsons -- all underperformed in the Dow Jones Index and the S&P 500.
Analysts attributed the weakness to a combination of factors, including increasing competition that forced traditional operators to slash retail prices at the expense of their profit margins. The labor dispute in Southern California also has widespread ramifications for the industry, the analysts said, because it represents a significant effort on the part of the largest traditional food retailers to rein in their costs and better compete with the likes of non-union rivals like Wal-Mart.
The economy gained speed as the year progressed, but supermarkets seemed to miss the ride, further fueling the notion that the industry's weakness is primarily the result of increasing competition rather than simply cash-strapped consumers.
"In the early part of the year, people were positive about the economy and the consumer, and we did see slight improvements in sales," said Lisa Cartwright, analyst, Citigroup Smith Barney, New York. "Then when people started reporting their second- and third-quarter numbers, there were a lot of pressures on gross margins, and I think there wasn't quite the earnings boost that people had expected with the slight sales pickup. Then by the time you get into October, you've got a strike, so it turned out to be not such a great year."
Andrew Wolf, an analyst in the Richmond, Va., office of BB&T Capital Markets, said the industry should have been among the first sectors to respond as the economy showed signs of improvement, but poor sales and earnings performances among some of the largest players held the stocks back.
"I would put the blame on competition," he said. "It's not a roaring economy, but consumers are spending, and if you look at other sectors of retail, they're doing OK. There's this notion that you need a cyclical recovery, but other retailers already got it, so here you are in the most defensive sector of retailing, and it looks like it will be the last to turn up when it should have been the first."
Gary Giblen, analyst, C L King Associates, New York, said the industry's poor showing in 2003 could be attributed to "the continuing loss of market share to alternative formats and inappropriate operating strategies to combat it, where the emphasis has been on cutting costs rather than building value into the offering."
Jonathan Ziegler, principal, PUPS Investment Management, Santa Barbara, Calif., said 2003 marked the first time that traditional supermarket companies admitted to investors that Wal-Mart was having an impact on their operations. "If you don't run and hide and put your head in the sand, that is the first sign of a positive for this industry," he said. The supermarket companies' tough stance in the California labor dispute, he said, reflects their admission that they need to cut labor costs in order to compete with Wal-Mart.
The SN Composite Index showed a gain of 10.47% in 2003, less than half the growth shown by the Dow Jones Index, which grew 25.32%, and the S&P 500, which grew 26.38%. Within the SN Index, wholesalers outpaced retailers with a growth rate of 16.11%, vs. 10.34% for the retailers.
Among the big three, Kroger fared the best with growth of 19.04%, closing the year at $18.51, followed by Albertsons with 1.75% growth, to $22.65, and Safeway, which fell 6.21%, to $21.91.
Thirteen of the 33 food-distribution stocks tracked by SN, however, exceeded the growth of the S&P 500. Three of the top five -- Spartan Stores, Nash Finch Co. and Supervalu -- are wholesalers. The other two -- Delhaize Group and Smart & Final -- are controlled by European conglomerates with large holdings outside the United States.
Other companies whose stocks exceeded the growth rate of the S&P 500 included Pathmark Stores, up 49.9%; United Natural Foods, up 41.66%; Costco Cos., up 32.5%; Ruddick Corp., up 30.75%; Village Supermarkets, up 28.06%; Arden Group, up 28.06%; Target Corp., up 28%; and Whole Foods Market, up 27.31%.
Many of those better-performing stocks merely regained ground they had lost the prior year, while some, such as Supervalu, whose limited-assortment Save-A-Lot concept has been one of the fastest-growing retail food banners, and Whole Foods, which continues to drive new traffic with a focus on upscale fresh/organic offerings, saw growth because of their alternative positioning in the industry, analysts said.
"If you can position yourself in a niche that's growing, then that's going to be rewarded in the stock market," said Ziegler. "I think both Supervalu and Whole Foods have positioned themselves that way, at opposite extremes."
Wholesalers also gained from the demise of Fleming Cos., Dallas, which filed bankruptcy in April and shed its supermarket-distribution operations throughout the year.
Although Safeway, Kroger and Albertsons are negotiating their new labor contracts collectively in California, each have their own sets of challenges and advantages as they enter the new year.
Some analysts think Kroger is the best positioned of the major traditional operators because of its experience competing against Wal-Mart.
"I think Kroger has been addressing the price gap vis-a-vis Wal-Mart for about a year to a year-and-a-half longer than everybody else, so I think they are farther along in getting their prices down," Cartwright said. "Also, with procurement, with things like their fast- and slow-moving warehouses, I think Kroger is ahead of the game."
"In terms of the supply chain, I think Albertsons has the most interesting initiatives in place for 2004, involving perpetual inventory, centralization of procurement, and so on," said Edouard Aubin, analyst, Deutsche Bank, New York. "They have a strong team in place now. They've brought a lot of people in from [other companies], so it's going to be very interesting to see what they are going to do in 2004. Albertsons is the company for which the supply chain is most likely to evolve in 2004."
Wolf of BB&T agreed, and added that Albertsons has several plans to expand its margins, such as increasing private-label penetration and rolling out loyalty cards. "That's not hard to do, and there's no great risk that they're not going to do it," he said.
Cartwright suggested that Albertsons might be better off if it reorganized as a smaller, regional company, and exit its markets in the Eastern United States, where it tends to have less market share.
"I think they are doing a lot of things very well, like merchandising stores at the local level [and] pulling back on cap ex, and they've worked hard to cut costs out of the supply chain and business in general," she said. "The unfortunate thing for Albertsons is that in a lot of their markets, they just don't have strong market share. They have been the [everyday-low-price player] with the No. 3 or No. 4 position, and they have been sort of the punching bag for Wal-Mart when they enter a market."
Safeway, meanwhile, has suffered from some top-level executive departures, including the recent resignation of its chief financial officer, Vasant Prabhu. Also, the sale of stock holdings by Steve Burd, chairman, president and chief executive officer, may have spooked investors, Cartwright said.
Spartan Stores, Grand Rapids, Mich., up 231.13% in 2003, after a decline of 87.37% in 2002: "Spartan had a new CEO, Craig Sturken, who's very good," said Giblen of C L King. "There was a lot of low-hanging fruit there, and he recognized that. Plus, they had the benefit of picking up some Fleming business."
Sturken, a veteran of A&P's Midwest operations, joined Spartan as president and CEO early in the year, and later added the title of chairman. During the year, the company also exited from its Food Town business in Toledo, Ohio, and pledged to restore operating profits to the company by year-end.
Nash Finch, Minneapolis, which was up 189% in 2003, after a slide of 75.14% in 2002: Nash Finch recovered from a Securities & Exchange Commission investigation into its accounting that forced it to delay reporting its 2002 results.
Giblen said he thinks Nash Finch's stock had also been driven down early in the year in sympathy with Fleming, but he questioned the company's ability to maintain the recovery it had in 2003 in the current year because of the weak position of some of the company's customers and the recent poor performance of its own retail stores.
Delhaize Group, Brussels, Belgium, up 184.35% in 2003, after a decline of 64.8% in 2002: Delhaize had "better management and good sales figures" in 2003, said Patrick Roquas, analyst, Kempen & Co., Amsterdam, noting that the company also reduced its debt load, which was a concern of investors. In 2004, he said, the company needs to "focus on maintaining its performance in Belgium and the U.S."
Wolf of BB&T said "the catalyst" has been the infusion of management from Hannaford Bros., the company's New England chain, into the ranks of Food Lion and Kash 'n Karry. He cited as examples of the management's efforts the introduction of U.S. Choice beef at Food Lion and the reformatting of some stores.
Smart & Final, Los Angeles, which was up 93.85% in 2003, after a decline of 50.19% in 2002: "They really have a much clearer picture of who they are. They are a cash-and-carry retailer," said Ziegler of PUPS Investment Management. He said the company's divestiture of its food-service-distribution business helped it focus on its retail operations.
Ziegler said some of Smart & Final's gains also can be attributed to an increase in business as a result of the labor dispute in Southern California, where Smart & Final has most of its stores. He cautioned, however, that some of those sales gains will erode when the strike ends and the chains launch aggressive promotions to lure back customers.
Supervalu, Minneapolis, up 73.17% in 2003, after a loss of 25.36% in 2002: "A number of things worked in Supervalu's favor this year, and they all coalesced," said Ziegler. He said the demise of Fleming, along with the positioning of Save-A-Lot, helped drive the company's performance in 2003.
Added Giblen: "Supervalu has a bright '04 because they are going to reap the benefits from Fleming, and the costs associated with that are minimal."
The poorest-performing stocks, excepting Eagle Food and Penn Traffic, which both filed bankruptcy, are as follows:
Ahold, Zaandam, Netherlands, down 39.04% in 2003, after a decline of 56.69% in 2002: Fears of increased financial risk drove Ahold's share price down after the company dropped the bombshell in February that its U.S. Foodservice division had overstated its profits by hundreds of millions of dollars.
"In the coming year, the focus will be on the performance of its operations in the United States and Netherlands, and the pace of disposals," said Roquas of Kempen & Co., referring to Ahold's plan to shed assets.
Winn-Dixie, Jacksonville, Fla., down 34.88% in 2003, after a gain of 7.33% in 2002: After failing to meet earnings expectations in the first quarter, the company is focusing on being more competitive on price and improving store-level execution under the new CEO, Frank Lazaran.
"They have had some interesting initiatives, but the bottom line is they are caught between the two fastest-growing supermarket chains in the United States: Publix and Wal-Mart," said Aubin of Deutsche Bank. "Florida has a low density of independent supermarkets, so when you have Publix and Wal-Mart growing, the buffer is basically Winn-Dixie."
Fresh Brands, Sheboygan, Wis., down 33.33% in 2003, after a slide of 19.94% in 2002: The resignation in November of Fresh Brand's CEO, Elwood Winn, along with other high-level executive departures during the year, soured the outlook for this company. In addition, Fresh Brands was unable to retain any permanent new customers after Fleming's disappearance from the market.
The company also could face a challenge maintaining sales in the face of the growth of Wal-Mart and Roundy's in its markets, said David Livingston, a Pewaukee, Wis.-based retail consultant, earlier this year.
Sobeys, Stellarton, Nova Scotia, down 14.62%, vs. a gain of 24.2% in 2002: "Sobeys' earnings didn't come through in the first half of the year," said Bill Chisholm, analyst, Dundee Securities, Toronto, noting that a strike at the company's Ontario distribution center affected results.
Perry Caico, analyst, CIBC World Markets, Toronto, also said the company had a difficult time keeping pace with aggressive price cuts by rival Loblaw Cos.
Marsh Supermarkets, Indianapolis, down 11.4% in 2002, after a fall of 11.67% in 2002: "They are facing ever-increasing incursions from alternative formats," said Giblen of C L King, although he noted that the company seems to have a good positioning in the market. "They do everything as best they can, but the competition keeps on coming," he said.