There's no sugar coating in this week's coverage of SN's annual Financial Analysts Roundtable (Page 14). The picture drawn by Wall Street's finest is grim: Supermarkets (at least the publicly traded ones) aren't benefiting from the economy's rebound; Wal-Mart Stores is capturing all the industry's growth; and alternative formats are making it difficult for supermarkets to pass on higher costs.
But a closer reading of the roundtable transcript unearths some factors that could spark an improvement in this picture, perhaps as early as this year. I've outlined here some key variables to watch for early signs of change (without any promises this will happen).
The Employment Picture: Some say major public supermarkets haven't received a boost from the economy because employment hasn't revived. Contends analyst Mark Husson, managing director, HSBS Securities: "Employment is the closest corollary to sales in this industry that we can find. Employment picks up and sales pick up." It's possible we'll have the chance to test out that theory later this year. But don't bet the store that the job picture will change dramatically enough in the near term to spark a turnaround.
Inflation's Course: The old conventional wisdom was that inflation is good for supermarkets. But there is more than one kind of inflation. As Mark Wiltamuth, executive director, Morgan Stanley, noted, "There's a big difference between demand-driven inflation and the cost- or supply-disrupted inflation" now evident. "This is bad inflation," analyst Husson remarked about the current state of affairs. Supermarkets are unable to fully pass on the increases in proteins, dairy and other categories, especially because the alternative format competition isn't passing on these costs. Inflation will play an increasingly important role in industry performance.
Strategy of the Largest Chains: This is a pivotal time for the biggest retailers, which need to prove they can be nimble enough to outmaneuver the stealth competition. Analyst Gary Giblen, senior vice president, director of research, C L King Associates, addressed the topic starkly: "It's a question of the relevance of an Albertsons or a Safeway. Maybe they are questing for the impossible dream in that they are just too plain vanilla." There's a big upside to any chain that proves it's found a sustainable niche.
CEO Investment Decisions: Visionary leaders will make wise investments in the future. That sounds like a platitude, but some analysts are basing their long-term recommendations to investors on just that reasoning. John Heinbockel, vice president, Goldman Sachs, stressed, "I think you have to invest in companies that can win a market-share battle. These companies will continue to make relatively heavy investments today in both price/promotion and labor/service." He pointed to Kroger and Supervalu as two companies well positioned to do just that.
Sounds like good advice. Now it's time to watch the early indicators and await performance numbers that will tell the full story of the next few quarters.