With supermarket operators facing the most difficult financial and competitive climate in years, it's almost hard to remember a time when the industry's outlook was rosy. But that time wasn't too long ago.
This issue contains SN's seventh annual Financial Analysts' Roundtable, which begins on Page 10. How does the analyst outlook about the supermarket industry today contrast with opinions at the first roundtable six years ago in 1996? Let's look at the comparison:
1996 Roundtable: "Overall, it's just very clear sailing," commented one analyst about the industry picture. "A good top-line performance in the industry, combined with direct cost controls, and then interaction with the top line helping the bottom line come out strong." Another analyst participant said, "In the current environment, managements are very focused on driving their business through merchandising changes, micromarketing and category management as opposed to price, and consequently they're seeing margin improvement. It's become a more rational business. What scares me is things are so good they can only go one way."
2002 Roundtable: One analyst seemed to crystallize the downbeat mood of 2002 with this comment: "You have the most intense competitive battles in years. You have Wal-Mart cracking the code on how to merchandise food in at least a tolerable manner so that its supercenters are finally fully competitive. You have the economy keeping general sales levels down and you have food deflation. The combination of all these factors is pretty discouraging looking ahead to the second half of this year, and it's hard to see how things will get better."
The divergence in analyst outlooks between the two periods couldn't be more stark. Clearly, things have turned. In this year's roundtable, analysts pointed to some of the reasons for the industry's current troubles.
First, retailers succeeded so well in creating more upscale stores with better specialty departments that they lost track of customers who are more cautious about price, particularly in this troubled economy. The economy is also reversing the progress of numerous companies that are battling in financial turnaround mode.
But analysts also pointed out that the steady erosion of supermarket business by Wal-Mart and other alternate formats is taking a bigger toll. Wal-Mart's expected build-up on the West Coast and in other regions will force supermarkets to rethink their pricing strategies, with price wars a possible danger.
Supermarket executives looking to the financial analysts for new and quick solutions will be disappointed. The roundtable participants stressed the need for retailers to differentiate their models from Wal-Mart, focus on building sales in existing stores rather than opening new ones, and stay competitive on price while not trying to outdo the price formats. None of this was new advice, but perhaps the fresh element was the sense of urgency conveyed. Retailers were told to implement these strategies before Wal-Mart reaches the same level of sophistication as supermarkets in terms of quality of merchandise, particularly perishables, and proficiency in marketing.
Will this advice help supermarkets to take back control of the situation? Stay tuned to upcoming annual roundtables to see how the story plays out.