Industry executives see challenging environment continuing through 2010
Food retail and wholesale executives have little optimism in their outlooks for the economy in the remainder of 2010, with weak consumer confidence and high unemployment expected to continue to constrain consumer spending.
While supermarkets overall have not been as severely impacted by the prolonged economic downturn as other segments of the economy, operators said the lack of pricing power in an era of consumer frugality is keeping pressure on both their margins and top-line sales.
“I think it is going to continue to be a situation in which traffic is very value-driven, and that tends to put a little pressure on margins,” said Rich Niemann Jr., president and chief executive officer, Niemann Foods, Quincy, Ill. “So I think that we are going to be fighting the same battles for the second half of the year that we were fighting in the first half.”
Some retailers also said they have seen some increased pressures from Wal-Mart Stores, which has ramped up its pricing message recently and restocked some grocery items it had previously deleted from its assortment.
“I think every major step Wal-Mart takes has an impact on the grocery industry,” said one operator, who asked not to be identified.
Although some operators reported that there were some signs of increased spending in recent weeks, and that deflation was easing in some categories — particularly meat — most were still concerned that high unemployment and an overall negative economic picture would continue to make it difficult to grow sales and expand margins in the next six months.
The latest consumer confidence report from The Conference Board, New York, seems to back up that outlook. Last week, the group reported a sharp decline in consumers' outlooks, following three straight months in which confidence had been increasing.
The report for June showed that the percentage of consumers anticipating more jobs in the months ahead dropped to 16%, from 20.2% a month earlier, and those who anticipated fewer jobs increased to 20.8%, from 17.8% in May. The Conference Board's overall Consumer Confidence Index stood at 52.9 for the month, down from 62.7 in May.
Last week, the Bureau of Labor Statistics also confirmed that unemployment remained higher than a year ago in most metropolitan areas of the country, with a national level of 9.3% at the end of May, compared with 9.1% in May of 2009. States with the highest levels of unemployment included Michigan, Nevada, California, Illinois, Florida, Alabama, Mississippi, Kentucky, Oregon, Ohio, Rhode Island and South Carolina, all with unemployment levels above 10%.
In recent earnings conference calls, some retailers have remarked about the impact of Wal-Mart's initiatives.
David Dillon, CEO of Cincinnati-based Kroger Co., said Wal-Mart's more aggressive rollbacks have made it resemble a high-low supermarket operator.
“We don't often talk about individual competitors, but many of you have asked about [Wal-Mart] and so it's probably worth commenting. Wal-Mart affects any of the marketplaces in which they operate, like any other competitor affects those marketplaces. Wal-Mart has become publicly more aggressive in what they are saying and doing. I think the marketing behavior and merchandising behavior at Wal-Mart is a lot more consistent with a traditional grocery-supermarket operation than it is consistent with what Wal-Mart used to do.
“It's a lot more feature items. Sometimes features are on longer than a week, but it's [still] feature items, and when you operate that way there's items that may come down in price, which get lots of publicity, but there are others also that go up in price that don't get much publicity. We see the behavior as a lot of marketing noise around it. We see that behavior as pretty much what happens in a lot of grocery markets we've been involved in for our entire history.”
Richard Dreiling, CEO of Dollar General, declined to comment on Wal-Mart specifically but acknowledged that Dollar General was better prepared to compete with price operators than ever before.
“During tough times it always gets competitive at retail, it's been that way forever. There are a lot of great competitors out there doing a lot of great things. I can tell you that we understand our pricing better than we ever have before and I can also tell you if you look at what we're doing with our margin and our cost, we're better positioned to compete than we ever have been before.”
PETER LYNCH, chairman, president and CEO of Winn-Dixie Stores, Jacksonville, Fla., said he expects the balance of the year to remain challenging.
“Until unemployment and the housing market get better, things will be reasonably challenging — and Wal-Mart's price rollbacks will also contribute to the challenges,” he told SN.
Lynch said he expects to see “a little bit of a comeback” for inflation during the second half of 2010 — “nothing dramatic, but the good news is, deflation is almost gone.”
He said he expects competition to remain “consistent and fairly rational.”
Asked about his outlook for the economy, Lynch said, “I like to be optimistic. There are good signs for an improvement, but till we see unemployment and housing start to get better, we anticipate a slow recovery.”
The outlook for the industry “will continue to be challenging,” he said, “but that makes us better operators and forces us to stay focused on the consumer.”
JACK BROWN, chairman and CEO of Stater Bros. Markets, San Bernardino, Calif., said he expects the conventional supermarket industry to see second-half results that are slightly lower than in the first half.
“Average orders are down slightly, and the average retail on average items is also down slightly, so it will be a pretty flat second half.”
He said he expects Stater's results to be similar to the rest of the industry.
“Sales in Southern California are starting to move up slightly, and housing starts are picking up. Construction is the No. 1 employer in our operating area, and it's been down for two years, which has meant fewer new shoppers. We're also in the third year where unemployment is close to 15%.”
As for consumer attitudes, Brown said, “The customer is very cautious right now. I sense that many of them are frustrated that unemployment is at an all-time high and the economy is still in the tank. And the oil spill in the Gulf means a loss of business in that area for tourism, and people are really reacting to that.
“Plus there are two wars going on, and many people don't see a lot of hope. And California is almost bankrupt, which has a lot of people concerned as well.”
Brown said he doesn't anticipate any new initiatives at Stater in the second half. “We're all in more of a survivor mode, doing all we can to get into the 2011 ball game.”
As for consumer spending, Brown said he sees “a slight upturn from last year to this year because of the onslaught of big-box stores adding more supermarket merchandise. They seem to be losing focus on their core business, and as other discount department stores lose nonfood sales, the two largest box stores are supplementing their loss of revenues with more grocery products.”
He said the Wal-Mart price rollback is not having as much impact on his business as its efforts to increase the assortment of supermarket products.
AL PLAMANN, president and CEO of Unified Grocers, Los Angeles, told SN he has become more pessimistic about the outlook for the second half in the last few weeks “after hearing what the Federal Reserve has said in terms of reversing its outlook for a good recovery.
“So as of today, I don't think the industry will see a lot of change, and I think the second half will look a lot like the first half, with one month up and one month down — just a lot of volatility, with unemployment likely to go up and customer spending remaining flat. We don't expect to see inflation this year, and we hope we don't see deflation.
“I wish we had a way to grow jobs and make other positive moves to improve the economy. But it seems like day after day it's all negative news, and with ongoing deficit spending, it's tough to see much growth in sales.”
For Unified, “members are still opening stores, and they will continue to do so through the second half. But we're also aware that more members are really feeling the pinch, so we may see some of them selling or closing down. But overall, things will be pretty flat.”
Plamann said Unified may have to dip into the expanded borrowing capacity it announced earlier in the year to help some members. “There's a good possibility we will have to help some customers later this year who are committed to opening stores in good locations but who may run short on money.
“We also will continue to put an aggressive marketing program in place for our private-label products. Sales have plateaued because the CPG companies have begun putting marketing dollars back into their programs.”
In terms of consumer spending, Plamann said, “Three months ago I would have said consumer spending was improving on a spotty basis, but over the last two months I haven't seen it, and with job cutbacks, I don't see any change in consumer behavior.”
Regarding margins, he said, “I was hoping for less pressure, but if the CPG companies pull back on marketing funds, then the larger guys [retailers] will continue to try to keep and maintain market share, and that would mean margin pressure through the balance of the year, which suggests the independent retailer will need to conserve cash.”
Plamann said Wal-Mart's impact depends on location. “There's no question Wal-Mart has had an impact in some areas, more so in the Southwest and the Pacific Northwest, where there are more Wal-Marts than in California,” he said.
WinCo has also put pressures on some independents, he added.
RICK ROCHE, CEO of Roche Bros., Wellesley Hills, Mass., said that easing deflation and increased consumer confidence suggest a better second half, but he isn't expecting dramatic improvements.
“I wish I knew for sure what will happen, but we have seen some signs over the last month and a half that things are picking up a little again. We are getting over some deflation, and it seems like our customer base and item count is hanging in there and maybe getting a little better. We are definitely hoping that the second half of the year is a little better than the first. There's no reason to think otherwise at this point.”
The extent to which Roche Bros. can recover margins is a function of the competitive environment, Roche added.
“We hope margins will be better in the second half, but most of our margin pressure has been self-inflicted,” he said. “We've been doing some price adjusting on our own so we can be as competitive as we can possibly be.”
Roche pointed to Demoulas Market Basket as exerting the most pricing pressure in Roche Bros.' markets. Even Wal-Mart, he said, was having trouble keeping up with Demoulas.
“We feel about the same pressure from Wal-Mart as we do from BJ's and Costco. We're losing maybe a trip a month to them, where [customers] are stocking up on lower-cost, higher-volume items,” Roche said. “Shoppers are changing and I don't know if they will ever go back to the way they were before, so we have to find new ways to get them back.”
JIM BUCHANAN, chief executive of Laurel Grocery Co., a distributor based in Loudon, Ky., said stubborn unemployment is tempering the pace of recovery for his company, its retail customers and their shoppers.
“I think things have gotten a little bit better recently, but things are still tight,” Buchanan said. “The changes the [Obama] administration has made have been counterproductive, in my opinion. I haven't seen a lot of hiring going on, and until that can happen I don't see the economy beginning to turn around. What we really need are tax cuts so that employers can employ and get people back to work.”
Buchanan said shopper behavior that came with the economic downturn — shoppers trading down, buying more sale items and cutting the size of their baskets — has continued.
“We're still seeing people with only a little amount of money to spend, and they're stretching their food budget to fit within the money they have to spend. Sales per customer are down. Our sales are up slightly, but it's still very tough. It's not where you'd like it to be.”
Meat prices are rebounding from a deflationary trend a year ago, which should help sales, Buchanan said. But much of the inflation in grocery is coming by way of smaller packages at the same price, which isn't helping rings.
“We're seeing manufacturers, rather than take price increases, are just making smaller packages. So we're not seeing inflation through price increases the way we would in past times,” he said. “We're getting price increases but it's not reflected in higher rings.”
Buchanan predicted that more aggressive rollbacks from Wal-Mart would result in hotter ads from all retailers to draw store traffic.
“They're relentless, and I don't see that changing,” Buchanan said of Wal-Mart. “If anything, it's just going to get hotter and hotter because they're not getting the sales they're hoping for. We have an EDLP program to help with center store sales and we've heated up our ads. We're using a lot hotter price points in our ads to draw consumers in and doing a lot of coupon-type offers to attract shoppers. I think you will see a lot more promoting to get people into the store.”
RICH NIEMANN JR., president and CEO, Niemann Foods, Quincy, Ill., said he expects consumers to remain focused on value in the second half of the year, much as they have for the last 18 months or so.
“In our part of the country, employment is really not any better than it was six months ago, and probably worse than it was a year and a half ago,” he said. “We were a little bit slower than the rest of the country in terms of getting into the teeth of the recession, but we are not seeing employment improve in the areas where we operate.
“I think it is going to continue to be a situation in which traffic is very value-driven, and that tends to put a little pressure on margins. So I think that we are going to be fighting the same battles for the second half of the year that we were fighting in the first half.”
Despite the pressures of the economy, Niemann pointed out that the supermarket industry has held up relatively well, compared with some other industries more dependent on discretionary spending.
“We as an industry have been very fortunate,” he said. “We have things that are truly discretionary purchases, but there are other businesses out there that only sell discretionary purchases, so we are very fortunate about what we sell and what we do.”
He said Niemann Foods, which operates about 90 locations under different banners and formats, has placed increasing emphasis on getting its value message across.
“About a year and a half ago, we felt that this was going to be a long haul, and we have become more and more promotional all the time, and we are always looking for new ways to do that.”
The key to communicating that message, he said, has been to make sure that the company's customers understand that the stores are sympathetic to their concerns and are honestly working to save them money.
“Our customers have to know that we get it,” he said. “They have to know that we understand they are suffering, and they need to understand we are doing everything we can to help them.”
He said consumers are returning to many of the money-saving habits they learned in the past, and that opens up opportunities for retailers to target them using those types of promotional vehicles.
“Customers are doing things that they had not done in the last five years in terms of trying to save money,” he said. “They are more willing to cut coupons, they are buying larger sizes, they are trading down in lots of different ways, with private label being one of them. Customers are doing just about anything to save money.”
PAT RAYBOULD, president of B&R Stores, Lincoln, Neb., said business at his 17-store chain has been “good, but challenging.”
“I am looking for more of the same, but I do think there are opportunities out there,” he said. “I think there is bound to be some more of an uptick [in the second half].”
He said he “would like to be more optimistic,” but he sees high unemployment levels continuing to pressure consumers.
“I think unemployment is definitely key,” he said, noting that it has been more severe in other areas of the country. “We are pretty fortunate here in Nebraska, which has the second-lowest unemployment of any state in the country. The agricultural base has been pretty solid.
“Things have been stable here, but there's no question customers have been more thrifty in their spending.”
MARK BATENIC, CEO of IGA USA, agreed that high unemployment is a major concern for consumer spending, although he said the IGA network of independents overall has been performing well in the economic downturn.
“There are still about 14 million people out of work, and that is still very troubling, with no immediate relief in sight and no prospects for job growth,” he said. “The consumers who are out there spending today are cautiously optimistic that the economy will improve, but they are still very cautious about their spending.”
The high rate of personal savings also is an indication that discretionary spending is weak, he noted.
“Americans continue to hold back more and more of their disposable income, because of the uncertainty about the economy, but they are still looking for good, nutritious, healthy foods from their grocers and the places where they shop the most,” Batenic said.
“We are cautiously optimistic the second half of the year will trend up slightly, but there will be no dramatic improvement in the second part of the year. As far as IGA goes, we are having good results across the base here in the U.S., and the stores continue to seek to provide customers with good value but also with healthy, nutritious food.”
He also noted that the revamp at the beginning of the year of the company's private-brand offering has driven sales of those products as consumers look to those offerings to save money.
Batenic said consumers seem to be “reconnecting” with their locally owned businesses, and that has benefited the independent, locally based IGA operators.
“We continue to poll our customers, and they tell us we are friendly and a convenient place to shop with good pricing,” he said.
Reporting by Elliot Zwiebach, Jon Springer and Mark Hamstra