With top-line growth hard to come by, most food operators are cutting back on capital spending this year until better times offer the promise of higher returns, industry observers told SN last week.
“It costs money to expand, and if a company is not getting sufficient returns, then it's better to hold off on spending and trying to drive productivity,” Simeon Gutman, an analyst with Canaccord Adams, New York, told SN. “That's especially true if other retailers are simultaneously cutting back on capital spending, because if business is going down, it gives everyone an excuse to do the same.
“On the other hand, a company like Trader Joe's is using the lull among the big companies to accelerate its growth,” he added.
Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, said early assumptions about cap-ex did not take into account reduced spending by consumers on discretionary items, which is prompting retailers to postpone some projects.
“There are also concerns with the stability of the credit market, which has certainly improved since the end of 2008, though uncertainties remain over whether the banks will honor existing credit lines,” he said.
Among the industry's biggest cap-ex cutbacks this year, Minneapolis-based Supervalu said projected spending has been slashed 37.5% to $750 million, compared with $1.2 billion last year.
According to Pam Knous, the company's executive vice president and chief financial officer, “Our capital spend was elevated in recent years to address deferred spending in the acquired Albertsons properties. In light of the economy, we are postponing certain store investments and will further reduce debt.”
She said Supervalu views $750 million in cap-ex as “a prudent level for today's economy.”
The company plans to open only three new conventional stores this year and 60 Save-A-Lots, compared with 14 new conventional stores and 25 Save-A-Lots last year; and to complete 77 major remodels and 34 minor ones, compared with 161 major remodels and 17 minor ones a year ago.
“Capital spending will be only about 0.6% of total sales, which is not a very good number for Supervalu, and they know it,” Gutman told SN.
“If the cutback remains that large for only a year, it will hardly be much of a setback — and if the company's aggressive ‘big relief’ [price-reduction] campaign draws traffic, then Supervalu could benefit. But turning the store fleet around must remain a key component of the strategy.”
Cerankosky said the decline in cap-ex at Supervalu “is bigger than we would have expected, but it parallels what the rest of the market is doing — and it reflects Supervalu's concerns after refinancing its debt.”
Gutman said he believes Safeway is in the best position among the major players.
“By the end of this year it expects to have 88% of its stores remodeled and operating in the lifestyle format, giving it one of the most updated store fleets in the industry, and that leaves them better off than almost anyone else because they can get away with spending less,” he pointed out.
The Pleasanton, Calif.-based chain initially said it expected to reduce capital spending by about 25% this year to approximately $1.2 billion, compared with $1.6 billion spent last year; it subsequently lowered its spending estimate to $1 billion, a 37.5% cutback.
The company had planned to open approximately 10 new stores and complete approximately 135 lifestyle remodels, compared with 20 new stores and 232 remodels in 2008. When it lowered its spending estimate, it said it would still open 10 new stores but do only 100 remodels.
By the end of this year Safeway said nearly 1,300 stores will be operating under the lifestyle format, “and we'll essentially finish off [that remodeling process] in fiscal 2011,” Steve Burd, chairman, president and chief executive officer, said.
“In a poker game, the guy with the largest wad coming in usually wins, and that will be Safeway — with a stronger balance sheet and more free cash flow putting us in a better position than anyone else in the industry.”
According to Cerankosky, “Safeway is in very good shape in terms of store conditions, and that gives it the flexibility to merchandise to the new consumer outlook, however it changes.”
Capital spending at Kroger Co., Cincinnati, will decline slightly this year — to a range of $1.9 billion to $2.1 billion, down by up to 11.6% from the $2.15 billion it spent last year — with a continuing emphasis on store remodeling and infrastructure investments, the company said.
Capital spending will account for about 3% of sales, which is on the high end of industry spending, Gutman pointed out. “But Kroger has been relatively unscathed by the recession, so it has no reason to deviate from the norm when nothing is broken.”
Cerankosky said the change in cap-ex spending is relatively small at Kroger. “Of the Big Three chains, it's the one that's added the most new square footage over the last few years, which reflects its practice of purchasing in-market properties from other supermarket operators and then being very diligent in upgrading those stores to improve its market position.”
Like Kroger, Wal-Mart Stores, Bentonville, Ark., will spend about 3% of sales on capital expenses — allocating about $13 billion this year, down 12.75% from the $14.9 billion spent in 2008. Of the total, between $5.8 billion and $6.4 billion will be spent on the company's U.S. stores, compared with $1.9 billion last year, and $800 million to $1 billion on Sam's Club, compared with $700 million in 2008.
It's hard to say how significant this year's cap-ex reduction is, one analyst told SN, “because Wal-Mart is so far ahead of everyone else in terms of value perception and overall footprint that the reduction probably won't hurt them much.”
The company said it expects to add 23 million square feet this year to its Wal-Mart operations, compared with 26 million additional square feet last year; and 2 million square feet to Sam's Club, the same as the increase in 2008.
Wal-Mart is projecting 166 additional supercenters this year, including expansions and relocations of discount stores, compared with 191 in 2008.
Costco Wholesale Corp., Issaquah, Wash., cut cap-ex to between $1.2 billion and $1.3 billion this year to open 18 warehouses, compared with $1.5 billion last year to open 26 warehouses.
Richard Galanti, executive vice president and CFO, said part of the reason was falling prices. “With real estate and construction costs dropping, we're trying to renegotiate any sites that we haven't committed to, which is allowing us to save significantly on costs.
“There are also some smaller markets where there's little competition likely to come in where we've decided to postpone openings.”
37.5%
Cuts in cap-ex spending at both Supervalu and Safeway
Source: Supervalu, Safeway