NEW YORK — While economic forecasters say the recession is ending and growth is just ahead, it could be longer until food retailers see a recovery at the checkout line.
So said officials of Delhaize Group last week at the Goldman Sachs 16th Annual Retail Conference here.
“There's a clear difference between consumer confidence and what the economists see,” said Geert Verellen, director of investor relations for the Brussels-based retailer. “What we think is going to highlight the remainder of this year is consumer confidence being influenced by unemployment.”
Verellen's remarks came days after the Federal Reserve released minutes of an August committee meeting indicating its members saw signs that the downturn in economic activity was ending and that growth was likely to resume in the second half of the year. However, the group acknowledged that unemployment was likely to rise through the end of this year and then decrease only gradually in 2010.
Supermarket health is tethered closely to employment figures, added Ron Hodge, president and chief executive officer of Delhaize's Scarborough, Maine-based banner, Hannaford Bros. That is keeping the retailer in a cautious posture for the remainder of the year.
“Of all the economic factors, that one seems to have the longest lingering effect on our supermarket sales. And we don't think we've seen the bottom in terms of unemployment yet. That could affect the supermarket business for a while after other economic indicators start to improve.”
The tough economic times have meant fierce price competition in the U.S., particularly in the Southeast, where Food Lion faces the largest group of competitors and the strongest influence of Wal-Mart as anywhere Delhaize does business, Hodge said.
“As the economy has settled in the [Southeast] marketplace, we've seen everybody scrapping a little bit more aggressively to create sales,” Hodge said. “Most of that is coming in the form of promotional spending. We've seen a higher degree of buy-one-get-one-frees, buy-one-get-two-frees, buy-one-get-three-frees. We've seen 10-for-10s and generally more aggressive price points.”
Officials in a Delhaize quarterly conference call last month described the Southeast as “irrational,” but Hodge noted that term is relative to a year ago. “I'm not sure they are irrational because if you look at the dynamics of the marketplace today, you'll see everybody is involved,” Hodge said. “We're involved ourselves.”
In many cases, manufacturers are fueling the fire, Hodge added, balancing the price increases they took in 2008 with added promotional spending this year. Suppliers have also been sparked to action by growth in private label, which at Delhaize is now between 20% and 21% of its overall sales.
“What we've seen over the past quarter is that these [rapid] growth rates in private-brand penetration have slowed down a bit,” Verellen said. “And that is, in our opinion, the result of the fact that national-brand manufacturers have stepped up their promotions, so some of the incentive to switch to private brand has gone away.
“We still think that private-brand penetration at the levels we see now is here to stay,” he added. “Surveys indicate that a lot of people are convinced that private brand is a good alternative, and they will most likely stick to private brands when the economy picks back up.”
Delhaize is investing in price but maintaining margins through cost reductions and improvements in its supply chain providing better inventory control, more efficiency and less shrink, said Hodge.
An extensive store renovation program, including marketwide renewals throughout Food Lion, has allowed Delhaize to slow capital spending in anticipation of economic uncertainty this year. According to Hodge, that could also allow the retailer to grow through acquisition in existing or adjacent markets.
“We've gotten ourselves in a somewhat luxurious position where we can afford to hold back on some remodeling activity, especially in Food Lion territory, and spend more on acquisitions and on new stores,” he said.