NEW YORK — On Wall Street — and Main Street — food retailers generally fared better than other retailers in 2008, but now it's a whole new year.
So far in 2009, some of the industry's better performers from last year — Kroger, Wal-Mart and BJ's Wholesale among them — have seen their shares take a turn for the worse. And some of the food retailers whose stocks performed poorly last year have only seen the trend intensify.
A report last week from Deborah Weinswig, an analyst at Citigroup Global Markets, speculating that the nation's traditional food retailers were headed into a “modern day price war” with each other and with Wal-Mart, only seemed to weaken investors' hopes that supermarkets might be a safe haven during the current economic storm.
In her report, Weinswig downgraded her opinions on Kroger and Safeway and lowered her earnings projections for both those companies, as well as for Wal-Mart and Supervalu. She lowered herrating on Kroger, which posted some of the best sales in the industry last year, from “buy” to “hold,” and issued a “sell” rating on Safeway.
The outlook for these companies turned decidedly worse, she said, in part because she expects a possible new price initiative by Wal-Mart Stores, fueled by the relaunch of the company's Great Value private-label offerings. In addition, she said, some retailers have been lowering shelf prices ahead of anticipated vendor price reductions “in order to gain market share.”
Additionally, retailers could see their sales — and thus their expense leverage — pressured from deflation and from consumers switching to more private-label products and other economizing activities.
“While we expect the ‘trade in’ from the restaurants and ‘trade over’ to private label to benefit the supermarkets, we do not believe it will be enough to offset pricing pressure from competitors,” she wrote.
The report, issued on one of the worst days of the year for the stock market in general, sent the already battered shares of several supermarket companies even lower. Kroger, Safeway, Whole Foods, Supervalu and A&P all slid in the 5%-9% range.
Analysts noted that supermarket shares have been in some disfavor with investors this year in part because sales growth is expected to be difficult to achieve amid ongoing financial pressure on consumers and anticipated price deflation.
“A lot of people think we're in a significantly deteriorating environment, and that's going to impact earnings,” said Karen Short, an analyst with Friedman, Billings, Ramsey & Co., New York.
She said she disagrees with the notion that the industry is entering a new “price war,” however.
“We've been in a price war forever — I don't see what has changed,” she said. “All of the retailers I've spoken with recently said the situation hasn't really changed.”
If anything, she said, retailers have gained more leverage over their suppliers lately, as indicated by the move by Delhaize Group last week to stop ordering about 300 products from Unilever for its Belgium operations after it said the two sides could not agree during negotiations for promotions in 2009.
“I think it's a situation where there's a potential for a balance-of-power shift,” she said. “This is a time when the retailers can really accelerate their private-label programs, and at the same time customers are less brand-loyal. I think it's going to give retailers a little more negotiating clout, and do exactly what Delhaize is trying to do, and not taking those products that are slow-turning. It's a matter of just buying the faster-turning items.”
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., also said he believes that the current “price war” has been going on for some time, and questioned the assertion that Wal-Mart would get much more aggressive in its pricing by leveraging private label.
“That remains to be seen,” he said. “Wal-Mart has always maintained its price advantage. Now that the economy is down, customers are coming to them anyway, so you have to ask, why would they get more aggressive on price now?”
One reason, he said, might be to gain further market share and “stick it to competitors.”
“But that's not the way they have been operating in recent years,” he added.
