Supermarket operators for the most part are keeping a tight lid on capital spending in the near term as economic conditions remain challenging, according to recent financial reports.
Although some food retailers have begun ramping up their store remodeling and development efforts after ratcheting back during the recent recession, many remain cautious.
In recent weeks Winn-Dixie Stores and Ruddick Corp., parent of Harris Teeter, both unveiled planned reductions in capital spending, and in January Supervalu said it would maintain cap-ex at $700 million in fiscal 2012, even with projections for the current year but down about 7% from 2009 levels.
And last week, both Kroger Co. and Ahold outlined reduced plans for capital spending in the current fiscal year. Kroger, Cincinnati, said it had trimmed cap-ex projections for this year by $100 million to $300 million — to a total of $1.7 billion to $1.9 billion — in order to help “provide the incremental cash flow necessary to execute our financial strategy in 2011.”
Reining in cap-ex can take some time, Kroger executives explained in a conference call last week discussing fourth-quarter results.
“Unless you want to pay a penalty to get out of things you have in the pipeline, it takes a little while to temper a capital-expenditure program, particularly as it relates to new, relocated and expanded stores,” said David Dillon, chairman and chief executive officer. “So we're being thoughtful on which projects get moved forward to the top of the list and which ones we have the ability to delay a little bit to create the incremental cash flow in the near term.”
Analysts said retailers' aggressive pricing efforts have necessitated the cutbacks.
“The supermarkets have reduced cap-ex significantly over the past couple of years, which we believe is due in part to price competition eating into cash flow,” said Deborah Weinswig, an analyst with Citigroup, in a report last week. “We believe the reduction in capital expenditures will have the greatest impact on Supervalu, as its stores are in the greatest need of updating as the company has spent less on cap-ex (as a percent of sales) when compared to the other grocers in our coverage universe.”
She said she expects cap-ex for the three largest traditional operators — Kroger, Safeway and Supervalu — to remain in the 2% to 2.5% range for the next two years, down slightly from historic levels and shy of her 3% ideal rate of spending.
Pleasanton, Calif.-based Safeway last month said its capital spending for 2010 came in below previous projections, although spending in 2011 is expected to increase slightly. Spending for fiscal 2010 came in at $837.5 million, vs. previous projections of $900 million to $1 billion. Spending for the current fiscal year, which Safeway is expected to elaborate on during an analyst meeting this week, is expected to be about $1 billion, the company said. At the end of 2010, it had remodeled about 85% of its store base with the “Lifestyle” format, up from 79% at the end of 2009.
The company said it expects to “eventually” convert most of its stores to the Lifestyle format.
Publix Super Markets also is among the few major supermarket operators projecting increases in capital expenditures in 2011. In a filing with the Securities and Exchange Commission last week, the Lakeland, Fla.-based retailer said it planned $710 million in 2011 cap-ex, significantly outpacing 2010 spending of $468.5 million, but in line with historic levels as a percent of overall sales.
While Delhaize Group, Belgium, said it would ramp up capital spending in 2011, it indicated that much of the increase would be directed overseas, citing its Bloom banner as among its significant new-store development plans in the U.S.