The recession may be over but so too is the post-recession rebound.
Financial results from several food retailers in the most recent earnings period illustrated a bleaker economic environment than many expected as the modest recovery exhibited in first-quarter results proved to be short-lived. Most food retailers found themselves in tight price competition that cut into profits as shoppers continued to spend cautiously and chase values, with little help from price inflation or job growth on the horizon.
Several retailers adjusted their sales and earnings guidance for the fiscal year downward as a result, and two companies, Winn-Dixie Stores and A&P, announced large store-closing programs.
“Supermarket operators are in the worst place right now,” Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN. “Essentially, you've got a flat inflationary environment with little opportunity to raise pricing, so there's no natural bump coming. On top of that the business is just so soft. If there's a recovery going on, it hasn't hit supermarkets yet.”
Second-quarter results from food retailers echoed national trends, including dips in consumer confidence and other economic indicators that were greater than anticipated beginning in June.
“The economic slowdown we anticipated to begin in the second half of the year began a bit early,” the Conference Board said in a statement earlier this month. Declaring the post-recession rebound “history,” the Conference Board noted the economic effects of last year's government stimulus package were waning and “the consumer was unable to pick up the slack.”
Food retailers appear to have responded with heavy price investments, led by Wal-Mart Stores, which made no secret of a stepped-up program of extended-discount rollbacks beginning this spring. Supermarkets were inclined to lead with hot prices on perishables along with a greater commitment to everyday shelf prices.
But after some initial optimism of a modest recovery this spring, results haven't been great, leading to a splintering of tactics. Delhaize's Food Lion, for example, found its investment in everyday low prices wasn't doing enough and said it would promote more in the second half of the year. Wal-Mart is doing just the opposite: Its officials conceded that the “rollbacks” weren't gaining traction and that it instead would reemphasize its EDLP positioning.
For BJ's Wholesale Club, Natick, Mass., responding to Wal-Mart's aggressive rollbacks and to supermarkets with hot ads featuring perishables drained quarterly profits and prompted the retailer to adjust its expectations for the year downward.
“There is no question that in Q1 we thought the economy was improving. Everything in our sales would have indicated that, and our plans for the year were based on that assumption,” Laura Sen, BJ's chief executive officer, confessed in a conference call discussing results this month. “But Q2 gave us a very different feeling about the consumer's mindset, the consumer's confidence and the consumer's willingness to spend on discretionary items.”
Safeway, Pleasanton, Calif., also adjusted its annual guidance downward after posting second-quarter results illustrating that deflation was blunting the benefits of volume improvements it saw as a result of price investments. It was also spending more to promote a price message as competition intensified.
Supervalu, Minneapolis, adjusted its annual same-store sales expectations to negative 5% from negative 2% — which was somewhat optimistic given the chain's negative 7% comp results for its first quarter, which ended June 19.
“The overall consumer economy is not recovering,” said Stern. “Broader retail numbers, they're soft too. Back-to-school has been soft. The real concern now is, are we really recovering? We may have bottomed, but I don't think there's real evidence of a consumer recovery.”
Cincinnati-based Kroger Cos., which reported relatively strong sales results in the first quarter and stood by a forecast for 2% to 3% same-store sales growth for the fiscal year, is expected to report its second-quarter financials next month.
