Finding ways to adapt to the current economic environment is Topic A on the minds of top industry executives as they contemplate their prospects for 2003.
While some executives told SN they expect the economy to undergo a gradual recovery beginning at mid-year, others aren't so sure -- and all expressed concerns about dealing with the more immediate challenges until a recovery kicks in.
They also expressed concerns about employee recruitment and training, the proliferation of channel leakage and the possibility of war with Iraq.
"Adapting to the changing business climate really is a serious challenge for all of us," Neil Golub, chief executive officer of Price Chopper Supermarkets, Schenectady, N.Y., said. "When you've been used to inflation at a certain level and growth at a certain level and budgeting your business a certain way and suddenly all of that changes, it's like getting the rug pulled out from under you.
"It's kind of a guessing game as to what's going to happen with the economy -- along with changing conditions in different commodity groups and in the budget- and profit-planning process -- because no one is sure what's going to be there and what's not. So I think we all have to figure out different ways of measuring the business to make sure we're growing."
Russell T. Lund 3rd, president and CEO of Lund's Food Holdings, Edina, Minn., also expressed concerns about changing industry dynamics.
"I grew up in my family's business, and I've gone through some recessionary times and have heard stories about consumers trading down. But we're in a new millennium -- a different time -- and we're seeing consumers trading down in certain categories at the same time they're purchasing olives and sushi at an extraordinary pace.
"So there are some different buying patterns out there that are less understandable using the old paradigm that people trade down in a recession."
Steve Smith, president and CEO of K-VA-T Food Stores, Abingdon, Va., said he expects the soft economy to continue for awhile, "and that will provide some opportunities for the grocery business because very often, when the economy is soft, people tend to stay home a little more and cut back on travel and eating at restaurants.
"Certainly we want the economy to be good, but we're going to try to step up and grow our business in spite of the economy. That's what we tried to do in 2002, and we had fairly good luck at it."
Al Plamann, president and CEO of Unified Western Grocers, Los Angeles, said he's guardedly optimistic that the economy will begin to rebound within the next six months "unless we get a major negative impact from a war or some other disruption. But although the rebound will be slow, I think we'll begin to see companies making capital investments again in the second or third quarter.
"In addition, there'll be a continuing focus on productivity. Everyone is watching productivity numbers very closely, and those numbers are clearly on the rise, and that will help if there's any economic stimulus at all."
Jeff Noddle, president and CEO of Supervalu, Minneapolis, also said he expects the economy to begin improving around the middle of the year. "But while the improvement will be gradual, things won't go back to where they were. When the economy revives, things will look different, with stimulus packages from Washington, D.C., driving growth moreso than dot-coms or technology companies."
Until the turnaround comes, however, the industry will continue to be challenged by the prospect of looking for growth in a no-growth environment, Noddle said. "The weak economy is affecting consumer decisions and leading them to trade down or buy less," he said, "and deflation in certain product categories continues to affect us, and we don't anticipate that will change in 2003, though no one knows for sure.
"But as the economy stays weak, it's producing more deflationary trends, including more promotional activity and more pressure from retailers for manufacturers not to increase prices."
The pressures retailers are putting on manufacturers is creating a new set of class-of-trade challenges, according to Jack Brown, chairman, president and CEO of Stater Bros. Markets, Colton, Calif.
"We're seeing large operators asking manufacturers to pay part of the cost of new systems that are being installed or asking them to put promotional funds into offshore accounts," Brown pointed out. "In addition, we've heard in the last year about a lot of deals that are not circulating throughout the entire supermarket industry.
"We need to make sure manufacturers offer every retailer the same opportunity with the same information as everyone else gets, even if that retailer may not be able to buy in the quantity being offered," he explained. "It should be the retailer's decision to participate or not.
"The trade associations are making good progress on resolving these issues, but it's still a major concern that these issues get resolved so we can all go back to selling products to customers instead of worrying how good each deal is."
Getting the right employees is another CEO concern.
Associated Food Stores, Salt Lake City, plans to focus on training as part of a broader effort to differentiate its member stores from competition "by stressing customer service to improve the shopping experience," Rich Parkinson, president and CEO, told SN.
Following testing at a group of corporate stores, Associated is offering training programs to all members "based on specific personal characteristics separate from any technical skills, including the ability to work with the public, to accommodate different personalities, to be sensitive to customer needs and to be able to listen to and sort through information," Parkinson explained.
Smith said K-VA-T is also tackling personnel issues. "As an industry we still have to work to attract, train and retain the best people we possibly can because I think the success of any retailer is all about the people. That has been and will continue to be one of our main focus points. Even though the economy has slowed down, we're still challenged to get exactly the folks we'd like to have."
Brown said Stater plans to focus on training store personnel "to meet our expanding needs because it's clear that, when you're dealing with the spread of club stores as we are, our people will make the difference. We need to be sure the quality of our people, and the service they provide, are strong marketing tools, so we're investing in our people because we count on them to make that kind of investment in our customers."
The executives also expressed concerns about the proliferation of alternative formats.
According to Parkinson, of Associated Food Stores, "Obviously, we all recognize what Wal-Mart has done, but it goes beyond Wal-Mart to companies like Walgreen's and Costco. The pie is being broken into smaller pieces, and we must deal with that."
According to Golub, of Price Chopper, "Wal-Mart, drug chains, limited assortment stores, clubs -- all are opening up and competing in the grocery business. They appeal to different customers, but it's something you have to take into consideration. When Wal-Mart comes along, it certainly has an impact on pricing and that, along with deflation, is kind of a multiple warhead, if you will, to anybody's business, but I think you just have to adapt to it."
For K-VA-T, "Wal-Mart Supercenters are probably the single biggest competitive threat that faces all of us in this business," Smith said. "With two-thirds of our stores competing with Wal-Mart, we've learned -- I won't say how to handle them, but how to cope with them and what's profitable to do and what's profitable not to do.
"You build your customer base on a lot of things you do well in the store, and you build confidence in the fact you are their hometown retailer, and you tell your employees, 'We're going to be here for a long time. There may not be room for everybody, but there's going to be room for us."'
Gary Phillips, president and CEO of Associated Wholesale Grocers, Kansas City, Kan., said his company will be seeking ways to differentiate its member stores from other distribution channels.
"We think the economic situation is very tough, and private label gives independent retailers a distinct advantage, so we believe this is a good time to develop private label further -- to offer different values from the national brands and to get more people back into the supermarkets and away from restaurants," Phillips explained.
AWG also anticipates developing more store-level consumer events to separate its stores from mass merchandisers. "The key is to have events designed to make the members' stores more interesting and to bring them more excitement as a way to differentiate them from those competitors," he said.
Executives offered these comments on the possibility of a war and its impact on the industry:
"What typically happens in any catastrophic time is that people tend to stock up on food," Parkinson said. "That's what we saw after 9/11, with a significant rise in purchases of staples because of the uncertainty, and we would expect to see the same pattern if there's a war with Iraq."
"I would hate to say the industry would benefit from a war," Noddle said, "but it would certainly tend to keep people at home more, particularly in the short term, as we saw after 9/11. But unless the war lingers and damages the overall economy, there probably won't be any major impact."
"A war in Iraq could stimulate additional acts of terrorism, and that could affect trade routes and trade patterns in some areas," Golub said. "But until the situation touches home, people may tighten their belts up another notch but they will still go about doing what they would normally do."
"The industry did well during the Gulf War, and we would expect to continue to sell a lot of food during a war with Iraq," Plamann said. "However, my concern is that the economy might not recover as quickly [in the event of a war], so we would continue to sell products at very competitive prices, meaning that while sales will be OK, margins may suffer."
"While you certainly don't want a war, the opportunity might be there for people to do a little more eating at home and shopping in the supermarkets," Smith said. "People get into somewhat of a hunkered-down mentality [in a war situation] and stay closer to their families. They tend to eat in, spend more time at home, watch more television, so I think a war can have a positive impact on our business."
"A war would be likely to benefit the industry if people stay closer to home and eat more at home", Phillips said. "Otherwise, we don't see any major impact from a war".
