Forward Motion

JON SPRINGER

Despite some spectacular failures — among them the sale and closure of hundreds of Albertsons stores; the wind-down of regional operators such as Tops and Southern Family Markets; and the bankruptcies of companies like Larry's Markets and Brown & Cole — 2006 was a pretty good year for food retailers.

Many are predicting 2007 could be even better.

Led by national conventional chains Kroger and Safeway, sales were up and profits were better than in 2005, according to Food Marketing Institute figures. Operators who spoke to SN on their outlook for 2007 predicted more of the same if they can stay ahead of rising costs, continue to fend off encroachment from alternative formats and avoid becoming the next victim of capacity shakeouts that they also expect will continue in some markets.

Rich Niemann Jr., chief executive officer, Niemann Foods, Quincy, Ill., said he believes supermarket momentum began several years ago when retailers rewrote their playbooks in the face of encroachment from supercenters and from alternative retail formats. Their responses are beginning to show now.

Niemann, for example, focused on creating a store atmosphere and brand image that better communicated with shoppers. Pricing strategies, consumer research, service and technology have also been assessed anew by retailers.

“Over the last several years it seems as if the industry has come out of a bit of a slumber,” Niemann told SN. “Today, more folks are realizing they can't do business the way it's been done for the last 50 years. You go around the country today and you see [retailers] doing different things. It's proactive.

“I think a lot of retailers came upon this realization a few years ago, and spent the last few years working on things, and you're seeing a lot of those efforts coming to fruition today. They've made things happen, and that's giving them a boost. I know that's what happened for us.”

On a broader level, conditions for a continued renaissance are good, retailers added.

“Economists tell us inflation is under control, gas prices are in check and unemployment is manageable, so all indicators point to a positive outlook,” said Mike Proulx, president and CEO of Bashas', Chandler, Ariz.

Capacity Shakeout

Though the industry experienced massive rounds of sales and closures in 2005 (led by Winn-Dixie Stores in the Southeast) and in 2006 (led by Albertsons in the West and Ahold's Tops banner in Ohio), many retailers said they feel the reduction of stores isn't over yet, at least not in all markets.

“There's considerable overcapacity in the number of stores, but more importantly, in square footage in some markets,” said CEO J.H. “Jay” Campbell of Associated Grocers of Louisiana, Baton Rouge. “I think there will be a readjustment or realignment.”

These situations tend to create both opportunity and chaos, according to Tom Heinen, president of Heinen's Fine Foods, Cleveland.

“No matter how poor the sales were at Tops, it was still sales,” said Heinen, whose company acquired one of the northeastern Ohio Tops stores that went up for grabs last year. “We saw the elimination of a major market force in Tops, and in 2007 we may see more attrition.”

Heinen said he was “cautiously optimistic” for 2007, noting that some of the issues that got Tops into trouble in Ohio — high costs, low growth and competition from alternative formats — still exist even as new retailers take over Tops' former buildings, and other Tops disappear completely. The arrival of several new owners at once in a market also tends to create price competition, he noted.

“We're confident that we can continue to perpetuate the value proposition that we offer our customers but I think overall, it's going to be a very competitive year with an overabundance of retail selling space in a zero-sum game market,” Heinen said.

Distributor Laurel Grocery Co., London, Ky., is another company finding opportunity in retail attrition. CEO Jim Buchanan told SN that his company had its eye on new customers, in areas like Pittsburgh, Cleveland and western New York, and even a new opportunity to acquire a warehouse as the result of Tops' wind-down and other market exits.

“We have a tremendous amount of growth planned in the Pittsburgh area as well as the Cleveland area. There's a lot going on there,”

Buchanan told SN. “We're working with a retailer to buy a few Tops stores in Cleveland, and we have another customer building a store near Cleveland. We are also looking to expand into another warehouse in northeast Ohio. If that gets done, we'll be able to extend on up to western Pennsylvania and even western New York.”

Schenectady, N.Y.-based Price Chopper Supermarkets may also be interested in some Tops stores, but according to Neil Golub, CEO, the chain will proceed with caution.

“Acquisitions and opportunities are always on our radar,” he told SN. “But while something might look nice, it doesn't necessarily mean that there's anything to it. We still think there are some opportunities out there, and we'll keep looking.”

Golub said he was “optimistic about the new year.”

“We continue to grow our business, and we try to continue to stay relevant to what our customers want,” he said. “We're going to focus on what we do best. We're not going to stray from that unless something comes up that's a slam dunk.”

K-VA-T Food Stores, Abingdon, Va., added five new stores to its Food City banner through the acquisition of Southern Family Markets stores dropping out of Tennessee in 2006. CEO Steve Smith said he felt there could more opportunities in 2007.

“It's a really good time to be a regional operator,” Smith told SN. “We're seeing a lot of downsizing, whether it's Ahold or Albertsons or Winn-Dixie. The really good regional operators and the independents have been presented with a really good opportunity as a result.”

Independent Strength

Fallout in the wake of a Wal-Mart invasion will provide opportunity for the survivors, predicted Dave Maurer, president, Pierce's Supermarkets, Baraboo, Wis.

“Because of the competitive environment that we're in, there are far fewer independents remaining. The ones left standing will be stronger. It's a very interesting dynamic in my opinion,” Maurer told SN. “We built a new store in each of the last two years, and in 2007 we intend to continue to grow, either through acquisitions or through ground-up building.”

Health concerns among consumers will also drive growth opportunities industrywide in 2007, Maurer added.

“The health food movement is more relevant and will continue to grow in importance, especially seeing as Baby Boomers continue to age and you see things like the latest E. coli outbreak,” he said. “Those kinds of things are going to make people look for stores that are protecting their food and providing a safe food environment.”

Martin Arter, president, Affiliated Foods Midwest, Norfolk, Neb., expressed a similar sentiment. Affiliated in 2007 will promote a program for its independents providing wellness staff at stores and an emphasis on food as part of an active, healthy lifestyle.

“The consumer today and tomorrow will expect the variety of healthy eating for their families and a lifestyle of products that have taste and are good for you,” Arter told SN. “We have a complete program with a wellness staff available at store level to educate and help the consumer provide their families what they are looking for.”

Affiliated also sees opportunity in a “best-in-class” private-label program, Arter added. These items were introduced in September and under development for more than a year. “We are excited for a complete rollout over the next 12 months.”

Independents that focus on customer service could achieve excellent results in 2007, said Campbell of AG-Louisiana.

“I find the independent is becoming stronger than before, offering a real viable shopping experience because they offer more variety and selection in their stores and offer real customer service — that's becoming a lost art in any retail environment,” Campbell told SN. “Those who can put the customer-service element back into the equation seem to have a leg up on chains if they have the variety, the selection and the quality at competitive pricing. If the independent does that, they are going to do extraordinary.”

Anthony Longo, president and CEO of Longo Brothers, Mississauga, Ontario, told SN his company in 2007 would focus on better execution in its 14 stores, and on improving assortment and selection. Internally, the company is focused on understanding its customer better.

“We believe we've got great prospects in terms of sales growth,” Longo said. “The industry has a great opportunity to reclaim sales lost to other channels, particularly the food-service sector. To me, it's a matter of having the courage to do what's right for the consumer first.”

Customers who have adopted Laurel Grocery's new strategic pricing program experienced results well above average in 2006, said Buchanan, adding that he expects 30 or more of its independent customers will make the switch during 2007. The “modified EDLP” program is focused on growing Center Store sales and meeting overall pricing levels midway between Wal-Mart and national chain stores, he explained.

Wal-Mart remains a formidable foe in nearly all of the markets where Laurel serves independents, but Buchanan said, “Wal-Mart's becoming same-old, same-old.

“The consumers who would shop at Wal-Mart are already shopping at Wal-Mart, so if they open another one, it's only moving them from one Wal-Mart to another. We track this pretty closely here in Wal-Mart country. The impact is just not what it was.”

Keeping a Lid on Costs

While many retailers contacted by SN were generally optimistic about sales growth in 2007, they also expressed considerable concern over rising costs eating away the profits those sales could generate. These include labor, health care, fuel and utility expenses, as well as items like interchange fees.

“I think costs are going to squeeze some retailers, so they will have to make efforts to keep prices in line along with the increase in fuel costs, which affects utilities and cost of goods,” Roger Collins, CEO, Harps Foods, Springdale, Ark., told SN. “Interchange fees are a big deal, and their increase is large and impossible to control. Those costs are going to force people to fight their other costs, so they can maintain their margins.”

Harps added two new stores to its portfolio in 2006, bringing its total to 53 stores, and intends to continue growth in 2007, Collins said. Harps has a new store under construction for a 2007 opening and is eyeing a few locations for a potential acquisition. “We have to keep growing and expanding,” he said.

After a few years of weathering an assault from new formats and nontraditional food retailers, John DeJesus, president, Foodmaster Super Markets, Chelsea, Mass., said his company is looking to recapitalize and invest in its stores in 2007.

“Our big plans are to spend some money in the stores and go after growth,” DeJesus told SN. “We've been inundated with all kinds of new formats, but I think most of us have been able to swallow it and assess the situation. Now we have to go for more growth and more sales.”

Other retailers expressed concern that a raise in the minimum wage — expected shortly now that Congress transitions to Democratic control — could pressure wages and costs upward. Retailers will also keep an eye on various local and state initiatives that could have heavy cost implications for retailers and consumers.

In New York, Golub of Price Chopper said the chain was fearing the state legislature would introduce a new bottle bill he described as a “nightmare.” In Massachusetts, DeJesus of Foodmaster is still trying to figure out the implications of a statewide health care initiative taking effect this year.

But overall, optimism abounds.

Proulx said Bashas' expects to continue to grow “as Arizona grows” in 2007. “The housing market has slowed, but it still shows a modest growth rate. There is also growth in good-paying jobs in our market, and the local economy is vibrant, so we're optimistic about having continued success in 2007.”

Jack Brown, chairman and CEO of Stater Bros. Markets, Colton, Calif., said 2007 will be Stater's “most outstanding year in its 70-year history based on current sales trends, comp sales trends and the opening of our new distribution center.”

That facility, on a 200-acre site in nearby San Bernardino, will include 2.1 million square feet of warehouse space and 100,000 square feet of office space; it will replace 11 facilities in seven locations in four cities. The warehouse is scheduled to begin shipping groceries in October and perishables early in 2008, Brown said, adding that the new facility “will take Stater well into the future for at least 50 years. It positions us to distribute to whatever size we can achieve.”

Brown said he was preparing to meet not only a new challenger in Tesco stores expected to arrive in Southern California this year, but faces renewed efforts from Safeway, Kroger and Supervaluowned Albertsons. The former two drove results in 2006 indicating they've successfully repositioned themselves. And Albertsons is expected to get new attention from its new owner this year.

“So for all three major operators in Southern California, none will be doing business as usual in 2007, so we will have to watch all of them so we do not lose any competitive advantages,” Brown said. “Competition has made us better in almost every instance, and competition has always been fierce, but there will be real challenges ahead as all three companies continue to work hard to reinvent themselves.”

For a Change

Easing regulations and focusing on consumer insights are among the top concerns of food industry leaders as 2007 begins. SN asked a number of them the following question: What, if anything, would you like to see change in 2007? Following are excerpts of their replies:

John DeJesus, chief executive officer, Foodmaster, Chelsea, Mass.:

“Utility costs. Since 2005 the biggest increase in anyone's statement is utility costs. It took a big bite of you. And it's not like you can just say, ‘Well, we'll just increase sales to cover it.’ The costs came down a little in 2006 but nowhere near the level we'd hoped they would come down.”

Anthony Longo, president and CEO, Longo Brothers, Mississauga, Ontario:

“I'd like to see the industry give a greater emphasis to consumer insights.”

Tom Heinen, president, Heinen's Fine Foods, Cleveland:

“The use of information to manage the business, whether you're talking about a card program, or studying transactions, is relevant for everybody. The greatest challenge for most supermarket operators is to really understand their business at a different level, so they can market more effectively and really be successful meeting their needs.”

J.H. “Jay” Campbell, president and CEO, Associated Grocers of Louisiana, Baton Rouge:

“The Democratic Congress is going to push to change the minimum wage. I would recommend this exclusion: A person would have to be 18 years old to be eligible. They have to be 18 to buy tobacco products, 18 to buy liquor, they can't vote, or enter the military, until they're 18. In most states you can't even get married without consent at 18. Why wouldn't we make minimum wage eligibility 18 years old? I think it would be a great compromise. It would help any and all small businesspeople across America whether they were grocery stores or not and it would offer entry-level opportunities to young people.”

Roger Collins, CEO, Harps Foods, Springdale, Ark.:

“We're hopeful that Congress can do something about interchange fees. For most retailers, the fastest-growing item on the income statement is the interchange fee. Managing that is very important, as is managing your utility cost. We will look for more effective ways to light the store, and use equipment that is more energy efficient.”

Steve Smith, president and CEO, K-VA-T Food Stores, Abingdon, Va.:

“We all agree there will be a minimum wage increase and while some of us — not many of us — hire at minimum wage, the ripple effect is going to put upward pressures on wages and labor budgets. Health care will continue to be an issue whether its double-digit growth or high single-digit. And I don't think we're out of the woods on the cost of gasoline.”

Mike Proulx, president and chief operating officer, Bashas', Chandler, Ariz.:

“For the industry to become more unified, with one voice, and to be more effective on issues that affect regulation and legislation. While our efforts are not lacking, we could have, and should have, a stronger voice if we band together.”

Jack Brown, chairman and CEO, Stater Bros. Markets, Colton, Calif.:

“Repeal of the ‘death tax.’ That's critical for privately owned companies, which make up over half the businesses in the U.S., because it would make it possible to move a business into the second generation without having to liquidate the estate to pay the taxes.”
— J.S., Elliot Zwiebach