Price Squeeze

Food retailers expect competitive pressures to subdue the potential positive impacts of inflation in 2011, and they also expect the weak employment picture to present ongoing challenges in the year ahead.

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“I think probably one of the biggest challenges is getting the workforce back to work,” said Mike Needler, chairman and chief executive officer, Fresh Encounter, a 32-store operator based in Findlay, Ohio. “We have had a fairly large number of layoffs throughout the area, and we feel it is important to get these people back to work so the disposable income level comes back.”

He and other top food-retailing executives said food inflation, projected to rise in the low single digits in 2011, could put pressure on margins, depending how competitors react.

“The only benefit inflation has to a retailer comes if he can raise prices and pass that on to the customer,” said Jack Brown, chairman and CEO, San Bernardino, Calif.-based Stater Bros. “But we’re trying to help customers hold the line on their food budgets, and it’s been more than a year that we’ve been digging in to avoid raising prices.”

The United States Department of Agriculture last month estimated that food-at-home prices — the price consumers paid at retail — was up about 0.5% to 1.5% in 2010, but that figure was expected to increase to between 2% and 3% in 2011. The highest increases are seen in dairy products and some meat items.

Unemployment, meanwhile, remained stubbornly high in 2010 at a rate near 10%, and many observers expected little headway in 2011.

In its monthly Consumer Confidence Index survey, released last week, the Conference Board, New York, reported that consumer confidence in the economy declined, in part based on a negative outlook for employment. Among consumers surveyed, 19.5% said they anticipated fewer jobs in the months ahead, vs. 19.1% in the preceding month, and only 14.3% expected an increase in jobs, down from 15.1% in November.

In addition, while supermarket executives said they were glad the Bush tax cuts have been extended for two years, they would like to see some action taken to make them more permanent, particularly with regard to the estate tax.

Following are comments from industry CEOs about their outlooks for the year ahead.

JACK BROWN, chairman and chief executive officer of Stater Bros. Markets, San Bernardino, Calif., said the chain’s biggest challenge is increasing sales, “which is tied hand-in-hand with the economy and, particularly in California, the unemployment rate.”

“In the Inland Empire [the Riverside-San Bernardino counties area] in which we operate 103 of our 167 stores, unemployment was at 15.1% in 2010, the third year in a row it’s been over 14.5%,” Brown explained.

“However, in the fall it dropped to 14.6%, which is the lowest it’s been in years, as a result of the housing industry starting to come back, with some small tracts of 50 to 100 homes beginning to be built. There’s also one tract of 2,000 homes in our area that’s also in play, and that’s the most encouraging thing we’ve seen in years.

“And another challenge we face is more consolidation in the industry. While Stater will not be shrinking, many of the large chains have stores for sale that could be acquired by independents,” Brown noted.

Stater has two replacement stores under construction and has another site under consideration for a new store, he said.

Stater began preparing for an upturn in the economy late in 2010 by re-financing its debt “to lower our ongoing costs in every way we could, which allowed us to lower the amount of the debt and also to get a much improved interest rate on the remaining debt.”

Brown said he expects sales to be up 2% in 2011, compared with flat sales in 2010.

He said he does not expect inflation to be beneficial at all to Stater. “The only benefit inflation has to a retailer comes if he can raise prices and pass that on to the customer. But we’re trying to help customers hold the line on their food budgets, and it’s been more than a year that we’ve been digging in to avoid raising prices.

“Besides, competition really won’t let you raise prices.”

Asked about key initiatives, Brown said, “We’re in the middle of the process of examining every cost we incur, including looking for bids on every service we purchase and every supplier we deal with to get the lowest cost.”

Brown said the biggest legislative challenge is bills that try to get rid of plastic bags. “For me, it’s an issue of taxing food. The laws that are being proposed are supposedly aimed at improving the environment, which is a good thing, but the laws should apply to all retailers, not just grocery stores.

“And even if we do end up having the charge for plastic bags, I’m pretty sure the public officials won’t allow us to keep that money but will want to control it themselves,” he added. “In any case, there should be state laws. You can’t have every municipality enacting its own version of these laws, which is what we have now.”

MIKE GILLILAND, chairman and CEO of Sunflower Farmers Markets, Boulder, Colo., said the biggest challenge in 2011 will be “pricing pressures and competition, and whether we will have inflation or deflation, which is still uncertain.”

To deal with competitive pressures, “we just have to keep focusing on costs and keeping overhead to a minimum; work on controlling shrink; and do a better job of purchasing — just running a tighter business in general.”

Gilliland said he projects sales growth companywide of 20% because of “some modest comp-sales growth, combined with five to seven new stores.” Sunflower currently operates 32 stores.

The company recently unveiled plans to expand into California, with a first store there set to open early in 2011.

Asked about inflation, Gilliland said, “Inflation usually brings benefits, but it’s still not clear if there will be inflation.”

The company’s initiatives for 2011 will be mostly concerned with new-store growth and finding real estate, “plus a bigger focus on private label, organics and information technology — mostly upgrading the capabilities of the systems we have.”

MIKE NEEDLER, chairman and CEO, Fresh Encounter, Findlay, Ohio, said his company has been “hanging on” through the tough economy, noting that his chain’s same-store sales have been positive recently, and improving.

“We are seeing a very, very small increase in sales over the prior year, which in many ways is very positive,” he said. “We have seen a lot of reports from public chains that same-store sales are down, so we are pleased that we are holding our own, at least, in our segment.”

He said he expects same-store sales growth to continue to climb in 2011. “In fact we are seeing an improving trend right now.”

He said he is expecting inflation, but he’s not sure how much benefit it will be to growing the top line, given the highly competitive nature of the industry.

“I am guessing that we will see some inflation in the next eight to 10 months,” Needler said. “We will see inflation that will hit us on the cost side, but how we are able to reflect that on the retail side will depend on the competitive situation.”

He said the unemployment in Northeast Ohio and Northwest Indiana, where his stores operate, has been hard-hit, first by declines in the auto industry but also by declines in other manufacturing jobs.

“I think probably one of the biggest challenges is getting the workforce back to work,” he said. “We have had a fairly large number of layoffs throughout the area, just because of the industries that are in our areas of Ohio and Indiana.

“We feel it is important to get these people back to work so the disposable income level comes back.”

Unemployment overall in Ohio was about 9.3% in November, according to reports last month, with some areas as high as 15.4%.

Needler said Fresh Encounter doesn’t have any major plans for expansion or remodeling in 2011, having refurbished many stores over the last 18 months. “We don’t’ have anything major planned in the immediate future — just helping customers as best we can.”

On the legislative and regulatory side, Needler said one of the major initiatives for 2011 should be to focus on extending the Bush tax cuts. The reductions were recently extended for two years.

“That was a major issue that got dodged when they extended the current tax rates, and for the next year to 18 months, that will be a front-burner item, to get more permanency built into that,” he said.

DONALD ROUSE, president of Rouses Supermarkets, Thibodaux, La., said he was looking to improve upon 2010 with a combination of new stores and continued emphasis on service and local offerings.

“Our team members are always a concern. Getting the right people into the right positions is very important to us. I also think our competition will be tough, because it’s heating up somewhat down here. So I think we’ve got to continue doing what we’ve always done, which is try to get better at what we do best.”

tter than anyone. We are local, we know how people in Louisiana live, and how they eat. We’re one of them, and I think that helps us tremendously. You walk into our store, it’s fresh, it’s full and it says, ‘Gulf Coast’ That’s what it’s all about for us.”

ores in 2011, bring its total to 42, including a location in downtown New Orleans. Rouses also will begin construction on two additional stores slated to open in 2012.

“We’re looking at 4% to 5% same-store sales growth in 2011. We’re not quite there this year, but we’ve seen a small increase,” he said. “It was actually a pretty good year for us in sales and profits, but we think we can do better, and continue to improve.”

He said the chain was not counting on any benefits of inflation in 2011.

On the legislative front, Rouse said he was encouraged by the tax-cut extension as well as depreciation benefits that he said would help the company as it opens new stores. But he remains concerned over the estate tax.

“This year coming we have the 100% depreciation benefit which will be helpful for the stores we’re opening on the equipment side. And we are glad for the extension of the tax cuts for two years, and we wish it were permanent. We’re a family-owned business, and the estate tax issue is big for us down the road. We see that as a big, big problem for us that we’re going to have to deal with.”

— Reporting by Mark Hamstra, Jon Springer and Elliot Zwiebach