Publix's Price Investments Squeeze Profit Margins

JON SPRINGER

LAKELAND, Fla. — Publix Super Markets here has picked a fight with Florida's struggling economy, and has the bruises to show for it.

The state's largest food retailer earlier this month revealed that net earnings in the third quarter had plummeted nearly 19% compared with the same period a year ago, due mainly to aggressive price promotions that brought down gross profits by a full percentage point, to 26% of sales. Product-cost inflation leading to higher inventory charges also impacted results, Publix said.

The company saw also profits decline 3.5% during the preceding quarter.

“Our costs are continuing to rise while many customers are struggling to make ends meet,” Ed Crenshaw, Publix's chief executive officer, said in a statement.

Observers contacted by SN last week considered the slowdown in profits at Publix to be the price of maintaining sales momentum in a market where the down economy — particularly the subprime mortgage crisis — has hit consumers especially hard. They also acknowledge sharper competition in Florida, where Winn-Dixie and Sweetbay have worked to repair their images and where discounters Wal-Mart and now Aldi are expanding, and in markets like Atlanta, where Publix is encountering a stronger promotional offering from Kroger.

“While Publix had a tough quarter on a per-store basis, in terms of dollar sales and operating income it was still more successful than Winn-Dixie,” noted Burt P. Flickinger III, managing partner with Strategic Resource Group, New York.

As reported previously in SN, Publix was among several chains operating in Florida to take a more aggressive stand on prices over the summer as the economic picture darkened. The chain in August began a program called Publix Essentials, which offered extended discounts — estimated to be as much as 20% — on selected everyday items in addition to Publix's weekly promotions. The program as of last week offered seven items, including store-brand milk, eggs and chicken; heads of lettuce; canned Green Giant vegetables; and Tide detergent.

Publix also made a bold strategic move by spending $500 million for 49 Albertsons stores in Florida. Those locations are gradually being reopened under the Publix banner now.

“When you're facing a down market you can do one of two things: You can duck down, put your head in the sand and ride it out, or you can be aggressive and face it head-on, and that's what they've chosen to do,” Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN.

Stern said it was telling of the seriousness of the challenges in Florida that Publix — which as a privately held company is generally under less pressure than publicly traded counterparts — chose to take an aggressive stance.

“Publix buying Albertsons theoretically should lessen the competition,” Stern noted, “but there's no question that the people who are still competing in the market have gotten better. And Wal-Mart seems to have gotten its act together.”

Flickinger said he believes the investments in pricing and in greater market share through the acquisition of the Albertsons stores will ultimately help Publix weaken its rivals in the conventional field and strengthen itself to stand tall against Wal-Mart once the economy improves.

“Publix is Wal-Mart's best-capitalized competitor, so it's investing in its base with the idea of shifting more sales from less capitalized, less capable competitors,” Flickinger said. “As a result, Publix is taking a little short-term pain, but they will reap greater long-term gains.

“The company will still face tough economic times in 2009, but I think Publix will come out stronger and better than some competitors who can't afford to make the same investments in these tough times.”

Publix, Flickinger added, may be seeing more trouble outside of Florida. In Atlanta, he said, the retailer is finding a difficult competitor in Kroger, which he said runs stronger ads and has a better private-label program.