Sales Strong, but Costs Are a Concern

JON SPRINGER

CHICAGO — Food Marketing Institute painted a healthy sales picture for the supermarket industry, but it cautioned the numbers could be deceiving.

“Like a lot of things in the industry, it's a matter of ‘it depends,’” said Michael Sansolo, senior vice president, FMI, who presented the figures at the FMI Speaks event here last week.

The sales figures, based on data from more than 15,000 stores, showed overall sales growth of 5.3% in 2006 and same-store sales growth of 4%. “Those sales numbers are among the best we've heard in a decade,” Sansolo said.

But a deeper look into the numbers reveals cause for concern, he said.

Food retailers are struggling to turn those sales gains into profits that can stay ahead of inflation, Sansolo explained. Net income before taxes and extraordinary items dropped to 1.8%, down from 2.1% in 2005. That figure barely stayed ahead of food-at-home inflation of 1.7% last year, Sansolo said, adding that 25% of the retailers in the survey showed profits below inflation.

Separating the profit leaders from the laggards was a matter of how well they controlled costs, Sansolo said. Particularly effective in this endeavor were the large publicly traded companies, including Kroger, Safeway and Costco. Kroger, he noted, owes its extraordinary numbers in part to effectively reducing energy expenses.

Profit leaders, he added, are average overall in terms of metrics that measure things like private-label sales, transaction size, shrink and out-of-stocks. “What they have done is looked at their costs and attacked them,” he said.

Profit Performance

Rising costs made it difficult for retailers to turn sales gains into profits, with median net profits at 1.8% or just ahead of inflation, FMI figures show. Larger companies with a focus on economies of scale and cost controls tended to fare better in 2006.