The Slow Road

PETER LYNCH, chairman, president and CEO of Winn-Dixie Stores, Jacksonville, Fla., said he expects the balance of the year to remain challenging.

“Until unemployment and the housing market get better, things will be reasonably challenging — and Wal-Mart's price rollbacks will also contribute to the challenges,” he told SN.

Lynch said he expects to see “a little bit of a comeback” for inflation during the second half of 2010 — “nothing dramatic, but the good news is, deflation is almost gone.”

He said he expects competition to remain “consistent and fairly rational.”

Asked about his outlook for the economy, Lynch said, “I like to be optimistic. There are good signs for an improvement, but till we see unemployment and housing start to get better, we anticipate a slow recovery.”

The outlook for the industry “will continue to be challenging,” he said, “but that makes us better operators and forces us to stay focused on the consumer.”

JACK BROWN, chairman and CEO of Stater Bros. Markets, San Bernardino, Calif., said he expects the conventional supermarket industry to see second-half results that are slightly lower than in the first half.

“Average orders are down slightly, and the average retail on average items is also down slightly, so it will be a pretty flat second half.”

He said he expects Stater's results to be similar to the rest of the industry.

“Sales in Southern California are starting to move up slightly, and housing starts are picking up. Construction is the No. 1 employer in our operating area, and it's been down for two years, which has meant fewer new shoppers. We're also in the third year where unemployment is close to 15%.”

As for consumer attitudes, Brown said, “The customer is very cautious right now. I sense that many of them are frustrated that unemployment is at an all-time high and the economy is still in the tank. And the oil spill in the Gulf means a loss of business in that area for tourism, and people are really reacting to that.

“Plus there are two wars going on, and many people don't see a lot of hope. And California is almost bankrupt, which has a lot of people concerned as well.”

Brown said he doesn't anticipate any new initiatives at Stater in the second half. “We're all in more of a survivor mode, doing all we can to get into the 2011 ball game.”

As for consumer spending, Brown said he sees “a slight upturn from last year to this year because of the onslaught of big-box stores adding more supermarket merchandise. They seem to be losing focus on their core business, and as other discount department stores lose nonfood sales, the two largest box stores are supplementing their loss of revenues with more grocery products.”

He said the Wal-Mart price rollback is not having as much impact on his business as its efforts to increase the assortment of supermarket products.

AL PLAMANN, president and CEO of Unified Grocers, Los Angeles, told SN he has become more pessimistic about the outlook for the second half in the last few weeks “after hearing what the Federal Reserve has said in terms of reversing its outlook for a good recovery.

“So as of today, I don't think the industry will see a lot of change, and I think the second half will look a lot like the first half, with one month up and one month down — just a lot of volatility, with unemployment likely to go up and customer spending remaining flat. We don't expect to see inflation this year, and we hope we don't see deflation.

“I wish we had a way to grow jobs and make other positive moves to improve the economy. But it seems like day after day it's all negative news, and with ongoing deficit spending, it's tough to see much growth in sales.”

For Unified, “members are still opening stores, and they will continue to do so through the second half. But we're also aware that more members are really feeling the pinch, so we may see some of them selling or closing down. But overall, things will be pretty flat.”

Plamann said Unified may have to dip into the expanded borrowing capacity it announced earlier in the year to help some members. “There's a good possibility we will have to help some customers later this year who are committed to opening stores in good locations but who may run short on money.

RICK ROCHE, CEO of Roche Bros., Wellesley Hills, Mass., said that easing deflation and increased consumer confidence suggest a better second half, but he isn't expecting dramatic improvements.

“I wish I knew for sure what will happen, but we have seen some signs over the last month and a half that things are picking up a little again. We are getting over some deflation, and it seems like our customer base and item count is hanging in there and maybe getting a little better. We are definitely hoping that the second half of the year is a little better than the first. There's no reason to think otherwise at this point.”

The extent to which Roche Bros. can recover margins is a function of the competitive environment, Roche added.

“We hope margins will be better in the second half, but most of our margin pressure has been self-inflicted,” he said. “We've been doing some price adjusting on our own so we can be as competitive as we can possibly be.”

Roche pointed to Demoulas Market Basket as exerting the most pricing pressure in Roche Bros.' markets. Even Wal-Mart, he said, was having trouble keeping up with Demoulas.

“We feel about the same pressure from Wal-Mart as we do from BJ's and Costco. We're losing maybe a trip a month to them, where [customers] are stocking up on lower-cost, higher-volume items,” Roche said. “Shoppers are changing and I don't know if they will ever go back to the way they were before, so we have to find new ways to get them back.”

JIM BUCHANAN, chief executive of Laurel Grocery Co., a distributor based in Loudon, Ky., said stubborn unemployment is tempering the pace of recovery for his company, its retail customers and their shoppers.

“I think things have gotten a little bit better recently, but things are still tight,” Buchanan said. “The changes the [Obama] administration has made have been counterproductive, in my opinion. I haven't seen a lot of hiring going on, and until that can happen I don't see the economy beginning to turn around. What we really need are tax cuts so that employers can employ and get people back to work.”

Buchanan said shopper behavior that came with the economic downturn — shoppers trading down, buying more sale items and cutting the size of their baskets — has continued.

“We're still seeing people with only a little amount of money to spend, and they're stretching their food budget to fit within the money they have to spend. Sales per customer are down. Our sales are up slightly, but it's still very tough. It's not where you'd like it to be.”

Meat prices are rebounding from a deflationary trend a year ago, which should help sales, Buchanan said. But much of the inflation in grocery is coming by way of smaller packages at the same price, which isn't helping rings.

“We're seeing manufacturers, rather than take price increases, are just making smaller packages. So we're not seeing inflation through price increases the way we would in past times,” he said. “We're getting price increases but it's not reflected in higher rings.”

Buchanan predicted that more aggressive rollbacks from Wal-Mart would result in hotter ads from all retailers to draw store traffic.

RICH NIEMANN JR., president and CEO, Niemann Foods, Quincy, Ill., said he expects consumers to remain focused on value in the second half of the year, much as they have for the last 18 months or so.

“In our part of the country, employment is really not any better than it was six months ago, and probably worse than it was a year and a half ago,” he said. “We were a little bit slower than the rest of the country in terms of getting into the teeth of the recession, but we are not seeing employment improve in the areas where we operate.

“I think it is going to continue to be a situation in which traffic is very value-driven, and that tends to put a little pressure on margins. So I think that we are going to be fighting the same battles for the second half of the year that we were fighting in the first half.”

Despite the pressures of the economy, Niemann pointed out that the supermarket industry has held up relatively well, compared with some other industries more dependent on discretionary spending.

“We as an industry have been very fortunate,” he said. “We have things that are truly discretionary purchases, but there are other businesses out there that only sell discretionary purchases, so we are very fortunate about what we sell and what we do.”

He said Niemann Foods, which operates about 90 locations under different banners and formats, has placed increasing emphasis on getting its value message across.

“About a year and a half ago, we felt that this was going to be a long haul, and we have become more and more promotional all the time, and we are always looking for new ways to do that.”

The key to communicating that message, he said, has been to make sure that the company's customers understand that the stores are sympathetic to their concerns and are honestly working to save them money.

“Our customers have to know that we get it,” he said. “They have to know that we understand they are suffering, and they need to understand we are doing everything we can to help them.”

He said consumers are returning to many of the money-saving habits they learned in the past, and that opens up opportunities for retailers to target them using those types of promotional vehicles.

“Customers are doing things that they had not done in the last five years in terms of trying to save money,” he said. “They are more willing to cut coupons, they are buying larger sizes, they are trading down in lots of different ways, with private label being one of them. Customers are doing just about anything to save money.”

PAT RAYBOULD, president of B&R Stores, Lincoln, Neb., said business at his 17-store chain has been “good, but challenging.”

“I am looking for more of the same, but I do think there are opportunities out there,” he said. “I think there is bound to be some more of an uptick [in the second half].”

He said he “would like to be more optimistic,” but he sees high unemployment levels continuing to pressure consumers.

“I think unemployment is definitely key,” he said, noting that it has been more severe in other areas of the country. “We are pretty fortunate here in Nebraska, which has the second-lowest unemployment of any state in the country. The agricultural base has been pretty solid.

“Things have been stable here, but there's no question customers have been more thrifty in their spending.”

MARK BATENIC, CEO of IGA USA, agreed that high unemployment is a major concern for consumer spending, although he said the IGA network of independents overall has been performing well in the economic downturn.

“There are still about 14 million people out of work, and that is still very troubling, with no immediate relief in sight and no prospects for job growth,” he said. “The consumers who are out there spending today are cautiously optimistic that the economy will improve, but they are still very cautious about their spending.”