RETAILERS OPTIMISTIC SUMMER FOOD SALES WILL HEAT UP 2004-06-07 (1)

SN STAFF

Supermarket retailers told SN their expectations are running high that they can maintain a healthy sales momentum as the Memorial Day weekend kicked off the summer selling season last week.

Meanwhile, analysts cautioned that escalating costs due to increases in gasoline prices and inflation could offset increases in food sales for the bottom line.

"Usually when wholesale gas prices go up, retail spending goes down, and though sales may look better, profits will be squeezed," said Andrew Wolf, analyst, BB&T Capital Markets, Richmond, Va.

Although Wal-Mart Stores said it sees rising gas costs hurting consumer spending, Gary Giblen, senior vice president and director of research, C L King Associates, New York, doesn't necessarily see high gas prices having that much of an impact on food sales. "Gas prices could put a crimp in consumer spending. But when you analyze gas prices, it's only a small extra part of spending. We should see some good [summer] sales for retailers."

As for rising inflation, Wolf noted that it will depend upon whether increased prices are passed on to the consumer. "The impact of inflation will depend on how much is passed on, but some manufacturers are already beginning to raise prices, and some, though not all, of that will get passed on to consumers."

Despite the increase in commodity prices, Wolf believes the environment is right for decent sales this summer. He said he expects it to be better than last summer, but "not something to write home about."

Retailers told SN that while rising milk, meat and gasoline prices are a concern, they are focused on promotional plans designed to beat the competition and make their stores a draw for shoppers. Also, they noted new products in the low-carb and healthy food segment should keep grocery sales buoyed up this summer.

Gene Clasen, president, Gene's Heartland Foods in Wichita, Kan., said he is trying to dampen the impact of increases at the pump. "We have two gas stations at our stores and we're experimenting with [using gas as a loss leader to drive traffic]. I think the higher the gas prices go the more effect it's going to have. It will start making a bigger and bigger difference as we go. People know if there's one gas station that's a penny lower than another gas station. And a penny on a full tank is 20 cents -- it's not much, but people pay attention to that."

Overall, Clasen, who operates six stores in Wichita, expects positive sales this summer. "I think we're going to do a little better this summer because the economy is a little better in our area than it was a year ago."

Wolf said it is a good move for retailers like Clasen to use gas as a loss leader to get people into their stores. However, he cautioned that shoppers may have less money left to spend in the stores after filling their tanks.

Giblen said club stores and supercenters are generally more adept and aggressive in using gas as a loss leader and the alternative formats do more cross promotions, such as lower gas prices for purchases of X amount of merchandise. "That approach argues in favor of a greater shift to those formats."

Brian James, chief operating officer for the nine-unit Wesselman's Supermarkets in Evanston, Ind., said rising gas prices could cut down on shoppers driving distances to alternative formats. "I think gas prices might affect customers driving a little further to go to the bigger stores more than affecting local stores. That could be very good for me."

James expects better summer sales this year. "I think we'll see more family functions. I can feel there's more loyalty in our people, whether it's loyalty to their local store, their family or their country as a result of world events for which we've pulled together more. I think that can be a good thing for supermarkets."

Darwin Metcalf, vice president of operations for the nine-store Western Supermarkets, Birmingham, Ala., said competitive changes within his market may actually boost Western's sales this summer.

"Birmingham has lots of competitors," Metcalf said, "but last summer we had Wal-Mart getting stronger and everyone was very aggressive. This summer, we're seeing Winn-Dixie and Bruno's both in a little trouble: Bruno's is for sale and Winn-Dixie is struggling for market share."

To pull shoppers into Western stores, Metcalf said they are going to feature food from Alabama. "We're going to put a lot more emphasis this year on Alabama farm products -- produce, cattle. We're even getting behind Alabama goat.

"As independents, we have to do things to differentiate ourselves and partnering with local farmers is a great way to do that. So we're working with local guys to promote their products and our business, and differentiate us from the chains, especially Wal-Mart," said Metcalf.

In Utah, Dick King, president of the 23-unit Associated Retail Stores in Salt Lake City, a corporate store division of Associated Food Stores, faces the opposite situation with new competition in the market. "We expect summer sales to be relatively flat, primarily because of new competition in Utah from supercenters and dollar stores, and the reaction of the chains to those stores."

To counter the heated-up competitive environment, King said his stores have a "lot of different events planned," including an annual case-lot sale in July.

King noted its Macey's banner, a warehouse, price-impact format, has been particularly successful with this promotion in the past. "With some additional training and better logistics, we think we've figured out how to do well at all our other three banners -- Dick's, Lin's and Dan's," said King.

Last year's case-lot sale was not as good as King had expected, he said, so this year's promotion is being refined. "We're cutting down on the number of items and being more aggressive on pricing. The case-lot sale last year included some items like bagged flour and sugar that we're eliminating this year in favor of more canned goods, which are easier for people to store," he noted.

"As we do a better job coordinating what all the stores need, we're making adjustments to carry what consumers want. Bottled water continues to be a very strong item, and we're making sure the stores have the assortments of low-carb products they need.

"We don't think the increase in gas prices will have much impact on consumer spending. With so many in-state recreation destinations, we think a lot of people will stay close to home this summer, and that should help our sales and enable us to come out close to even with last year," King said.

It is expected that Clarks Market, a nine-unit operation based in Basalt, Colo., will benefit from an influx of summer vacationers to the Colorado resort communities of Aspen, Telluride, Crested Butte and Vail, said Tom Clark, president.

"We expect sales to be up this summer. Our stores are in resort communities and I think there's a huge pent-up demand for vacation travel because in the last couple of years a lot of families have curtailed their vacations," he said.

While Clark is anticipating a record-breaking travel season, rising fuel prices could slow the pace of retail sales, he said. "There are some steps being taken to mitigate the impact of high fuel costs. We're seeing the reservations community here in Aspen doing free-gas promotions, offering a free tank of gas for [vacationers] staying in their properties. And once they get here, visitors use mass transportation or walk around the community. People come here to do hiking, walking and biking, so I would guess it's less of an effect."

Retailers noted that increases in the low-carb segment will help boost overall sales.

"The hottest category I see this summer is the influx of low-carb products, particularly now that the national-brand manufacturers are getting into it," said Dick London, owner of two Major Market stores in Fallbrook, Calif. "We have a full end devoted to new low-carb items, and we do quite well. On the other hand, sales off our Krispy Kreme floor fixture are down compared with last year, when the display was going like gangbusters."

London expects a better summer than last year, based on current trends and the fact he has retained about 10% of the sales he picked up during the California strike-lockout. "So with moderate growth and the sales we held onto, we should have a wonderful summer."

Clemens Family Markets, Kulpsville, Pa., is enjoying strong sales in low-carb products, according to Jack Clemens, chairman, president and CEO. "People are more health conscious, and that's driving natural foods. We're expanding our lines all the time. We have a person in charge of that, and we didn't used to. We're integrating the products on our regular grocery shelf, trying to distinguish them a little bit from the regular products. I think when the customer goes to look for a certain product, and sees all the varieties that we have, it tweaks their interest," he said.

Clemens expects it to be a "fairly good summer. The economy has helped us, and so far our sales are ahead of last year, so the indications are good coming into the summer months."

Other than the low-carb craze, Andronico's Markets, Albany, Calif., expects the organic category will continue to grow during the summer. "We've also seen an increase in Hispanic products, and many more recipes are coming out with that Hispanic flair," said Bill Andronico, president and CEO. He said that Dreyer's is coming out this summer with a new, light ice cream that tastes as rich and creamy as regular flavors, and there's a new adult beverage that's growing in popularity called "The Switch," which is 100% juice, carbonated and all natural, with no preservatives, no corn syrup, no sugar added and no mystery ingredients.

Andronico expects sales to be stronger this summer due to the ongoing economic recovery, a slight reduction in travel due to increased fuel costs and uncertainty over the situation in Iraq. "If things remain steady-state, we don't expect any additional negative impact on spending -- unless there's an additional loss or a spike in consumer confidence."

Lou Amen, chairman, chief executive officer of Super A Foods, a 12-store operation in Paramount, Calif., said he has held onto 10% to 15% of the business from the California strike. "That volume is holding up pretty well," he said, "and gas prices won't affect our business because most of our customers are Hispanic and they don't do a lot of traveling."

Jax Markets, Anaheim, Calif., caters to Hispanics. "The rise in gas prices could be a positive thing for us, because as gas prices increase, our traffic tends to go up as people make fewer trips to destination stores for their needs," said Bill MacAloney, chairman and chief executive officer. "And if the threat of terrorism increases, then people might stay closer to home, and that could help us as well."

MacAloney said Jax is benefiting from higher employment among customers in his market, with more people working, especially in the farming industry, as crop harvesting picks up in the summer.

Darioush Khaledi, chairman and CEO of the 23-store K.V. Mart Co., Carson, Calif., said he doesn't expect any changes from last summer, other than the fact that K.V. Mart held onto half the business it picked up during the California strike. "When you factor that in, sales this summer should be better than last year," said Khaledi.

He noted that last summer the retailer was successful selling gazebos -- 10-by-10-foot structures with a canvas roof that sold for $9.99. The retailer sold about 10 truckloads, and plans to carry the merchandise again this summer.

One concern this year is the increase in beef prices. "We've had some luck recently promoting beef tongue. Customers are buying it like crazy and using it in tamales and other recipes that call for ground beef, and we'll keep promoting it through the summer," Khaledi said. K.V. Mart's shopper base also is heavily Hispanic.

One factor impacting sales that is always a big concern to retailers is the weather. "I don't think gas prices will affect customer spending," said Mark Barnett, senior vice president, sales and merchandising, Bashas', Chandler, Ariz. "We're more concerned about the possible impact of drought in Arizona, as well as the possibility of forest fires. Forest fires greatly affected many communities in Arizona last summer," said Barnett, who expects Bashas' same-store sales to be up this summer.