PENNY BUSINESS

David Merrefield

Food retailing is called a penny-profit business, but for the fourth year running the industry, in the aggregate, has done a little better than that.

According to the Food Marketing Institute's "FMI 1997-98 Annual Financial Review," the industry chalked up profits of 1.22% for the 1997-98 period, a bit above the previous record set in 1995-96 of 1.20%. Here's how other recent years weighed in: 1993-94 was at 0.93%; 1994-95 at 1.14%; and 1996-97, 1.08%.

It's interesting to see, with an eye to the future, that retailers with sales of less than $100 million produced profits of 1.34%; those above that break point produced 1.18%.

This bias of profitability toward smaller companies raises an intriguing question: Why is it happening, and will such a spread be sustained in the future?

It may be that larger companies produced slightly weaker profits than did their smaller brethren because they were plowing a higher percentage of sales into capital spending, notably for technology and acquisitions.

Meanwhile, smaller companies may have simply decided that capital spending should be curtailed in the current retail market. And, of course, smaller companies are far less likely to be on the acquisition trail.

Some smaller companies may have taken a hiatus from capital spending in anticipation of being acquired. Others may have put off technology spending to get a little closer to the year 2000, at which time it makes sense to replace everything. There's more on how technology experts are dealing with the upcoming new-century problem in this issue. See Page 1.

Assuming these are some of the reasons that smaller retailers have produced higher profits than have larger ones, it's also safe to assume that the situation will reverse. Larger companies will eventually pay down debt generated by acquisitions and spending on technology will start to generate added efficiency.

The ability of the food-distribution industry to build profit through the use of technology-driven solutions is a matter of paramount importance to SN's editors. You'll see more about that next:

Technology Solutions

Careful students of SN will see something a little different this week: A new section called "Technology Solutions." It begins on Page 15. The new section integrates elements of the two technology-oriented sections that previously appeared in SN. They were "Retail Systems & Marketing" and "Supply Chain & Operations." The idea behind the former was to show how technology is used in the store, such as to inform marketing decisions. The latter was intended to show how technology and equipment could drive profitability in backstage areas such as transportation and distribution.

But the world changes: Retailers and wholesalers increasingly view decisions about product, merchandising and distribution as elements of an integrated decision-making process. SN's new Technology Solutions section will retain the news and feature coverage of both marketing and supply-chain issues, but present it in a unified package, in keeping with how the industry sees such considerations.