SUMMER SALES OFF TO A SIZZLING SEASONAL START

MARK HAMSTRA / Additional reporting: David Ghitelman / Christina Veiders / Elliot Zwiebach

Despite the clouds of intensifying competition and the chills of a jittery stock market, supermarket operators have a sunny forecast for this summer's retail food sales.

The sputtering economy and a lingering aversion to air travel could keep many consumers close to home this summer, as they forego expensive vacations until a more positive economic picture emerges. Supermarket companies hope this translates into more spending on grocery supplies for at-home eating and entertaining.

Analysts, however, caution that a looming pullback in consumer spending could hurt supermarkets, and a continuing shift toward value-priced rival formats will put pressure on traditional food retailers. In addition, emerging price deflation could start to crimp top-line growth.

Early indications bode well for the industry's prospects in the coming months, however, as operators throughout the country reported busy sales around the Memorial Day holiday. Retailers said they anticipated that next week's Independence Day festivities would continue to propel their strong sales trends as they head into the second half of the year.

"I do think the Fourth of July -- the way the week falls -- has the potential to be a very good week for retailers across the country with two weekends people will be celebrating, and the potential for a very long weekend with the Fourth on Thursday and the Fifth on Friday," said Steve Smith, president and chief operating officer, Food City, Abingdon, Va.

Smith said K-VA-T plans to host cookouts and offer "typical summer promotions: cookout, general merchandise, things like that."

Smith added that he felt "positive" about this summer's sales prospects, given that the economy is picking up in his region of the country and that some of his competitors have been having financial difficulties. The season got off to a strong start, he said, with a good May overall and a busy, rain-free Memorial Day weekend.

The chain took advantage of warm May weather with tent sales of floral items, and also conducted a successful promotion with a local strawberry farm in about 25 stores, generating about $150,000 in sales.

Jack Brown, chairman, president and chief executive officer, Stater Bros. Markets, Colton, Calif., said his company also had a strong Memorial Day, and he anticipates a good Fourth of July as well.

Stater Bros. will build its Independence Day promotions around the theme of celebrating the holiday at home, he said, "because of the soft economy, because a lot of people are still reluctant to travel, and because the backyard is still a great place to vacation -- and because it helps us."

For Memorial Day, Stater Bros. ran ads focusing on the chain's everyday low pricing and featuring national brands. The company will emphasize its traditional Fourth offerings of hot dogs, ribs and soft drinks, he said.

At Associated Wholesalers, York, Pa., Charles Yahn, vice president, said sales of big-ticket items sold briskly this spring.

"I think consumers are gaining more confidence," he said, "and they are definitely staying home for the holidays. Also, they are cooking more."

Rosemary Hansen, chief financial officer, Hansen's IGA, Bangor, Wis., said the summer started off well.

"We were almost as busy the week after Memorial Day as we were the week of," she said. "We're kind of baffled by it."

She estimated sales were up 10% to 15% over year-ago levels.

"I think it will be a good summer," she said, although she said the lower price of gasoline this year compared with last year might make sales comparisons difficult. All five of her company's stores sell gas.

At K.V. Mart Co. -- the Carson, Calif.-based operator of Top Valu Markets and Valu Plus Warehouse -- Phil Hawkins, executive vice president and CFO, said he expected his Latino customer base would take fewer trips to Mexico this year, "and that will help our sales."

He said the company plans to focus on perishables in its Fourth of July ads.

Frank Badillo, senior retail economist, Retail Forward, Columbus, Ohio, agreed that consumers would be likely not to splurge on expensive vacations this summer, although he cautioned that an impending slowdown in consumer spending could hurt supermarkets as well.

"We're definitely not going to see the accelerated rate of spending that we've seen before, and now we're seeing some of the lagging pressure from unemployment that's been in the pipeline that's hitting home for a lot of people," he said.

Many of the forces that have driven the economy since late last year -- a drop in gasoline prices, tax rebates, mortgage refinancing because of lower interest rates -- are losing some of their impact in terms of freeing up household budgets, he added.

"I think a lot of those one-time benefits are dissipating as we enter the summer," he said. "I think that's going to mean more of a pullback for some categories, such as spending on the home, but to a lesser extent that may also affect supermarkets as well."

Another factor that could constrain supermarket sales growth this summer is price deflation, he said.

"If you look back at the last year, a lot of results have been sort of propped up by food inflation, and it's starting to die down as we go into the summer" he said. "That may dampen the dollar growth."

However, food prices will be subject to fluctuations in the weather and in gasoline prices, he said.

The fact that the dollar is weakening in the global marketplace also could affect food prices, he said.

"It may make food prices loom cheap overseas, and you may get more demand for them overseas, which would then drive food prices higher," Badillo said.

Lisa Cartwright, director, Salomon Smith Barney, New York, said she expected consumers to continue to seek out value in the food aisles, pointing to the 12.9% same-store sales at Wal-Mart supercenters during the first week of June. The Bentonville, Ark.-based retail giant has since predicted same-store sales for all of June to be up close to 7% over year-ago results, with demand for basic food commodities apparently benefiting during the past few months from growth in customer traffic.

Retailers also pointed to other factors that could have a negative influence on sales, from wildfires in the West to another terrorist attack.

"Right now, the economy is perking along at a slow pace, and as long as it does that, we are OK," said Yahn of Associated Wholesalers.