A ROSY SCENARIO

David Merrefield

A couple of SN editors had a chance last month to attend a conference in New York that attracted a number of the very topmost executives in food retailing.

At the two-day conference, sponsored by Wall Street firm Lehman Bros., executives of companies such as Kroger Co., Supervalu, Food Lion, Stop & Shop, American Stores, Hannaford Bros., Giant Food and Safeway gave their ideas about what the future might hold for their companies. Many of those who made presentations at the conference expressed little more than cautious optimism about future sales improvements, although a few were more bullish. A report on the conference, compiled by the editors, appeared as a front-page article in SN's Feb. 21 issue. Since the conference has been an annual event for a while now, I thought I'd chat with Edward F. Comeau, the securities analyst who spearheaded the conference for Lehman Bros., to find out if he knew what the executives' privately held opinions about future business directions might be -- and to find out if opinions differed from the publicly expressed outlook.

As might be suspected, Ed did have an idea or two along those lines, so here are some of his thoughts:

"Three years ago, executives of the companies who presented were saying they thought their business was almost completely recession-resistant and that they were nearly invulnerable to the macro factors in the economy, such as its sharp decline. "What no one knew at the time was that we were heading into the first deflationary recession. Food retailing wasn't so resistant to that kind of recession, it turned out. "So by the time of last year's meeting, there was nearly a death march under way, with everyone predicting nothing but downside moves for their companies.

"This year, economic conditions are much improved and many executives see an improved outlook for their companies, too. But they are reluctant to say that because they remember the past and maybe realize they aren't so good at predicting the future." Asked what might be signaling the executives that the outlook is rosier, Ed said there are a couple of strong reasons: · Deflation is gone, but food-price inflation remains low. But, at the same time, it must be acknowledged that a little upside price pressure wouldn't hurt and, because of increasing commodity prices, such pressure may build as time goes on. · The industry has been enormously successful in holding the line on operating costs, more successful than is generally recognized. Six of the nation's 10 largest retailers have managed to hold the line on expenses, or have actually reduced them. This is no small achievement. Indeed, the present moment is the first time in a decade or more that there has been a significant downward trend in operating costs.

The industry's general success in the cost-reduction effort means, of course, that profits stand a chance to increase even if top lines do no more than remain constant.

I also asked Ed what factor might cloud the rosy scenario some see. In a word, he said, the cloud on the horizon is supercenters. He pointed out that if Wal-Mart Stores and Kmart roll out supercenters at the rate predicted, some 41 million square feet of additional grocery-selling space will be added nationwide by 1998. That, by the way, is not much less than the combination of all the space Kroger now operates.

I happen to think predictions concerning the pace of supercenter rollouts are quite a bit overdrawn, but the possible magnitude of the thing is disquieting, isn't it?