CAPITAL EXPENDITURES PICK UP IN THE WAKE OF BETTER SALES

David Merrefield

There's a bit of good news for the food distribution industry when it comes to capital expenditures - spending is expected to be on the increase for this year because of the better sales, profits and cash flows experienced by the industry last year.

You'll find a multi-page report about capital spending starting on Page 13 of this week's SN that delves into why spending is increasing, and which companies are stepping up in a big way. The report was written by SN's Retail and Financial section associate editor Jon Springer. Let's preview that information presentation.

To start, it's important to note that much of the expected spending increase for this year will be plowed into store remodels, not into entirely new stores. Indeed, findings of a survey issued lately by the Food Marketing Institute show that in 2003, 4.9% of store locations were being renovated, 5.7% in 2004 and 9% in 2005. So, it seems, that trend is likely to pick up more momentum this year. It's also the case that in most instances, companies close more locations than they replace with new stores.

Focusing activity on renovating instead of new construction implies something of a defensive tinge to the spending activity, not just because it's cheaper to remodel than to build from the ground up, but because it's recognition that facilities are aging and need to be redirected for competitive reasons. The latter reason may really be what the remodeling is all about, namely that existing facilities need to be repositioned in the marketplace before much construction can be justified.

Perhaps the best illustration of that is Safeway's rebranding effort aimed at rolling out "lifestyle" stores that move the retailer upscale with improved fresh offerings. This year, Safeway intends to spend about $1.6 billion in revamping 280 stores to the new format. Up to 25 new stores are to be added to the mix this year too. That comes atop 291 lifestyle renovations accomplished last year, and 21 new stores.

Another company spending heavily on a new format is Delhaize, which is more aggressively sweeping its aged Kash n' Karry stores aside, converting them to Sweetbay.

Kroger, meanwhile, intends to spend even more this year than what Safeway plans, or about $1.8 billion, up from $1.3 billion last year. Kroger, as might be expected, is moving forward cautiously with up to 175 remodeling projects planned, together with up to 40 new locations. Kroger has formats that are alternatives to its conventional stores, such as Marketplace, but the shift to that format is taking quite a bit of time, and will continue to do so. Last year, Kroger didn't fulfill the high end of its expected remodeling efforts, which may prove to be the situation for this year too.

As cited earlier, the industry focus on remodeling instead of new construction is a defensive move, but it may also be a prudent move. As is pointed out in this week's news feature, a few companies have experienced huge downsides in connection with spending on new stores that weren't just what the market demanded. One example is the now-bankrupt Winn-Dixie Stores, long identified as a purveyor to the blue-collar market, which muddied its image with a new-store-driven move upscale.