RETAILERS PONDER IMPACT OF FOOD STAMP LAW

JENNIFER L. BALJKO

NEW YORK -- Though several supermarket operators say it's too early to gauge the effect new food stamp rules will have on the industry, predictions among retailers and observers run the gamut of possibilities.

Some chains and industry observers interviewed by SN said the new law could be devastating for small inner-city chains where food stamps account for a substantial amount of business. Others said it will curb fraudulent activities that taint the system. Others still are on the fence waiting for final figures to come in before speculating one way or the other.

The uncertainty stems from President Clinton's recent approval of a welfare reform bill that, among other things, called for about a $27.3 billion reduction in the food stamp program within six years. Those cutbacks may trigger a ripple effect in the industry and some fear that supermarkets, particularly those in low-income areas, will feel the brunt of any shortfalls.

That's what worries Darioush Khaledi, chairman and chief executive officer of K.V. Mart, Carson, Calif.

"If they cut that program in any way, it's like cutting our throat," Khaledi said. "It will put us out of business. Half of our business is from food stamps and government aid because of the very nature of where we are." The 14-unit chain has operated in Los Angeles' poorer areas for two decades and did nearly $200 million in sales last year. Though Khaledi told SN he is still doing the math on potential financial losses, there is a possibility that the chain may have to review its expansion project or close stores to soften the blow.

"All independents are very worried about this. We're still digesting this and calculating what this really means to our business," he explained. "Independents cannot survive without the food stamps program. If we go out of business, the jobs we offer people will vanish and then they will get unemployment. One way or another the government will have to pay them.

"Food stamps are the only sure way to get food on needy people's dinner table," Khaledi added. "Any other program doesn't work because people use the money for other expenses, and not for food. Food is the basic need of all families. Bureaucracy is the thing that should be cut."

Khaledi's concern is shared by Zy Weinberg, director of the Inner City Food Access Program for the Public Voice for Food and Health Policy, a Washington-based advocacy group.

"It may cause some crisis for stores that do a high percentage of business in food stamps. There will be $27.3 billion in program reductions over the next six years and, obviously, a lot of that will come from lost sales to retailers. I don't know the figures exactly, but some stores in the inner city do 50%, 60%, 70% of their business from food stamps," Weinberg explained. "There will be a lot of people cut off from the program and their benefits will be reduced. There could be serious repercussions to these cuts."

When asked if the effect would be severe enough to push supermarket operators out of low-income areas, Weinberg said those markets still offer promising opportunities for them.

"My feeling is that there are enough underserved areas that grocers can still go in and set up a business that will be profitable," he said.

Despite the uncertainty, a few operators believe the changes could be a plus for the industry, particularly if states comply with a provision recommending the installation of electronic benefits systems. With an electronic system in place, incidents of fraud may drop and tighter controls would be implemented for food purchases, said Jack H. Brown, president, chairman and chief executive officer of Stater Bros. Markets, Colton, Calif.

"It is estimated by [the Food Marketing Institute] that about 35% of food stamps are used fraudulently. There are some unscrupulous operators that buy them for 50 cents on the dollar and then cash them in. No food product is being bought and people can buy liquor with [the money], gamble it away or do anything they want with it," Brown said. "If food stamps were all used for food purchases, it is likely that they [supermarket chains] will see a fairly new volume. [The electronic systems] are a win-win for everybody. It's win-win for the government, for the food stamp recipients and for the chains."

Barring any major amendments to the law, the food stamps reduction should have little effect on the company's bottom line, Brown added. Though some of Stater's 110 stores see more food stamp sales then others, the total percentage of those transactions is a small part of the chain's $1.7 billion annual business.

Similar sentiments were echoed by Peter Castellana Jr., president and chief executive officer of Western Beef, Ridgewood, N.Y. "I don't think it will affect stores if they enforce the use of food stamps for food. If there are better controls for buying food, there definitely will not be an impact," he said. "If there are security measures in place to make sure the [food stamps] are used for food, some of that shortfall will be picked up. That would prevent any business from getting hurt."

Castellana added that he is confident that the 19-unit chain will not feel the pinch because its no-frills, low-price format caters to people with less disposable income. Western Beef had sales of $255 million in 1995, less than half of which came from food stamps, he noted.

"A company like ours will benefit because consumers will be looking for ways to stretch their dollars," said Castellana. "It would draw them to an operator like us. They may use more of their food stamps with us because if they went to other places they would have to cut back on their spending."

Since the legislation is so new, some retailers are hesitant to comment on its effect until details about provisions and language are hammered out. Pathmark Stores, Woodbridge, N.J., is one operator taking that position.

"It's too early to tell. It depends on how the laws are written and certainly what provisions go into effect," said spokesman Stan Sorkin. "We are waiting for more specific information about the laws."