Supermarket operators weathered the downturn in consumer spending during the recent holiday season, according to analysts interviewed last week by SN.
“If the economic trends continue to suggest that consumer spending is going to slow down, it will catch up to the supermarkets eventually, but so far it hasn't,” said Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va. “They have been the least affected [retail sector] so far, and their holiday sales, I think, will reflect that, certainly on the food side.”
Although he said the volume of unit sales might be slowing slightly at supermarkets, inflation and other factors have kept dollar sales robust.
“It's because of inflation and because the consumer is still healthy enough that, for the most part, they can still afford to have a full shopping cart and haven't adjusted much in their food basket,” Wolf said.
Supermarket executives told SN they are cautiously optimistic for ongoing sales growth in 2008 (see story on this page).
Holiday sales for the 2007 season at general-merchandise retailers were the slowest in several years — weaker than many analysts had expected — preliminary reports revealed. According to SpendingPulse, which uses data from MasterCard Advisors, retailers' sales rose just 2.4%, excluding gasoline, during the period between Thanksgiving and New Year's. Including gasoline, sales were up 3.6% over year-ago results, the weakest performance in four years. SpendingPulse had previously projected holiday sales to rise 3.5% to 4%.
Minneapolis-based Target Corp. stunned investors on Dec. 24 with a warning that its same-store sales for the peak shopping season might have actually declined from year-ago levels. The company said its same-store sales for the five-week period ending Jan. 5 could be in the range of -1% to +1%, after it had previously projected same-store sales gains for the period of between 3% and 5%.
Drug retailers also experienced weak sales during the end of 2007, in part because of the light flu season, Wolf explained. That trend can be expected to affect supermarket results as well, but to a much lesser degree than drug stores.
“The supermarkets are probably turning out to be the most defensive retail group in this down-cycle, which they haven't been in the two previous down-cycles I've been involved with,” he said.
Perry Caicco, an analyst with CIBC World Markets, Toronto, said the ongoing weakness in consumer spending should have minimal impact on most supermarket operators.
“I'm not a believer that a weak consumer should impact supermarkets in any way, shape or form, if they are well positioned,” he said. “They did not used to be, but in general they are now.”
Even though Wal-Mart Stores was aggressive in promoting low prices for the holidays, Caicco said he thinks supermarkets were able to adjust.
“I think it was very manageable,” he said. “In many ways, they used their promotional strategies to manage prices up instead of down because of inflation.”
Caicco also said he believes supermarkets can continue to weather anticipated inflationary pressures. Last week, a Wall Street Journal report said consumers have begun trading down in their grocery shopping, switching to less expensive products and in some cases to alternative formats where they can find better deals.
“Obviously, there's going to be a little more inflation, but I think supermarkets can handle that,” Caicco said.
Supermarket operators have told SN that higher prices at restaurants and for gasoline may also be driving a trend toward more at-home dining, helping offset some declines in volume for certain items that have seen the highest inflation, such as dairy products and meats.
“Unless the economy somehow reverses and heads up, and if food inflation continues to be a little higher than normal, you will probably see [sales unit] volume slippage continue,” Wolf said.
