2014 Outlook: CEOs plan innovations, efficiencies

Retail CEOs interviewed by SN were mostly optimistic on their outlooks for 2014, buoyed by a focus on productivity improvements and new efforts around differentiation.

Most are not counting on meaningful gains from the nation’s slow-but-steady economic growth, however. Lower-income consumers are being hit by cutbacks in benefits like the Supplemental Nutrition Assistance Program, as well as by new costs related to the Affordable Care Act, retailers said.

“I think with all the uncertainty around the economy and healthcare, people are just not in a spending mood,” said Neal Berube, president and CEO of Associated Food Stores, Salt Lake City.

Berube is among several CEOs who said they are seeking to offset pressures from the sluggish economy and from competition by focusing on internal improvements, and innovations in their businesses, such as new retail formats.

Price Chopper Supermarkets, Schenectady, N.Y., for example, is planning to debut a new banner in February with a strong focus on foodservice.

Others, such as Weis Markets, Sunbury, Pa., are doubling down on the price and value programs they offer in an effort to retain those customers that remain under pressure.

Investments at Weis

Jonathan Weis, interim CEO of Weis Markets, said he was optimistic that sales and profits will improve in 2014 despite the effects of a slow-growing economy and reduction in SNAP benefits. Key to Weis’ success will be continued improvements in productivity, value and operations.

“We’re optimistic, but we understand the challenges of operating in a slow growth economy.” — JONATHAN WEIS, Weis Markets

“We’re optimistic, but we understand the challenges of operating in a slow growth economy impacted by sustained high unemployment and slow job growth, which has resulted in a flat sales environment,” Weis said. “We’ve managed by improving productivity and efficiencies in our stores and supply chain, which has resulted in improved freshness and better in-stock positions. In 2014, we’re going to increase our efforts to drive sales through a number of sustained price and value programs.

“We’re mindful of the competition and certainly don’t minimize the impact of economic issues such as the recent 5.4% cut in SNAP benefits, but we strongly believe our success depends on our ability to execute at store, supply chain and support levels,” he added. “As part of this process, we will continue to make substantial investments in our store base — we’ve completed more than 100 projects over the past four years and have another big round of projects planned in 2014. This has allowed us to upgrade our store base and expand our market area in Baltimore, New Jersey and the Delaware Valley near Philadelphia.”

Weis said the company also plans to invest in a warehouse expansion and in efforts to provide locally relevant products in every store and expand its loyalty rewards program.

Read more: Weis ranks No. 46 in SN's 2014 Top 75

“In addition to our [store renovation] investments, we’re expanding our distribution center — which will make us more efficient and improve variety,” he said. “In recent years, we’ve worked hard to build on our advantages as a locally relevant retailer — we expect to make more progress in this area in 2014. As part of this process, we will continue to tailor our variety on a store-by-store basis. We also continue to build on our successes in loyalty marketing. A year ago, we rolled out our Weis Preferred Shopper Gold Card, which rewards our best customers, and we have some interesting programs and initiatives on tap in 2014.”

Competitive pressures at Fox Bros.

Pat Fox, owner of Fox Bros. Piggly Wiggly, Hartland, Wis., said he expects sales and profits to slow a bit in 2014 as additional competitors crowd the greater Milwaukee market.

“We had a solid year, we had same-store sales growth — which I’m very appreciative of — and profit growth too. I think [2014] is going to be a little tougher as we will have a direct competitor opening against one of our existing markets, and we expect some impact,” he said.

Fox said sales growth in 2013 exceeded inflation as stores benefited from service initiatives and a focus on specialty items like store-made smoked meats and sausages. But new stores opening or planned from Walmart, Sendik’s, Woodman’s, Costco and Meijer are outpacing market growth overall. Fox said he expects that pattern will continue through 2015, and eventually result in some competitors exiting the market.

“I feel like we’re positioned pretty solidly, but there’s competition,” he said. “The pie only gets so big; it just gets sliced more. Right now, there’s way too much footage chasing way too few dollars. I think that’s going to be a challenge in 2014 and even more so in 2015 when Meijer starts putting in stores. But I also believe there’s going to be a fallout of conventional grocery stores, and we may end up benefiting from that.”

Fox said he expects to continue to emphasize service and exclusive products in 2014 — including a smoked beef stick that would become the company’s first shelf-stable private label meat product — and also expanding its fresh sandwich program in association with Boar’s Head. “We have to continue to look for ways to expand in that area because that’s our best opportunity to differentiate,” he said.

Focus on basics at Harps

Roger Collins, chairman and CEO of Harps Foods Stores, Springdale, Ark., said he expects Harps could improve upon a modest same-store sales gain in 2013, citing a culture aligned to get the basics right.

“As a company, we have a lot more focused on driving same-store sales, from our department managers to our store managers to our district managers,” Collins said. “We are really focusing on ways to increase sales, whether that’s merchandising, making sure we’re in stock and making sure we’ve got the right products. We’re really working hard to give ourselves a better opportunity to increase sales.”

Harps Food Stores in SN's Top 50 Small Chains and Independents

Collins said he anticipates higher same-store sales in 2014 while “holding the line” on margins. Harps built five stores in 2013 and acquired four more, and will continue to look for new growth opportunities, Collins added. That’s important as Collins anticipates additional competition for Harps stores beginning later this year from its Northwest Arkansas neighbor, Walmart. That company is expected to boost its concentration of Neighborhood Market stores in Harps’ trade area.

“We’re the most saturated state with Walmarts already but in the next three years, we’re going to get more than we’ve had in the last three years,” he said. “Our level of competition form Walmart is increasing.”

New approach at Price Chopper

Jerry Golub, CEO of Price Chopper Supermarkets, said he believes that customer-focused initiatives, a new approach to store formats and design, and price inflation should help to raise sales this year, although profits will remain under pressure as competitors fight for a flat consumer base and feel the effects of reductions in food-stamp benefits.

“This store will showcase numerous innovations designed to create a completely new customer experience.” — JERRY GOLUB, Price Chopper

“We are currently working on the implementation of a number of customer-facing initiatives that should take hold over the next 12 months,” Golub said. “As a result of those initiatives and the opening of a number of new stores, we expect both total and ID store sales to show solid growth next year. Margin rates should be flat to slightly down, as retailers in the Northeast continue to fight for unit share in a market that has been relatively flat. “

Golub said SNAP reductions that went into effect last year — and the possibility of additional cuts to federal aid programs — could have significant implications for food retailers. “It certainly seems as though there is a growing gap between social classes,” he said.

Read more: Price Chopper is No. 41 in SN's 2014 Top 75

Price Chopper plans to launch a new store format, Market Bistro, in February. “Including a focus on high-quality, made-to-order prepared foods, this store will showcase numerous innovations designed to create a completely new customer experience,” he said. “In addition, we will begin to roll out our next generation store design for our base chain. We are extremely excited about both of these initiatives, which will have a significant impact on the long-term direction of our company.”

New initiatives at AFS

Berube of AFS said he hopes to drive growth at the cooperative through some new programs, including its new role with Topco’s pharmacy offerings and its plans to experiment with new, alternative formats.

“We are looking at other areas, maybe adjacencies to our current business, and look to grow our business in that way,” he told SN. “We’re looking at actually developing, supplying and maybe even licensing alternative formats.”

“We are looking at actually developing, supplying and maybe even licensing alternative formats.” — NEAL BERUBE, Associated Food Stores

Berube said these new formats, which he said would be “innovative new types of approaches” to the business, are still early in the developmental stages.

He said AFS expects wholesale sales to be relatively flat in the coming year on a comparable basis, with the potential for some slight increases at the retail level.

He said he does expect volume to increase from some new programs the company has entered, which include an agreement with Topco and McKesson for AFS to distribute pharmacy products to its members.

Berube said that with warehouse grocery sales expected to be flat, however, the company “is going to have to figure out how to become more efficient and effective with our distribution process to our retailers.

“Obviously if we’re going to increase profits and we’re projecting flat sales, we’re going to have to figure out how to do what we’re doing better, and look at other sources of revenues, and other formats, like foodservice.”

Berube said that despite indications that the economy is improving, consumers are still pressured, and their spending is weighed down by uncertainty about the future and about things like healthcare costs and unemployment benefits.

Read more: AFS ranks No. 53 in SN's 2014 Top 75

“They are talking about decreasing unemployment percentages, but what we find is that people who were making $25 an hour before are now making $18.50 or $20,” he said. “There may be more people employed, but they don’t have any more money to spend.”

He also cited cutbacks in SNAP benefits impacting customers at the co-op’s stores serving high populations of low-income consumers.

Berube said he thinks consumers could be unpleasantly surprised by new healthcare costs they will incur for payments and deductibles under the Affordable Care Act.

“I think there’s uncertainty now, but when they really see the cost of health insurance — if people have to choose to spend money on healthcare or food, that’s a tough decision.”

Remodels at K.V. Mart

Darioush Khaledi, chairman and CEO, K.V. Mart Co., Anaheim, Calif., said he is optimistic about business in the coming year in part because of investments the company is making in its stores.

The company is remodeling half of its locations in 2014, in many cases expanding the fresh departments and service offerings, at the expense of center store categories. The company operates stores in Southern California under the Buy Low and Top Valu Mart banners.

“In stores where we have had remodels, we have had anywhere from 12% to 18% sales increases,” Khaledi told SN. “That’s where most of our growth will come from — remodeled stores.

“We are enlarging, taking away from the center of the store, and adding to the perimeter and service departments,” he said. When I started in the business 35 years ago, center store was doing 70% of the business. Now it is less than 35%.”

The company recently opened a new 80,000-square-foot warehouse and moved into a new headquarters in Anaheim.

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Khaledi noted that K.V. Mart faces a “very saturated market” in Southern California, where competition from big-box stores like Costco and Walmart continues to increase.

“They keep chipping away at the market share,” he said.

However, he said he feels that niche operators like K.V. Mart, as well as others that target specific consumer groups will continue to thrive in the region.

“The future of independents and niche marketers in Southern California is very bright,” he said. “And operators like Whole Foods and Trader Joe’s have a very bright future here.”

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K.V. Mart recently sold two of its Long Beach, Calif.-area locations to another Hispanic-focused operator, Northgate Gonzales, but has no plans to divest any more sites, Khaledi said.

“For us, we are niche marketers, and I don’t think Walmart and Costco can come here and do as good a job as we do serving the local community — that’s our edge over the big guys.”

He said one competitor he is particularly concerned about in the region is Fresh & Easy, which he said could make a resurgence under the direction of Ron Burkle, whose investment firm Yucaipa acquired the banner last year, and Jim Keyes, the former 7-Eleven and Blockbuster Video CEO who is running the chain now.

“One thing I have always thought is there is a gap in the market between 7-Eleven and Trader Joe’s, which could be filled perfectly by those 150 Fresh & Easy locations,” Khaledi said. “If he is smart, he would stock those stores like a 7-Eleven with perishables. I think that would be a big factor, and could be new competition.”

Rowe’s in ‘growth mode’

Rob Rowe, president of Rowe’s IGA, Jacksonville, Fla., said he was hopeful his six-store chain could continue to improve sales in 2014 while maintaining profits and remaining in “growth mode.”

The company opened new stores in September and December, and Rowe said he had his eye on several potential new sites this year. Size isn’t necessarily a requirement at Rowe’s: The company operates stores as large as 60,000 square feet, while the most recent store in Baldwin, Fla., measures just 8,500 square feet. Service, Rowe said, is what matters most.

“I think we can continue to grow our market share and maintain our margins,” he said. “The key for us is to get smarter at what we do every day, and take good care of our customers.”

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