Supermarket Rebounds in Price-Driven Market

Buoyed by improving net profits, some 85% of financial executives in the supermarket industry expect their companies to perform well in the 2005-2006 fiscal year, according to a study by the Food Marketing Institute (FMI). Despite the optimism, an increasing number of these executives are concerned that rising costs, especially spikes in energy prices, could alter the way consumers shop.
FMI’s study, released in December, noted that total industry net profits average averaged 1.16%, topping the 1% mark for the first time in three years. The Top 25 profit leaders of 140 companies surveyed — with 19,558 stores and $380 billion in annual revenue — sparked the rebound, with net earnings of 3.68%, or more than three times the industry average.
It’s even more impressive considering how Wal-Mart and other low-cost retailers have wreaked havoc on the industry with their everyday low prices. FMI’s study shows that 37% of financial executives list competition as their biggest concern, followed by healthcare costs (17%), cost containment (11%) and credit card fees (8%).
“Companies of all sizes are performing extraordinarily well during what many regard as the most competitive era in the industry’s history,” says Tim Hammonds, FMI’s president and CEO. “Many companies are opening smaller stores to target people at specific income levels, and shoppers are seeking ethnic foods, gourmet delicacies and organic and nutritious products to promote wellness.”
Certainly, the landscape continues to change. Struggling Jacksonville, Fla.-based Winn-Dixie, which has been dramatically impacted by competition from Wal-Mart, filed for Chapter 11 protection and has been forced to sell many of its assets throughout the South.
Acquisitions also are changing the shape of the retail channel.
For instance, Sheboygan, Wis.-based Fresh Brands Inc. agreed to be purchased by Certified Grocers Midwest Inc. of Chicago in a transaction valued at about $100 million, which includes assumed debt and certain other liabilities. The goal is to lower its costs so it can compete more effectively in the marketplace.
“We believe that this merger provides an opportunity for us to further lower our product costs, realize operating synergies and efficiencies and deliver an even more effective value proposition to our franchisees and retail customers, while also providing us with greater financial support and flexibility to grow our business in the future,” said Louis Stinebaugh, Fresh Brands’ president and chief operating officer.
Even before the post-hurricane fuel spikes, retailers reported changes in consumer shopping, especially among those with less disposable income, when they completed FMI’s questionnaire in mid-2005. More than 27% are seeing more bargain shopping; 21.5% are reporting fewer trips to the store; and 15.9% are finding that consumers are purchasing more items per trip.
Perhaps the only bad news for the mega-stores is that consumers are seemingly less willing to drive longer distances to supercenters that typically attract their customers from larger geographic areas, according to some executives. This trend could accelerate if fuel costs remain high or spike again in 2006, according to the report.
For more information, contact FMI at SF&WB