Why supermarket chains are poised to do well in a
https://www.portfolio.com/news-markets/top-5/2008/02/22/Supermarkets-Gird-for-Recession
Cleanup in Aisle 8
Why supermarket chains are poised to do well in a recession.
Grocery giant
Safewayreported what appeared to be some pretty good numbers the other day:sales that exceeded analysts' estimates by $400 million and a strongearnings forecast for the year.
But Safeway's shares
fell nearly 10 percent on the news, as investors focused on slightly lower same-store sales.
Investors have been punishing the big supermarket chains. Share pricesof the Big Three—Kroger, Safeway, and Supervalu—have all slumped inrecent months.
At first glance, that would seem to makesense. The food and beverage industry is struggling with climbingcommodity prices at the same time that consumer spending is slowing.
Wal-Mart, the retailing behemoth, has made successful inroads into the grocery business.
Yet some argue that the selloff has been grossly overdone.
"U.S. grocers have been unfairly punished as investors have doubtedtheir ability to manage food-cost inflation, a changing consumer, and amore promotional pricing strategy at Wal-Mart," said Perry Caicco, ananalyst with CIBC World Markets, in a note last fall.
Indeedthe latest results from Safeway, which operates 1,743 supermarkets inthe United States and Canada, underscore why grocers are betterpositioned than most to weather the recession.
"We've seena very modest impact on identical-store sales in the first seven weeksof the year; nothing that gets in the way of producing earnings,"
Steve Burd,the company's chief executive, said on a conference call. "The worstthing that happens to a good supermarket operating during a recessionis that earnings slow. They never go negative. Safeway doesn't expectany slump."
High commodity prices may squeeze grocers in theshort term, but unlike casual dining and fast-food chains, they havethe ability to pass on the price increases to the consumer and retainhealthy margins.
"Although the grocers have raised prices tocatch up with inflation, it has yet to deter the consumer from making atrip to the local grocery store," says independent credit researchCreditSights, which raised its recommendation on the grocery sector to"overweight" from "marketweight" earlier this week.
Those higher prices, meanwhile, raise revenue overall for the supermarkets.
Most of grocers' gains come about as
consumers, worried about the economy, exhibit "trading down" behavior.
As a result, spending on food at home is outpacing food away from homefor the first time in six years, according to the U.S. AgricultureDepartment. Big grocers are taking advantage of that trend by investingin prepared-food offerings.
Safeway has been moving towardprepared offerings since 2000, when the chain first introduced frozensoups, and is currently in the midst of a major experiment with sellingprepared entrees.
At the end of 2007, Safeway beganpiloting new prepared meals in 10 stores, and Burd says consumerinterest "has beat internal expectations by a factor of three."
While no details have been provided, Deborah Weinswig, an analyst withCitigroup, says that Safeway plans to further invest in preparedofferings by opening small-format stores based around thecategory—imitating a strategy recently tried by the British supermarketchain Tesco on the West Coast with great successes.
Burdnoted that some of the "softness" observed in the first seven weeks of2008 involved trading down in highly discretionary categories like theultra-premium wine market, and general growth in the sale ofprivate-label products over name brands.
Safeway haspositioned itself to capture its portion of that high-margin businessby expanding its own offering of private-label products in its ownstore and elsewhere. New brands include O Organics (organic-food line),Eating Right (health-food line), Basic Red (paper-product line), andPriority (dog-food line).
Aside from the general economic forces shaping the retail industry, there is still the competitive threat from
Wal-Mart.
But rather than compete with Wal-Mart on price, Safeway has chosen todiverge from the value categories with its own unique branding.
Over the past four years, Safeway has rapidly remodeled stores in whatthey call a "lifestyle" format, a renovation that focuses attention onfresh produce and creates a more upmarket, fresh, and modern feel.
"Safeway's focus on a differentiated shopping experience has allowed itto retain and gain market share in the increasingly competitivefood-retail industry," says Deborah Weinswig.
This morepremium feel (if not pricing), combined with Safeway's O Organics, alsopositions the grocer to catch consumers trading down from Whole Foods,which itself is hoping to benefit from brisk prepared-food sales.
"Regardless of what happens in 2008, there's nothing that shakes ourconfidence of being able to deliver our guidance," Burd says.