With the economy faltering and sales at most retailers declining from year-ago levels, many firms are trimming growth projections, cutting back on new store development and closing down locations.
The major pressures on consumers — declining housing values, stagnating wages and employment and inflation in commodities prices — don't appear to be going anywhere any time soon. Most economists expect these troubles to persist well into 2009, if not further. True, gas prices have dropped from their precipitous heights in the past month. (The price of oil has dropped from a peak of $147 per barrel down to about $120.) Gas, however, still costs more than $4 a gallon in much of the country, higher than the level at which Americans have become accustomed.
But for at least one sector, the dark days of the summer of 2008 have been light indeed. Grocery stores — benefiting from high food prices — are thriving and some of the largest companies in the sector are poised to open more new stores than in the past two years. Many more are embarking on ambitious remodeling programs. Banc of America Securities analyst Christy McElroy says in a recent note to investors that “in-fill suburban supermarket-anchored strip centers are positioned well, as grocers have been able to pass through higher food prices.”
Unlike most food and beverage companies, which have suffered as consumers have altered spending patterns given the rising price of food, grocery stores have been able to reap benefits of this inflation. When commodity prices rise, food manufacturers pay more to produce goods. To recoup those costs, food makers pass along the price increases in the form of higher retail prices. The higher prices then show up on grocery stores shelves. The grocers, themselves, though don't bear any of the costs. They simply pass them along. And as long as consumers keep buying food, the higher prices lead to higher revenue and profit at supermarket companies, providing them with more cash to spend on expansion.
Furthermore, while some consumers are trading down and buying more of their food at dollar stores and discounters, supermarkets are gaining business at the upper end — in the prepared foods segment — as Americans eat out less.
Of course, the picture isn't uniformly rosy for supermarkets across the country. In markets where the run-up in housing prices was particularly steep or where too many new homes were built, there is more risk. Many California markets were rife with risky mortgage activity — such as excessive subprime lending and too many adjustable rate mortgages — could still face a painful readjustment as defaults, delinquencies and foreclosures work their way through the system. Florida, parts of the Northeast, Minneapolis and Baltimore also showed pockets of high-risk mortgage activity, according to Phoenix-based data provider Synergos Technologies.
Consumers struggling with mortgage payments may be more inclined to visit a local Wal-Mart Supercenter or discount store rather than a more upscale supermarket. Smart retailers, say analysts, are taking this to heart and focusing on opening new stores in areas that correspond to the needs of their customer base. “Retailers are slowing expansion plans, but continue to open new stores in good locations with the appropriate tenant mix to complement their brands,” according to McElroy.
Opening acts
Most grocers have not disclosed the markets where they plan to open new stores. But their expansion plans for the year show many are spending at or above what they did a year ago to open new stores and remodel existing ones.
Cincinnati-based Kroger Co., which operates 2,474 stores, spent $2.1 billion on capital expenditures in 2007 and opened 23 new stores. The company has not said how many stores it expects to open in 2008, but it did say it will likely spend between $2.0 billion and $2.2 billion for capital investments and will grow its total square footage by 2.0 percent to 2.5 percent before acquisitions. In 2007, the company posted $70.2 billion in sales.
At Pleasanton, Calif.-based Safeway Inc., meanwhile, the company said in its first-quarter earnings report that it expects to spend $1.70 billion to $1.75 billion on capital expenditures in 2008 and will open 20 to 25 new stores in its “lifestyle” format, which features fresh and prepared foods and more upscale products. Last year, the company spent about $1.77 billion on capital expenditures and opened 13 new stores. Beyond opening new locations, Safeway is focused on remodeling its existing store base as lifestyle stores. The company plans to remodel 250 to 255 stores this year, on top of the 253 lifestyle remodels it completed in 2007. Currently, the company operates 1,740 stores and had annual sales of $42.3 billion in 2007.
Both Eden Prairie, Minn.-based Supervalu Inc. and Winn-Dixie Stores Inc., which is headquartered in Jacksonville, Fla., are in the middle of remodeling programs as well and most of their capital expenditures are dedicated to those initiatives.
Supervalu, which operates 2,475 supermarkets and has annual sales of about $44 billion, is still digesting locations it inherited from Albertsons Inc. The company acquired over 1,100 stores as part of a consortium of companies that purchased Albertsons for $17.4 billion in early 2006. A Supervalu spokesperson said many of the former Albertsons locations are “not up to standard.” The company is attempting to reach its goal of remodeling 80 percent of its now-expanded store base in seven years. Overall, Supervalu will spend $1.3 billion in its retail capital program in fiscal 2009, which began March 1. In fiscal 2008, the company remodeled 141 stores. It expects to remodel 165 in fiscal 2009.
Winn-Dixie, which operates 520 grocery stores predominantly in the Southeast, also expects to spend the majority of its capital expenditures on remodeling its stores in 2008. The company remodeled 20 stores in 2007 and plans to remodel 75 stores this year and each year in the future, according to its third-quarter earnings report. In a quarterly conference call with analysts and investors in March, CEO Peter Lynch said the remodeling program is “progressing on plan.”
“We're moving efficiently to update, revamp and reenergize the conditions of our stores across the entire fleet,” Lynch said. “As we move forward with the program, we'll have an increasingly strong store base from which to compete, leverage the strength of our brand and increase sales per square foot over the long term.”
Even London-based Tesco PLC's Fresh & Easy Neighborhood Market chain is getting back into the store-opening game. Tesco, which premiered the Fresh & Easy concept in the United States last year with 61 stores in California and the Southwest, stopped opening stores for 12 weeks starting in late March “to allow the business we've created to settle down a bit,” according to a statement from Fresh & Easy chief marketing officer Simon Uwins. However, at the beginning of July the company resumed opening stores with a new location in Manhattan Beach, Calif.
Opening new stores with a smaller footprint — Fresh & Easy stores come in at roughly 10,000 square feet rather than the typical 40,000-square-foot supermarket — can be a challenge and the break in store openings made some analysts question whether the chain could succeed, particularly given the difficult environment in the initial markets. “There's some experimentation with the smaller store,” says Elliott Olsen, chairman of Minneapolis market research company Dakota Worldwide Corp. But he adds, “it's something that's very difficult to chain.” Consumers, he says, are typically used to more variety. Still Tesco says its U.S. chain is performing well so far.
Perhaps surprisingly, the one chain reporting slower development is the world's largest retailer, Bentonville, Ark.-based Wal-Mart Stores Inc. In June Wal-Mart said it was cutting its capital spending forecast for fiscal 2009 and slowing construction of new Supercenters, which sell groceries as well as consumer products, clothing and electronics. The company said it would open 140 Supercenters in 2009 instead of the 170 it had initially projected. The retailer said it now expects to spend $13 billion to $15 billion, down from its previous estimate of $13.5 billion to $15.2 billion for the year.
But even though the company is slowing its Supercenter growth, it has said it plans to open a new smaller-format food store called “Marketside.” The first store is slated to open in Phoenix in the fall of 2008 and will likely focus on more premium items, like prepared foods.
The other big discounter that dabbles in groceries, Minneapolis-based Target Corp., is ramping up growth of its own supercenter concept, SuperTarget. Target has said it plans to have SuperTarget represent a larger percentage of square footage growth going forward. SuperTargets stock groceries, prepared meals and household staples. There are now 182 locations in 21 states.