American Society of Magazine Editors

Latest Directions for Retailers

By Karlene Lukovitz, IPDA Daily Publishing & Retail News

Two food-industry analysts provided Retail Marketplace 2013 attendees with timely insights on current and evolving trends in traditional supermarkets and other retailers competing in the food arena. Panel moderator David Orgel, editor of Supermarket News, began by asking the analysts to summarize how traditional supermarkets are performing in the current economic environment, as the U.S. continues to emerge from the “great recession.”

Meredith Adler, managing director at Barclays Capital, said that the supermarket industry’s overall decline in sales volume as a result of high food inflation and resulting price increases in some categories in late 2011 and into 2012 has now begun to stabilize. However, she said that improvement in sales of impulse/discretionary products seems still to be limited mainly to stores in more affluent areas.

Many supermarket customers are still struggling financially, which means that there is still a lot of pressure on publicly-traded supermarket companies, she said. But while some of these companies are troubled, others are doing very well, Adler stressed.

Those who believe that the traditional supermarket industry as a whole is in decline are misguided, both because some public companies are far outperforming the average, and because investors tend not to be aware of “the really well-run privately-owned regional chains” like H-E-B, Wegmans, Hy-Vee and Publix, she said.

Adler and Orgel agreed that it’s more accurate and useful to look at the performance of specific supermarket operators, rather than try to characterize the industry as a whole.

However, Andrew Wolf, managing director/senior equity research analyst, Consumer Group, for BB&T Capital Markets, observed that, looking at the overall picture for public companies, “Supermarket stocks are up quite a lot year-to-date, and it’s not so much because of a generally robust [economic] recovery as it is that for some operators, like Kroger, things were already good and now they’re getting better, and for other operators, like Safeway, things are still tough but getting less bad.”

In general terms, supermarkets’ stock prices are rising, but they’re still not “robust,” he said: “They’re trying to get to decent/good, and if the economy cooperates, I think that’s where they’ll be in 2013.”

Same-store sales started to turn positive even at struggling chains like Safeway at the end of 2012, and while the increased payroll taxes that kicked in early this year had some negative impact on those retailers, in particular, BBT believes that as long as the economy continues to add jobs at a reasonable rate, 2013 will be a year of slow improvement for the supermarket industry as a whole, he said.

Adler noted that smaller regional supermarket chains (as opposed to the large regional chains she noted above) are experiencing increasing economic distress and closing down or selling some or all of their stores. In response to this trend, Kroger has said that it is planning to open new stores and take market share in regions where there are now gaps in service, she said.

Supermarkets continue to battle increasingly aggressive competition from other retail classes of trade that are expanding their food offerings, including drug and dollar stores. But while dollar stores are showing impressive growth, that whole industry segment is still small- to medium-sized–”about the size of Walgreens’ front-end sales,” noted Wolf.

“The whales of the industry are still Wal-Mart and Kroger,” which realized about $10 billion and $5 billion, respectively, in food-sales growth last year, out of the entire retail food industry’s $30 billion in 2013 sales growth, Wolf said. And while Whole Foods increased its sales by about $1.5 billion, that represented just 5% of the overall food retail industry’s sales growth.  

“Dollar stores are doing great on the low end, and natural food stores are doing great on the high end” in terms of their own growth rates, but the magazine category should remember that the greatest dollar sales volumes are still in the middle of the mass market, and focus on maximizing sales in the retail “winners” within that mass segment, Wolf advised. He added, however, that the magazine category should also pay attention to dollar stores and other retail segments that are showing the greatest growth rates.

Adler said that she believes that the dollar store segment is quite important to the magazine category, because its number of stores is growing very rapidly, making it an attractive distribution-channel opportunity. Family Dollar has about 9,500 stores and believes that it can grow to about 18,000; Dollar General [which currently has more than 10,000 U.S. stores, according to its investor relations materials] could expand to 18,000 to 20,000, she noted.

Further, research indicates that a broader spectrum of consumers–including more affluent consumers (the heaviest magazine readers)–are  increasingly comfortable in shopping in dollar stores, she said. Dollar chains have improved their store environments, and their premise of value plus convenience is attractive to a wide range of demographics, particularly as they focus on adding food convenience/staple offerings, Adler noted.

She added that while drug store chains, which already have large store counts/high penetration in most markets, are not expanding their new stores as quickly on a percentage basis, these retail formats are also expanding convenience food items that draw people into stores. Further, they can offer competitive pricing combined with the convenience of broader selections of day-to-day needs–drug/health and other product categories, in addition to growing food offerings. All of which should continue to drive their front-of-store sales growth, Adler said.

Wolf noted that one way for magazines and other discretionary product categories to get a “quick and dirty” read on how those types of products are performing is to look at retailers’ gross margins, which tend to reflect discretionary category sales trends (as well as competitive pressures, to some extent). According to Wolf, average year-over-year gross margin among the major supermarket chains has been down since the recession, but while it trended down by about 30 basis points last year, average gross margin has improved in 2013, trending down by about 15 basis points year-to-date.

Asked about their views on Wal-Mart’s current status, Wolf said that Wal-Mart has corrected its major misstep of changing its positioning in the midst of the recession, by returning to its core every-day low pricing premise, improving its merchandising and investing in marketing/advertising that goes up against regional competitors with its pricing claims. The retailer’s low single-digit gains in same-store U.S. sales in Wal-Mart stores in recent periods demonstrate that these initiatives are working, he said.

Adler noted that existing food retailers in urban markets where Wal-Mart is now opening its smaller-format Neighborhood Market stores–particularly on the West Coast and in the Northeast–are no doubt feeling the pain.

Asked about services offering online sales/home delivery of groceries, Adler said that even grocery leaders such as Kroger have in past years found such offerings to be unsustainable due to being unable to charge prices high enough to cover the substantial operational costs involved in establishing/maintaining the distribution depots necessary to enable timely, efficient delivery of food/perishables.

However, she added that what’s “scary” about Amazon Fresh, from competitors’ standpoint, is that Amazon doesn’t need to realize a profit on groceries or the other products that it sells. Instead, Amazon’s business model is based on driving revenue and profits by expanding the services/incentives within its Amazon Prime program to grow the number of consumers willing to pay an annual fee to be Prime members.

Wolf added that even the huge New York metro market, dominated by Fresh Direct with about 80% of share, still “only” represents about $500 million in annual sales, and the market opportunities in most of the rest of the country are clearly smaller. The online grocery business is “not a huge threat” to traditional brick-and-mortar grocery retailers, because the economics of that business “are no different than they were 12 years ago–they still don’t make sense,” he asserted.

Turning to another topic, the analysts agreed that monitoring front-end trends and experimentation by retailers in all key classes of trade is critical for magazines and other impulse-driven categories.

Wolf noted that Kroger is experimenting with “tunnel” technology that enables  streamlined self-checkout, and that retailers (as well as suppliers of key checkout product categories), are concerned about the “blinder” syndrome created by customers using their mobile devices and therefore being oblivious to the impulse products displayed at checkout.

Wolf also observed that it would certainly seem to make sense to include displays of magazines at self-checkouts. Adler and Orgel added that introducing magazines into produce departments and other synergistic, highly-trafficked areas of the store would also seem to make sense in terms of driving both magazine and other product sales for retailers.

The panelists had limited time to address the far-ranging impacts of mobile technology/devices on food and all retail segments. However, Adler pointed out that while redemption of online coupons via mobile devices is certainly growing, it still represents only about 4% of all coupon redemptions.

Wolf observed that the influence of social/online sharing among consumers about currently-available coupons (whether traditional or digital) is no doubt significant, but that at this point, it’s still difficult to measure or quantify that influence.