COLUMBUS, Ohio -- Research firm Retail Forward here last week predicted that the supermarket industry would see little respite in 2003 from the pressures that plagued it last year.
"[Supermarkets'] lack of pricing power is limiting their ability to grow sales, but that's only a symptom of the increasing competition they're facing, with Wal-Mart and Target opening supercenters," said Frank Badillo, senior economist, Retail Forward, in a conference call discussing the overall retail outlook for 2003. "That is creating lots of new competition that is definitely putting pressure on supermarkets, and that is one of the channels that is ripe for more shakeout. All the supermarkets that are out there now will not survive, given the growth of supercenters."
He said he expected that a significant number of food stores would have to be removed from the marketplace before traditional supermarkets could start to show growth.
At the same time, a shift in attitude has taken place in which consumers have embraced the shopping experience at discount stores, said Mary Brett Whitfield, senior vice president and director of intelligence programs at Retail Forward.
"I think consumers have a new definition of what is acceptable," she said. "People say what they can find at Target and Wal-Mart in terms of brands is good enough -- there's no need to spend money at a higher-priced venue. Even though the recession accelerated that trend, once the economy starts to get better, we're not going to see a wholesale shift [away from discounters] by any means."
In addition, the food-service sector is expected to continue to pose challenges for supermarkets. Consumers have grown accustomed to obtaining more of their meals from restaurants, and Badillo said that trend was expected to continue despite the slower economy.
"Consumers have made a significant shift in their behavior in the last decade," he said. "They just will not cook and, given the low inflation, it's affordable to continue to eat out. Instead [of cutting back on spending on food away from home], they have made cutbacks elsewhere in their budget, and that bodes well for continued growth in eating away from home."
Badillo said he expects that 2003 will be the worst year in recent memory for retailers in general because he expects consumer spending power to be considerably weaker than last year, at least through the first half of 2003.
"Consumers are dealing with a loss of a lot of one-time benefits," he said. "If you think back to a year ago, consumers were benefiting from tax rebates, tax cuts and falling fuel prices, and all those things were gone by this past holiday season. Now what we're seeing is that rising fuel prices are creating a big drag on consumers for the first half of the year, and that is going to be even bigger when you look at natural gas and heating oil prices. Basically, consumers are going to pay a lot more to stay warm this winter and that's going to have an effect on retail sales."
He noted that spending has been buoyed by low interest rates, which have allowed consumers to refinance their homes and free up more cash. However, he said some data indicate that consumers have entered a "retrenchment mode" and could be using that newfound money to reduce their debts rather than increase their spending.
"If that continues into 2003, that's going to be another big drag on retail spending through the first half of the year," he said. "The biggest factor that's putting consumers into a retrenchment mode is the uncertainty and caution that's created by the threat of war in Iraq and North Korea. War is not good for the economy or retail sales -- what it does is create more uncertainty."
