NEW YORK -- Standard & Poor's, the debt-rating agency here, said last week it is shifting to a somewhat more negative view of the supermarket industry in light of the weak economy and the continuing encroachment into food retailing by nontraditional channels.
"We expect industry conditions to remain difficult as Wal-Mart and other retailers grow their share of the grocery dollar," said Mary Lou Burde, credit analyst, S&P, in a conference call monitored by SN. "The economy should eventually improve and help all operators, but when and by how much we don't know."
Despite S&P's negative outlook on the industry, Burde said the agency raised its rating on Kroger Co., Cincinnati, citing that company's dominant market positions and experience competing against Wal-Mart. She also cited Kroger's history of consistent operating performance.
"Those factors more than offset adequate but somewhat weak credit ratios," she said.
The agency lowered its rating on Albertsons, Boise, Idaho, Burde said, citing "a number of operating challenges ahead." Those challenges include the need to improve its pricing position, which will require a significant investment in gross margins. Albertsons also needs to roll out more localized merchandising programs, add its loyalty card in more markets and find additional areas to cut costs, she said.
S&P maintained its rating on Safeway, Pleasanton, Calif., citing the company's strong presence in California. Although she pointed out that Safeway has higher operating margins than either Kroger or Albertsons, she said the company still faces both competitive and internal challenges.
"Safeway also needs to improve its merchandising to better differentiate each of its local banners," she said.
Burde said she was encouraged by the prospect that Safeway may shift the use of its free cash flow this year to reduce debt after recently spending much of it on stock repurchases.
In other comments during the call, Burde said she did not expect to see any major acquisitions in the industry this year. She said she expected Wal-Mart to maintain its pricing advantage of about 15% over traditional grocers, even as they lower their own prices in an effort to better compete.
