NEW YORK -- Major supermarket operators can expect a stable business outlook intermediately, according to a report by Standard & Poor's, a credit ratings agency here.
fundamentals and the industry's preponderance of noninvestment-grade ratings, Janis C. Richards, a Standard & Poor's analyst, said in the report.
The companies' median rating is in the 'B' category, a noninvestment-grade status; only 24% of the ratings are investment-grade.
Many ratings, such as for Kroger Co. and Safeway, have been upgraded since 1990 due to higher operating efficiencies and lower interest expense from refinancings and equity offerings, according to Richards.
In the intermediate term, several chains -- such as Kroger and Vons Cos. -- could reach investment grade if credit measures continue to improve, Richards reported. Yet investment-grade companies like Ralphs and Pathmark Stores could be limited to noninvestment-grade ratings in the near term because of their credit measures.
Acquisitions often trigger a negative ratings outlook, Richards said, pointing to the Ralphs Grocery Co.-Food 4 Less merger and Stop & Shop Cos.' purchase of Purity Supreme. Similarly, chains that have faced a lot of supercenter competition, such as Homeland Stores and Eagle Food Centers, also have seen ratings downgrades.
However, chains actively adding and upgrading stores, such as Albertson's and Winn-Dixie, are more likely to have a positive ratings outlook, according to the report.
"Standard & Poor's believes that it is crucial for supermarket companies to reinvest in order to remain competitive," Richards said. "However, chains will be opening many new stores and fighting for market share in a slowly growing market."
Total supermarket sales growth in the intermediate term is likely to remain slow, according to Richards, because of scant population growth, low inflation, increased consumer spending on food away from home and higher sales of lower-priced private-label items.
On the plus side, the supermarket sector continues to hone operating efficiencies, despite low sales growth and rising wage and employee benefits costs.
Richards noted that many operators have improved buying via forward or centralized buying, raised profit margins through more private-label sales and divested underperforming stores.
They also have enhanced merchandising, renovated stores to add higher-margin service departments and upgraded technology in such areas as scanning, labor scheduling, and time and attendance tracking.