LOOKING AHEAD

Some analysts foresee a somewhat better year for sales and earnings in 2004, which could translate into gains for more companies' stocks, but they say the same competitive pressures that impacted traditional players in 2003 will be there again in 2004."I think 2004 is going to be a very interesting year for the industry," said Edouard Aubin, analyst, Deutsche Bank, New York. "It's definitely an important

Some analysts foresee a somewhat better year for sales and earnings in 2004, which could translate into gains for more companies' stocks, but they say the same competitive pressures that impacted traditional players in 2003 will be there again in 2004.

"I think 2004 is going to be a very interesting year for the industry," said Edouard Aubin, analyst, Deutsche Bank, New York. "It's definitely an important year, but I don't know if it will be a turning point."

He thinks traditional food retailers have the opportunity to reduce their cost structures in a couple of ways in 2004: through labor negotiations and through innovations in the supply chain.

"A lot of labor contracts are going to come up for negotiation in 2004, and because the United Food & Commercial Workers Union is going to be weakened significantly by the strike in California, chains will be in a position to extract some significant concessions from the unions in 2004," he said.

"From a supply-chain point of view, I think that despite the fact that Wal-Mart and Target and other retailers continue to be fairly innovative in terms of their supply chain, my opinion is that traditional food retailers will narrow the gap in 2004. Is that going to be significant enough for them to post some improvements in margins? No. Why? Because, again in 2004, supply [of retail square footage] is very likely to outstrip demand."

Lisa Cartwright, analyst, Citigroup Smith Barney, New York, is less optimistic about the impact of the California labor dispute and the several large contracts that come up for negotiation this year, although she said she thought Safeway, Kroger and Albertsons were "doing the right things" by taking a hard line with the union in California in order to gain long-term cost reductions.

"I think that the strike in Southern California, along with the potential for other strikes, could dampen performance in 2004, along with the likelihood of having to invest in lower prices to keep those sales going," she said.

Andrew Wolf, analyst, BB&T Capital Markets, Richmond, Va., said he thinks 2004 will be a slightly better year for sales and earnings for the big three, although he maintains a "hold" rating on their stocks.

"A lot of what happened in '03 was because of retailers bringing down pricing," he said. "That will continue in '04 -- they've all said there is still going to be an investment in price -- but the economy is better, it will continue to improve, and it will help everybody, including supermarkets."

Gary Giblen, analyst, C L King Associates, New York, has a more negative outlook: "I wish I could be more optimistic, but I think it's going to be another bad year," he said, citing the impact of the strike, the loss of meat-price inflation due to the mad cow disease scare and weak positioning by some of the larger chains. "By midyear, once the operating numbers are reported without the effect of the strike, people will see that the underlying performance is weak."