Analysts Pessimistic on Supermarket Sales Growth

NEW YORK — Some industry retail analysts are advising clients to invest with caution in 2012, predicting sales will weaken under the stress of declining inflation and declining demand.

John Heinbockel, an analyst at Guggenheim Securities here, in a report this month said he believed all U.S. retailers will see comps weaken by 1% to 2% in 2012 as an overabundance of retail square footage and tepid demand from consumers slow the overall growth of the $1.7 trillion consumables market in the U.S.

Retailers that grow in this environment — likely to be dollar stores and others built around low prices and convenience, Heinbockel said — will do so by taking share from established players.

“Consumables spending is currently solid, but we doubt it will persist as the headwinds begin to mount in early 2012,” Heinbockel wrote.

Heinbockel calculates consumables will grow by 3% over the next five years — a slowdown from 5% growth over the past two decades. The spending outlook, he said, is poor, citing demographic and financial reasons: Consumers are suffering from continued unemployment — and a lapse of unemployment benefits — along with a low savings rate, the cycling or expiration of the payroll tax holiday, and “stickiness” in higher fuel prices. In addition, he said the number of people age 65 and older is growing, and bringing lower income and spending rates with them.

Heinbockel said he expects the rate of inflation to halve in 2012, with retailers feeling a “lag” effect of sliding comps over the course of the year.

Karen Short, an analyst with BMO Capital Markets, New York, reached a similar conclusion on food inflation in particular in a report this month. Using the consumer price index, data from the U.S. Department of Agriculture and other sources, Short estimated inflation would be higher than expected during the first half of the year (5.7% and 4% for the first and second quarters, respectively) — but lower than expected in the second half (1.6% and 1.8% estimated inflation for the third and fourth quarters, respectively).

This, Short said, portends a drop in comps during the third quarter, as demand weakens, but a chance for a recovery by year-end.

“Despite a more favorable pricing environment there is usually a lag between the price decline and the increase in tonnage — and as a result, the [third quarter] could represent a trough in total comps,” Short said.

Consumer Pressures

Heinbockel estimated that consumers’ household incomes could realize negative impacts of $54 billion to $180 billion from the lapsing of the payroll tax holiday and unemployment benefits during 2012. The tax holiday provided consumers with around $126 billion in tax money normally withheld for Social Security benefits in 2011. If Congress fails to extend the credit, 120 million households would feel the impact. Retailers in the meantime would see no new benefit if the tax is extended.

Another 6.5 million people are expected to lose unemployment benefits during the year, which will also challenge consumer spending, Heinbockel said.

The aging U.S. population in the meantime has the country on the brink of a “boom” in the subset of Americans aged 65 and over. That group’s growth will jump from 2% to more than 3% in 2012 a trend that will continue for more than a dozen years, Heinbockel noted.

This group by definition earns less than their juniors, and should have less money to spend as a result of what Heinbockel called an “unsustainable” level of saving.

Implications for Retail Despite the grim conditions, some retailers could benefit, Heinbockel said. In particular, he said opportunities for dollar stores, specialty food stores and warehouse clubs should remain strong. “The dollar store format is the most compelling in consumables retail,” Heinbockel said. According to his figures, the channel has the opportunity to nearly double the number of stores operating today before reaching saturation, with a vehicle that is cheaper to build and operate — and more profitable — than competing sellers of consumable goods. The channel’s share of the consumables market — around 1.9% today — could double to 3.7% by 2020, he said, gaining as a result of comp increases, new stores and a growing base of shoppers. “A large number of households will be becoming older and/or financially constrained, thus dramatically increasing the potential pool of customers seeking smaller, cheaper stores,” he said. “There is little that can prevent this growth, in the aggregate, though investors may worry whether the market will become unduly crowded sooner rather than later.” Heinbockel said specialty retailers like Whole Foods and The Fresh Market as well as warehouse clubs and drug stores also have potential to grow their consumable share; and will do so by taking share away conventional supermarkets, convenience stores and supercenters.