No Relief in Sight

No Relief in Sight

Consumers remain under economic pressure throughout the United States, forcing retailers to pay close attention to price and value, according to industry leaders interviewed by SN. Many expect conditions to remain challenging through the second half of the year, as inflation and high gas prices restrain consumers' ability to spend freely. The situation will just drag on, and people [will continue

Consumers remain under economic pressure throughout the United States, forcing retailers to pay close attention to price and value, according to industry leaders interviewed by SN.

Many expect conditions to remain challenging through the second half of the year, as inflation and high gas prices restrain consumers' ability to spend freely.

“The situation will just drag on, and people [will continue to be] extra cautious in what they do with their money, especially as they worry about keeping their jobs and losing equity in their homes,” said Al Plamann, chief executive officer, Unified Grocers, the Los Angeles-based cooperative. “So they will continue to shop for deals.”

Although many retailers and wholesalers interviewed by SN expressed optimism that they would be able to grow sales in the second half, they said they expected margins to remain under pressure from cost inflation, especially in beef and pork prices.

“If you're a perishable-driven, meat-oriented company like ours, it's tough to drive your business because what was a good price on sirloin tips a year ago is $1 higher now,” said John DeJesus, president of Foodmaster, a multi-format food retailer based in Chelsea, Mass.

Some operators mentioned that they have been able to pass along Center Store grocery price increases at the shelf, and that overall pricing in many markets has been rational, with competitors passing along price increases as well. Inflation and economic pressures are also continuing to drive private-label sales, they pointed out.

Retailers also noted that competitive pressures from alternative formats and channels remain intense, especially with Wal-Mart Stores talking about more rapid rollouts of its smaller-store formats.

“I think the biggest reality that we all face is that there are so many avenues for the consumer to find the goods that they want,” said Jay Campbell, president and CEO, Associated Grocers of Baton Rouge, La. “There are so many different channels they can go to, and they can find the pricing that meets their budget needs.”
— Reporting by Mark Hamstra, Jon Springer and Elliot Zwiebach

AL PLAMANN UNIFIED GROCERS

Al Plamann [3], chief executive officer of Unified Grocers [4], the Los Angeles-based member-owned cooperative, said he is more pessimistic about the second half than he was earlier in the year.

“I'm more pessimistic about the general economy,” he told SN. “There just aren't jobs in a lot of the areas we serve, and I don't see any change though the rest of the year.

“At the start of the year we fully expected that by July and August we would have seen some positive impact from an economic turnaround, but it didn't happen, and now we don't see a turnaround until at least the first quarter of next year.

“The situation will just drag on, and those depressed feelings will cause people to be extra cautious in what they do with their money, especially as they worry about keeping their jobs and losing equity in their homes. So they will continue to shop for deals.

“We are continuing to cut costs and watch our expense line, and we continue to work with vendors to make sure we know what deals are available.”

Plamann said sales growth “will be spotty at best through the second half because the economy is way too difficult.”

He cited a study indicating that the average shopping trip in 2011 costs $94.60, compared with $98.70 in 2010, “so consumers are buying less and shopping more for deals and using more coupons.

“Plus, households earning less than $75,000 a year are spending 10% less this year, while higher-income shoppers are spending 35% more.

“We have some members who are very price-sensitive and others that are more upscale operators, which is why we believe sales will be spotty. We may see some same-store sales growth in some areas and slight declines in others.”


He said he expects existing Unified members to open between 25 and 30 new stores during the second half, primarily in Southern California, Arizona, Southern Nevada and New Mexico. He also said he expects Unified to add approximately 20 stores from new customers — “mostly conventional stores, including some that will carry the IGA banner,” Plamann said.

Unified has been a licensed distribution center for IGA for the past couple of years and serves approximately 40 stores that have added the IGA banner. “Those stores are up double-digits from what they did before,” Plamann said, “due to IGA's disciplines at store level, the educational opportunities it offers and the fresh, energetic new look the stores take on, especially in terms of marketing programs.”

Regarding inflation, Plamann said Unified is passing on “only some” of the increases, “and our margins continue to be pressured from inflation and also from increasing health care costs. To the extent we can mitigate food cost increases, we will, but we have little choice but to pass increases along to maintain margins.

“The members and consumers understand that, and consumers are taking the increases in stride to the extent they can. But in some areas, they are definitely trading down” — in meat, for example, where beef and pork sales are down, and sales of chicken and frozen fish are up.

“And in some instances, I think people are trying to consume less,” Plamann said.

Neil Golub, Price Chopper Supermarkets

Neil Golub, president and CEO of Price Chopper Supermarkets [5], Schenectady, N.Y., had a positive outlook for his company's prospects in the second half of the year, but is expecting a difficult environment just the same, citing uncertainty about the economy and world events combined with rising inflation and competition.

“There are so many conflicting events going on in our country and the world. Right now, we're experiencing inflation at around 7% and we're seeing an impact on grocery tonnage. At this moment fuel prices are abating slightly, but for the American consumer it's still a tough grind.”

Golub said he was pleased that New York state officials made recent strides toward tackling its budget crisis, and that Price Chopper is continuing programs to open and renovate stores and battle back against competitive openings.

“I'm still optimistic about our business,” he said. “We're still growing and adding new stores and remodeling. And as long as we stay ahead of those negative curves we'll be healthy.”

Golub said rising costs — and their effects — could ultimately affect margins.

“As business gets tough, we as an industry tend to fight back, and how do we fight back? We spend more money,” he said. “And when we spend more money, we put a dent in our margins. So as inflation continues to create havoc among retailers — all of them; it's not just supermarkets that sell food anymore — there will be some impact on margin. It can be offset with hard work in costs. That's what everybody in the industry is trying to do.”

Golub said his outlook hasn't changed much from the beginning of 2011, noting that Price Chopper is working to maintain the uptick in business it experienced near the end of 2010 after several flat months. “We see the uptick continuing, and it's every helpful. Our rebound from competitive openings has been very strong, and that's a factor that every retailer has to deal with. I don't think my attitude has changed. I feel like if we can do our thing well, we'll continue to be OK.”

Rich Parkinson, Associated Food Stores

Rich Parkinson, president and CEO for Associated Food Stores [6], Salt Lake City, said he expects sales to be “fairly flat” for the second half, excluding inflation, “though we are seeing some improvement in expenses.”

He said Associated is seeing ongoing improvements in profitability at its 28 Fresh Market locations, which it acquired from Albertsons in late 2009. “We're cash-flow positive at those stores,” he said.

The company's other 22 corporate stores, which operate under various banners, have seen sales slip for the past couple of years due to increased competition in the area from WinCo and Wal-Mart, Parkinson said.

Consumer behavior is also a factor in his sales expectations, he added. “There are still real concerns over the economy. Unemployment in our area is at 7.5%, which is below the national average but still unusually high for this area, and there's uncertainty among consumers and a lack of confidence that's reflected in trading down and a reluctance to buy impulse items.

“And with sabers rattling about the possibility of another recession, that tips consumers toward even less confidence.”

Parkinson said he anticipates food inflation will be 3% to 5%, “and that will all be passed on in retail pricing, which will probably improve the quality of our margins — but with the cost of goods going up, there won't be an increase in our gross profit.”

Regarding consumer attitudes, “there hasn't been a lot of pushback,” Parkinson said. “It's only their confidence that's shaken. They're being more frugal as they realize prices may go higher, but they've seen it so often in other areas, such as fuel prices, that they are fairly insulated against increased prices.”

Parkinson said his outlook for the second half is the same as it was at the beginning of the year. “I'm not really a pessimist, but things look pretty much the same now as they did then. I'm still not sure what will ultimately happen, and my outlook isn't helped by government policies.

“So on all fronts, uncertainty is creating challenges.”

Rich Niemann Jr., Niemann Foods

Rich Niemann Jr., president and CEO, Niemann Foods [7], Quincy, Ill., said he sees consumers in his area remaining in a hunt for value.

“We think the economy is going to continue to be very, very sluggish, much the same as we have had for the last 2½ years,” he said. “Customers are going to continue to be value-oriented, and we don't see any change to that.”

He said the company, which operates about 90 stores under a variety of formats, has been focused on keeping prices low to maintain a strong value image with consumers, even at the expense of margins.

“To drive that value, you are either doing it with prices, promotions, or both,” Niemann said. “We've been able to drive traffic and drive sales, but it has cost us margins. We've been doing that for the last 2½ years.”

Customers have been embracing money-saving tactics, he said, including “clipping coupons like never before” and buying large packages of meat to break down at home.

Meat is one area that has been hit especially hard by inflation, Niemann noted.

“We have been able to pass along most of our cost increases, except for meat,” he explained. “In our part of the country, there has been so much sticker shock that we just can't charge the prices we would need to, in order to get a typical gross margin — the customers won't accept it, and that center of the plate is so important in setting that value image.”

He said he doesn't expect that to change much in the second half of the year. Inflation on Center Store grocery items, however, has been generally passed along, both by Niemann Foods and by competitors, he pointed out.

The rising gas prices in the first half of the year have been especially hard on low-income consumers, Niemann said.

“Even though prices have moderated in the last week or 10 days, I think people are still scared to death,” he said. “Prices will still be between $3.50 and $4, so it just reinforces the importance of having that value proposition every day. That's money out of people's pockets.”

Niemann said he expects the company's sales to continue to grow in the second half, and the company also is continuing to expand. Niemann Foods is in the final stages of making a three-store acquisition, he said, and it is also adding three new hardware stores to its portfolio and planning two new supermarket locations and three major remodels.

“We have had respectable comp sales for the first half of the year, and we expect that to continue for the second half, as long as we continue this value proposition,” he said. “If you maintain a value connection with consumers, you will be fine.”

He said the year so far has panned out as expected.

“Before the year started, we figured it was going to be a long tough road in having to fight for business, and having to drive traffic at the expense of gross margins. And that's how it has been.”

Jay Campbell, Associated Grocers of Baton Rouge

Jay Campbell, president and CEO, Associated Grocers of Baton Rouge, La., said the economy in Louisiana has been hampered by the slowdown in oil and natural gas production in the Gulf of Mexico.

That, combined with inflation, high gas costs and high energy costs for air conditioning, is keeping a stranglehold on consumers' spending power in the area, he said.

“Being very competitive on retail price is key right now,” Campbell said.

He noted that he does expect strong sales at the cooperative wholesaler in the second half, however.

“We are experiencing like everyone else the switch from brands to private label, and even from private labels to value brands, however, so I think that's making it just a little more difficult,” Campbell said. “Before, where you were getting a sale at a branded price, now you are getting a sale at a private-label price or a value-brand price, so you are not getting the same dollar sale volume that you would have.”

He said he thinks margins have been pressured to some degree by the conditions and by consumers trading down.

“These are difficult times,” he said. “In years past, inflation was a boon to the industry, but you can't take those price increases as routinely as you could have in past times. You have to be very sensitive to the consumer's needs.”

Many shoppers in the areas served by AG of Baton Rouge members have very low incomes and receive state or federal assistance, which is expressed in the cyclical buying patterns of strong sales at the start of the month and weaker spending as the month goes on.

“I think the biggest reality that we all face is that there are so many avenues for the consumer to find the goods that they want,” Campbell said. “There are so many different channels they can go to, and they can find the pricing that meets their budget needs.

“Our plan is that we are going to promote heavily, and we are going to be out there providing consumers with value each and every day.”

Jack Brown, Stater Bros.

Jack Brown, chairman and CEO of Stater Bros. Markets [8], San Bernardino, Calif., said he expects sales for the industry to be “fairly flat” in the second half “because we aren't seeing any real improvement in the economy.

“I had a little hope during the first quarter that things would improve, and they did get a little better, but I don't see any confidence out there right now. People have money, but they're not willing to part with it.”

He said he expects Stater's sales to be up 3% during the second half — about the same level they are up now. “We don't see that changing, but we expect it to stay about where the trends are now. We are investing in new, larger stores — one newly built unit and two Albertsons stores we acquired that are twice the size of our existing stores, which are right across the street from our smaller stores whose leases will expire in 2012.

“We're also benefiting from working with suppliers on deals to support our 75th anniversary — deals that are available to any chain celebrating its 75th anniversary.”

Supermarkets in general are benefiting from inflation, Brown said, “but we've opted to share part of the increases with our customers. So we use half the inflation rate for margins, but the other half we use to keep prices down or to lower prices because we don't think the families that shop with us are in a better position this year than they were a year ago, so we try to help them.”

Consumers are seeing inflation boosting prices all around them “so those of us who can hold the increases will be looked at favorably.”

John DeJesus, Foodmaster

John DeJesus, president of Chelsea, Mass.-based Foodmaster, said he was concerned that rapid food inflation was interfering with shoppers' pricing perception and making business difficult. “I'm not getting a warm, fuzzy feeling about the second half of the year,” he said.

“Everyone says that with inflation, sales should automatically increase but I think the consumer is having a problem making ends meet and we're getting tugged on both ends,” DeJesus told SN. “The price of goods is going up like crazy, but I don't think our customers have fully understood what happened. They don't understand what a good price is anymore. They are looking at the old values and those days are gone.”

Foodmaster operates 11 stores in Massachusetts, including a newly converted Save-A-Lot, which DeJesus said has gone well since changing from a full-service Foodmaster last fall. Although DeJesus is confident that higher prices will raise revenues, he added, “I don't feel strongly that there's a real great upside.”

He said meat inflation — including an uptick in items like ground beef — has been especially difficult.

“It's crazy to the point where it's scary,” he added. “If you're a perishable-driven, meat-oriented company like ours, it's tough to drive your business because what was a good price on sirloin tips a year ago is $1 higher now.”

The appetite for value among shoppers is such that it has extended beyond price to other aspects of quality and freshness, DeJesus added. “The prices at my Save-A-Lot are cheap, but there's not a lot of national brands. Now people are coming in and saying, ‘I want the national brands. I want Hellman's mayonnaise at this price.’”

Pat Raybould, B&R Stores

Pat Raybould, president of B&R Stores [9], a 17-unit operator based in Lincoln, Neb., said he's expecting “a decent second half of the year” at his company.


“We're having a good year so far — although we're certainly concerned about inflation and gas prices and how that is affecting the consumer,” he said.

“If you only have so much money, and you have to spend more on gas, there's that much less you have to spend on groceries.”

Raybould said inflation has been pressuring margins in some areas.

“We have had some problems passing inflation along, and we are not making price increases on some items,” he explained.

He noted, however, that consumers served by B&R overall have not been as severely impacted by the economic downturn as consumers in other areas of the country.

“We've been fortunate. The agriculture economy has been going strong, and that's helpful for Nebraskans,” Raybould explained.

He also credited his company's wholesaling cooperative, Associated Wholesale Grocers of Kansas City, Kan., as helping the members manage through the difficult economy with a good private-label offering and strong buying power.

“I see AWG continuing to make positive and progressive changes,” Raybould said. “Having a strong co-op behind you is really helpful.”

The severe flooding that has impacted some areas of the Midwest has not had a big impact on B&R's stores, Raybould said, although he noted that in some areas he's heard reports that people have been buying less in anticipation of having to evacuate with short notice.

“We have had some people in our areas displaced by the flooding, and that's expected to last for some time this summer, but it's not as bad around here as it is in some areas,” he said, noting that only one of B&R's stores is somewhat close to a flooded area.

Overall, Raybould said he maintains a positive outlook about the economy and his company's fortunes.

“We're concerned about inflation, but we've had a decent year. I was cautiously optimistic at the outset, and I still remain cautiously optimistic.”

Dennis Butler, Laurel Grocery

Dennis Butler, president of Laurel Grocery, London, Ky., said many of the independents served by his regional wholesale company have seen some same-store sales increases in the first half of the year, and he is optimistic that those gains can continue in the second half.

He estimated that about half the sales growth could be coming from inflation, with the other half coming from retail initiatives such as store upgrades and other efforts. A few Laurel customers have been able to expand with new locations, he said, and many have remodeled individual departments within stores in an effort to get a sales lift.

“For the most part, any significant growth is going to be hard to come by,” Butler said. “If we can get 2% growth above inflation, I think we'll be doing fairly well.”

Rising gas prices also appear to be impacting consumer shopping patterns, he pointed out.

“We continue to see a very strong sales per transaction, vs. gains in customer counts,” Butler explained. “People seem to be buying more when they do come into the store.”

He said higher fuel prices could be a hurdle that the economy will “take a long time to figure out.”

Clouding Butler's outlook for the future is the large number of competitive openings by nontraditional operators, and the anticipated rollout of small-format stores by Wal-Mart.

“The areas we operate in have basically been covered up with dollar stores and drug stores,” he explained. “It makes it very difficult to see significant sales growth in this kind of environment.”