Supermarket CEOs Tout Industry's Resilience

Consumers may be cautious, but supermarket executives maintained a positive tone albeit one tinged with a degree of uncertainty at investor conferences here last week and in financial forecasts. Both Supervalu and Safeway, whose most recent quarterly reports had led investors to question the resilience of the traditional supermarket in the current economic environment, issued strong defenses

NEW YORK — Consumers may be cautious, but supermarket executives maintained a positive tone — albeit one tinged with a degree of uncertainty — at investor conferences here last week and in financial forecasts.

Both Supervalu and Safeway, whose most recent quarterly reports had led investors to question the resilience of the traditional supermarket in the current economic environment, issued strong defenses of their strategies and outlined their reasons for optimism.

“Don't lump us together with the rest of retail and believe [food] retail will suffer if the consumer is cautious,” said Steve Burd, chairman, president and chief executive officer, Safeway, in a presentation at Bear Stearns Retail, Restaurant & Consumer Conference here. “We are a very resilient sector, and Safeway is a very resourceful company within that sector.”

He said Pleasanton, Calif.-based Safeway is positioned to boost earnings by more than 50% in the next few years, to as much as $3.07 per share by 2011, compared with $1.99 in 2007.

Minneapolis-based Supervalu also projected strong profit growth, setting a net income target of $3.06 to $3.22 per share for fiscal 2009, which began about three weeks ago. Analysts had projected net income for fiscal 2009 of about $3.04 per share.

The company said it expected same-store sales, which eked out a 0.5% gain in fiscal 2008, to rise by 1% to 2% in the current fiscal year.

In a presentation at the Bear Stearns conference the next day, Jeff Noddle, Supervalu's chairman and chief executive officer, said the company's aggressive store-remodeling effort underlies his outlook for sales gains. In addition to the remodeling program, which could touch 400-500 stores in the next year and a half, the company also expects to see benefits from a coordinated program of national merchandising and promotions and better execution of private label, Noddle said at the conference.

With regard to the coordinated national programs, a Supervalu spokeswoman told SN after the conference that Noddle was referring to the company's “corporate-led collaboration” model that seeks to leverage the company's purchasing power.

“Our corporate merchandising teams — in collaboration with our banner merchants — work with our national vendors to identify and deliver opportunities to achieve these [programs],” she said, citing several “first-to-market” product rollouts Supervalu has conducted with major vendors.

Noddle also said the company has seen little evidence of consumers “trading down” to lower-priced products at Supervalu's traditional supermarket banners, although he conceded the outlook for consumer behavior is uncertain.

“It's a very cautious consumer, and how long that will last is anyone's guess,” he said. “They are looking for value any way they can.”

He said he doesn't expect retail food sales for the industry as a whole to keep pace with price increases, indicating that consumers will cut back to some degree, but he said he expects food retailers to pass their cost increases on to consumers in the form of higher retail prices.

“Inflation has been passed through quite orderly in 2007, and we expect the same this year,” he said, noting that even Wal-Mart seems to pass through its cost increases eventually.

Still, he added, consumers are “very cautious, and it's very hard to predict, because there's still a lot of inflation in the pipeline.”


Speaking at the CIBC World Markets Retail Conference in Toronto last week, Christian Haub, executive chairman of A&P, Montvale, N.J., said he has not seen any indication that consumers are changing their shopping behavior based on the economy.

“We saw from the slowdown in 2000 that consumers can and do change their behavior, but we have not seen any of that this time,” he said. “I don't see any ‘trading down’ from fresh foods to packaged, or from branded products to private label.”

Haub said he believes that, if anything, traditional supermarkets are benefiting from consumers' shift away from restaurant dining.

“It's really an opportunity to showcase what we've done in the stores,” he said, adding that A&P's newfound focus on more aggressive pricing should play in the company's favor if consumers do begin to react more strongly to economic pressures.

Noddle agreed that consumers are cutting back on restaurant meals in favor of home cooking, to the benefit of supermarkets.

“We talk about turning the dining room lights back on, and we think this is a good time to do that,” he said.

He said Supervalu is seeking to capitalize by providing more prepared foods and “meal kits” that offer customers dinner solutions they can prepare in 20 minutes or less. The company's new “innovation center,” located at the former Best Buy headquarters in Minneapolis, is focusing on expanding Supervalu's product offering in that area.

Analysts seemed skeptical of Supervalu's revised guidance, although shareholders responded positively by driving the stock up about 7% on the day Supervalu issued its forecast.

“We believed that the company would take this opportunity to guide more conservatively,” said John Heinbockel, an analyst with Goldman Sachs, New York, in a research note. “Why? The economic environment is challenging, ID momentum is unacceptably soft, and with the shares trading below 10 times forward-looking [earnings per share], the bar could be set lower without risking an adverse reaction. A lower bar would also give the company operational flexibility to reinvest in pricing/promotions and service later in the year to drive IDs without missing numbers.”

Despite the bullish pronouncements of Safeway, Supervalu and A&P, some retailers said they have begun to see some signs of consumer unease reflected at the grocery checkout.

In reporting quarterly financial results last week, wholesale club operators Costco and BJ's both said they have seen some slight indications that consumers are “trading down” to lower-cost grocery items, such as substituting less expensive proteins in the meat department, at their stores (See Page 8).

“Within some strong categories like meat, which is about 6% of sales, we've seen a little bit of a mix shift over the last few months, from beef to things like chicken,” said Richard Galanti, chief financial officer, Coscto. “That is anecdotal, but it's consistent with what is going on out there in the economy.”

And Village Super Market, which operates 25 ShopRite supermarkets in New Jersey, said that based on its February sales volumes, it expects same-store sales for the current quarter to be down sequentially from the preceding quarter because of consumer unease about inflation and the economy (See Page 6).