Supermarkets Opening Fewer Stores, Spending More

Less is more is the mantra for many of the largest supermarket companies as they continue to close more stores than they open and invest more heavily in existing locations. Capital expenditures have increased at a double-digit pace for many traditional food retailers, reflecting the strong returns on investment from remodels and an increasing emphasis on bolstering food service and perishable offerings.

“Less is more” is the mantra for many of the largest supermarket companies as they continue to close more stores than they open and invest more heavily in existing locations.

Capital expenditures have increased at a double-digit pace for many traditional food retailers, reflecting the strong returns on investment from remodels and an increasing emphasis on bolstering food service and perishable offerings.

“The trend makes sense, with the focus on the perimeter of the store,” said Jason Whitmer, an analyst with Cleveland Research in Ohio. “It really makes sense to allocate capital dollars toward those departments and really push hard in an area where Wal-Mart is considered weak. Plus, business has been good, so I think there's a bit more money to spend.

“They are net rationalizers, too,” he added, referring to the increasing pace of store closures and decreasing pace of openings. “Square footage is coming out — it's the right thing to do, absolutely.”

As recent company statements and filings with the Securities and Exchange Commission indicate, supermarket operators are increasing the pace at which they remodel their stores.

Supervalu, for example, said it would spend about $1.2 billion on capital expenditures in the current fiscal year, remodeling 100-110 stores and opening about 25-30, an increase in the number of remodels over last year and a decline in the number of store openings (see Page 14). The company ended its most recent fiscal year with 2,478 stores, including 858 licensed Save-A-Lots.

Similarly, Kroger, Cincinnati, has been increasing its remodeling activity as it decreases the number of new stores it opens. It spent about $1.78 billion on cap-ex last year, and it recently projected an increase of up to 15% for the current fiscal year, planning to invest $1.9 billion-$2.1 billion.

That spending will fund nearly 200 remodels, compared with 158 in 2006 and 147 in 2005. New-store openings have been dropping steadily, from 41 in 2004 to 28 in 2005 and 21 last year. The company had a net decrease of 39 supermarkets in fiscal 2006, as it closed 60 stores, not including relocations.

“Kroger has done a good job with what it calls ‘value’ remodels,” Whitmer said, noting that not all supermarket remodeling activity focuses on making stores more upscale.

At Safeway, Pleasanton, Calif., remodeling investment has been especially productive as it continues to convert nearly 300 stores per year to its “lifestyle” format. Last year the company spent $1.67 billion on capital expenditures, or 4.2% of sales. This year it is expected to spend about $1.7 billion, which would fund 25 new stores and 275 remodels.

The company had a net decrease in store count in 2006, however, closing 21 supermarkets, not including relocated stores, and adding only seven new sites. It finished the year with 1,761 supermarkets, down 14 from the year-ago level.

One of the few large supermarket chains to continue to invest its capital expenditures in new stores is Publix Super Markets, Lakeland, Fla. The company, which files financial reports with the SEC because of its large number of employee-owned shares, said in its most recent annual filing that it would increased its capital spending by 25% in the current fiscal year, to about $600 million, which would fund 37 new supermarkets and an unspecified number of remodels, plus investments in technology, warehouse expansions and the rollout of back-up power generators.

Unlike traditional supermarkets that are scaling back on their new-store development, Whole Foods Market, Austin, Texas, is gearing up to ramp up its development even as it seeks to acquire rival Wild Oats Markets, Boulder, Colo.

The company said it plans 18-20 new stores in the current fiscal year, following a net increase of 11 locations in fiscal 2006. Cap-ex is expected to increase significantly, to about $550 million, from $340 million a year ago.

Montvale, N.J.-based A&P, also in the process of a major merger with regional rival Pathmark Stores, Carteret, N.J., was one of the few supermarket chains to say it planned to reduce its cap-ex in the current fiscal year. The company spent $208 million last year and opened 10 new stores (including six acquired Clemens locations in Pennsylvania) and undertook some major remodeling initiatives, but plans to reduce cap-ex to about $150 million this year as it focuses on the Pathmark deal. It said it plans to increase cap-ex again in 2008.

“A&P is an anomaly among the medium-sized chains [in terms of its decrease in cap-ex],” Whitmer said.