In the first column written for this space in 2007, the welcome news that many retailers predicted that this would be a good year for supermarkets was mentioned.
At that time, the opinion was that such would be the case for several reasons. Among them was the Darwinian effect: The robust competitive milieu of years past weeded out weak operators and caused strong operators to get stronger. Compounding that, surviving operators — chains and independents alike — were able to accelerate growth by acquiring good store locations shed by weaker operators.
Now, with the passage of a little time, the opinion that this would be a strong year for the industry is proving to be correct. Indeed, that's the theme of the front-page news article in this week's SN that analyses the industry's financial results for the last half of 2006 and projects how those results will continue to march forward during the first half of this year. The report was prepared by SN's Elliot Zwiebach.
One observer quoted in this week's report said that “the second half [of 2006] was phenomenal and shows the industry is alive and vibrant and growing.”
Said another, “Total sales growth for January and February of this year was up more than 5%, slightly ahead of last year's second-half results with food inflation accounting for about 2% of the increase.” If such is the case, the industry is realizing a genuine 3% uptick for the year, an excellent performance.
Let's take a closer look at industry performance by the numbers. Then, just to be sure, we'll see if there are any factors that could dull the good news moving forward.
The 10 largest chains that publicly report results registered an average 2.1% sales increase, as compared to a decline of 0.7% during the same period a year earlier. Operating income for the most recent half rose 11.4% against 2.1% in the year-earlier period.
Several factors were cited for this performance. One that seems counter-intuitive is the increasing cost of gasoline. But that had the effect of keeping shoppers close to home and reduced the amount of cherry picking. Those factors accrued to the benefit of conventional supermarkets, which is why Wal-Mart Stores frequently cites rising fuel costs as a negative. Another factor involving the competition between Wal-Mart and conventional supermarkets is merchandising. At last, many supermarket operators have figured out how to better merchandise their stores and provide a differentiation with big-box stores. To a great extent, that differentiation is established by an emphasis on fresh product. Conventional stores have also benefited from increased labor productivity and improved store-level execution.
Although there are many reasons to believe the upturn in sales and profits will continue for the industry, in an abundance of caution let's look at what might produce headwind as the year goes on. Of concern are prices for commodities such as meat and poultry, plus eggs and orange juice. It's possible that attendant increases in price points will drive some shoppers to trade down. So far, though, the reverse is true: Pricing power is increasing, making it possible to recover commodity-price increases.
Finally, as the year goes on, comparisons to better numbers in like periods last year will make gains look smaller. But that's not a bad problem to have.