Economic Storm Finally Crashes Into Supermarkets

Economic Storm Finally Crashes Into Supermarkets

Until late last month supermarkets still could say they were mostly unscathed by the economic slump. Sure, consumers showed signs of trading down and retail distribution costs were increasing, but the economy's troubles hadn't yet altered financial projections.

That all changed with a string of forecast revisions that finally made it official: Supermarkets had joined the list of victims.

Operators including Safeway, Supervalu, Delhaize and Costco revised outlooks downward and food retail stocks took a beating (SN, July 28).

The events took many by surprise despite months of worsening news about the economy. “Today's economic environment is quite different than we anticipated just a few months ago,” observed Jeff Noddle, chairman and CEO, Supervalu.

The fact is, supermarkets were hit by a quickening cycle of consumers trading down. At the beginning of this year supermarkets were still benefiting from a switch to more eating at home. In January, the headline on this publication's annual outlook story was: “Retailers Optimistic for 2008 Despite Inflation Pressures.”

Eventually, consumers began to shop more on deal and seek store-label merchandise. Finally, shoppers gravitated to discounters, accounting for increased sales at limited assortments stores, dollar stores and supercenters.

Retailers were also socked by higher energy costs, which explains why Costco, a company expected to do well in this environment, was forced to recalculate its financial outlook.

Each week brings launches of new retail pricing programs. Among the most recent was Bashas', which twinned its introduction with a heroic marketing effort that included multi-colored shelf tags communicating different types of specials, in-store banners, radio, direct mail and a run-of-press insert.

Now comes the hardest part for conventional grocers. They face tough choices on how to balance near-term imperatives with long-term goals and plans.

Supervalu is talking about speeding up its timetable for changing pricing strategies at Albertsons stores. Safeway is among operators that must relay a price-competitive image even as it operates more upscale lifestyle stores.

Some distributors are justifying strategies by pointing to long-term benefits. Supervalu, for example, is turning to cost cutting to “create a foundation for sales momentum and future growth.”

Wouldn't it be nice if all companies had the luxury of Tesco's time-frame in the U.S.? One high-level Tesco executive recently said the venture should be judged over a period of 10 years rather than 10 weeks.

Putting current events in perspective, supermarkets are still in better shape than many other types of retailers, and much better off than restaurants. Last week's news about the bankruptcy of Bennigan's is a reminder that more pain is likely to be felt in the foodservice sector.

Supermarkets are now in the thick of this economic drama. There are no established scripts on how to get through this one, except that innovation and ingenuity will provide an edge.