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Traditional food retailers and wholesalers are navigating a sea of cost increases and consumer concerns about food safety, but their forecast is for smooth sailing. As they enter into the second half of 2007, industry executives interviewed by SN said they project strong sales to continue, buoyed in part by inflation that is being passed along to consumers. Although some retailers expressed concern

Traditional food retailers and wholesalers are navigating a sea of cost increases and consumer concerns about food safety, but their forecast is for smooth sailing.

As they enter into the second half of 2007, industry executives interviewed by SN said they project strong sales to continue, buoyed in part by inflation that is being passed along to consumers. Although some retailers expressed concern about consumers trading down, most said they expect shoppers to absorb the added costs.

“There's more price inflation than I've seen in many, many years, and it's just starting to happen right now,” said Robert Miller, chief executive officer of Albertsons LLC, Boise, Idaho. “That's going to be a big factor in the second half of the year. The ability to pass that on and keep your margins where they are is always important in our business.”

He said Albertsons LLC, which operates the Albertsons stores in Florida, Colorado, Texas and other areas that Supervalu did not acquire last year, has already passed along some price increases, and consumers do not seem to be changing their shopping behavior because of it.

Retailers said they have seen cost increases across a broad range of items, including meat and dairy products, but also other products like cereal that are impacted by the rising costs of corn due to increased demand for ethanol. In addition, the relatively high cost of fuel — although it has moderated somewhat in recent weeks — is also driving up prices as both transportation costs and petroleum-based packaging costs increase.

Some operators said they have seen some adverse reactions to inflation, particularly among low-income consumers.

Dick King, executive vice president, Associated Food Stores, Salt Lake City, said the differences in the reaction to inflation among low-income shoppers and others are visible at that company.

“It's affecting some stores that are located in more price-conscious areas, where they're experiencing decreases in red meat sales,” he said. “But we're making adjustments in package sizes, with more thin-sliced offerings, for example.”

King said he believes customers understand that fuel costs are largely to blame for the increases.

“Customers vote with their pocketbooks,” he said. “Sales of red meat and pork are down at our [corporate] Macey's banner, which has a stronger price image, but basically unchanged at our other three corporate banners. So lower-income people will have to find alternatives to red meat, such as lunch meats or canned items.”

He said he also expects added price pressures in the second half on canned vegetables.

The company is confident in its ability to compete successfully, however. King said he expects his company to see increases in same-store sales of 5%-7% during the second half, “in part because our independent members are more willing to replace equipment or invest in remodels.”

He said Associated has established a program for low-cost loans that enables more members to conduct major or minor remodels.

“They've weathered the storms of the big-box era, and they're now confident about investing in their stores,” King explained.

Bob Piccinini, chairman and CEO, Save Mart Supermarkets, Modesto, Calif., said he thinks rising food prices tend to have the biggest impact at nontraditional supermarkets.

“If the cost of a product is about the same at Safeway, Raley's, Albertsons or Save Mart, and they really want it, they will buy it,” he said. “But the people who are most concerned about pricing tend to shop at price-oriented formats.”

Piccinini said he's not aware that consumers are reacting negatively to higher gas prices. “If they are, I don't see it. People tell us shoppers are more likely to shop in their own neighborhoods than to drive 10 miles to a box store, but that's pure supposition.”

Asked about consumer spending trends in the second half, Piccinini said, “People are still making the same amount of money but they're not spending it as quickly — whether because of the war or inflation or other issues, I'm not sure.

“So some people have to be looking closely at their grocery bills because that's the largest expense for most families, and that's bound to help price-impact stores because they can save money there.”

Al Plamann, president and CEO, Unified Western Grocers, Los Angeles, said he hasn't seen consumers trading down to less expensive products because of price increases.

“It's not like the recession of a few years ago, when we saw consumers switching to private-label or more generic products to save money,” he said. “I don't sense that's happening now because the brands are hanging in there.”

He said he believes consumers are becoming more conservative in their use of fuel, however.

“We're seeing more hybrid cars on the road, and we sense that people are taking shorter trips and staying closer to home,” he said. “And if they take two-day trips instead of two-week trips, or stay home more, that could help avoid the typical softness of summer sales, and we're anticipating sales may be a bit stronger this summer.”

Rising Costs

Mike Proulx, president of Bashas', Chandler, Ariz., was one of the retailers who said he believes customers may be trading down as a reaction to higher prices. He said he expects to see costs rise in the second half of 2007 for beef, poultry, eggs and dairy products, all due to higher fuel costs.

In fact, he said Bashas' biggest priority for the second half will be “adjusting to the rising cost of doing business — rising energy and fuel costs, increases in medical benefit costs, the cost of credit-card interchange fees and new-store construction costs.”

Rich Niemann Jr., CEO of Niemann Foods, Quincy, Ill., said his company is also concerned about labor cost increases.

“We do a lot of business in Illinois, where everybody is adapting to changes in the minimum wage in the second half of the year,” he said. “Another priority is keeping a handle on our health care costs, which have been going up so much over the last several years.”

Customers seem to be accepting the price increases that have accompanied the rising costs of doing business, however, he said.

“We are seeing some [cost increases] and we do anticipate we'll see some more,” he said. “I don't think there's any way to avoid it — there are so many costs that everybody has had for the last year or so. Whether you're a manufacturer or a retailer, all of your costs — your labor, your fuel, all of it — eventually have to get passed on. And when the manufacturers pass those costs along, the retailers have to. The momentum has built and from what I can observe, it looks like costs are getting passed through.”

Retailers seem to understand that they can't survive if they try to absorb too many of those costs, Niemann pointed out.

“The supermarket industry has had so much shakeout over the years, lots of the folks in the business are pretty savvy,” he said. “They understand that costs have to be passed on. It happens today probably easier than it happened 15 years ago.”

Neil Golub, CEO of Price Chopper Supermarkets, Schenectady, N.Y., said consumers “have reluctantly decided to deal with what's going on in the world” by accepting higher prices.

“We've seen a lot of cost increases in commodities — the things that affect the prices of other products — dairy products, and with fuel prices high, anything coming in from the West, and anything related to corn and the implications of the demand for ethanol,” he said. “There's a lot coming through, and we just have to deal with it.”

Jack Brown, chairman and CEO, Stater Bros. Markets, Colton, Calif., said that in addition to ongoing cost increases in dairy products and in cereals, he also expects to see coffee prices increase in the second half. He agreed that consumers seem to be accepting the higher prices on the retail shelves.

“We haven't had any major complaints about prices because people realize that, when they're paying $3.49 or so for a gallon of gas, that anything that's delivered will go up because of the cost of fuel,” he said.

At-Home Dining

According to Brown and other retail executives interviewed by SN, the cost of fuel is prompting more people to eat at home more often, even to the point of avoiding fast-food restaurants.

“People have found they can save money eating at home and driving less, and we'll encourage that with a couple of themes during the second half,” he said.

One theme will be, “Save Money. Save Time. Save Gas. Eat at Home,” Brown said, while another will be built around the tag line, “If the store is in your neighborhood, then we're on your way home,” which will be an effort to attract customers already driving past a Stater store while running other errands or driving home from work, he explained.

“Consumers are really in a tough financial situation, with a large percentage seeing their adjustable mortgage rates going up,” he added. “Spending is a big drain on a family, and while they can't control the rates on rents, gas or lights, one of the only areas they can save money is by shopping carefully for food.”

Jeff Maurer, president of Pierce's Supermarkets in Baraboo, Wis., agreed that consumers seem to be shunning restaurants in favor of supermarket shopping.

“I'm not sure what the reasoning is, perhaps because of the higher gasoline prices, but our sales are increasing,” he said. “I think it means more people are eating at home, and it makes me wonder what that must mean for the restaurant industry. Our sales are up significantly in the last six months, and we haven't seen much of a trade-down. People are spending on home-cooked meals and trying to make the best for their families.”

He said the chain, which is expanding through the acquisition of a former Pick 'n Save store from Roundy's Supermarkets, has seen increases in both customer counts and sales per customer.

“It does not appear they're shopping any less — I think they are spending more time at home making more meals at home.”

He said inflationary pressures began to exert themselves just last month.

“We have not seen a lot of changes in grocery costs, though we have seen significant increases in meat and dairy,” he explained. “In Wisconsin, milk went up considerably on June 3. And along with that, yogurts, butters — all of the cultured products — have gone up along with it. The whole meat category is up because of the corn and ethanol issue. We are certainly planning on [food inflation] being the case for the second half of the year.”

Some retailers see inflation as a boon to sales, provided it comes in small enough doses.

“We did see some increases in cereal and milk, but so far we've held it at about 4%, maybe a little more,” said Jeff Reasor, chairman, president and CEO of Reasor's, Tallequah, Okla. “To be honest, we'd like to see inflation in the 2% to 3% range. We think that would bode well for the economy, locally and nationwide as well, if we can keep inflation a little bit in check.”

He said he is “cautiously optimistic” about his company's prospects for the second half, noting that the economy is so strong — with unemployment at about 4% — that it is sometimes difficult to find enough qualified people to staff his company's stores.

He said he's seeing some impact of rising gas prices on consumers' shopping patterns. The company tends to operate large stores — about 65,000 square feet — that draw from a wide area, and shoppers have been making fewer trips, he said.

“I think we are starting to see fuel affecting that a little,” he said. “We're seeing customer counts dropping a little bit, but average purchases are going up. Part of that is inflation, but part of that is people, instead of coming twice every 10 days they are coming once, and spending $100-$200 once instead of $100 twice.”

Growth Initiatives

Several of the companies contacted by SN are in the midst of major corporate initiatives reflecting their ongoing growth.

At UWG, for example, Plamann said he is focused on the pending acquisition of Associated Grocers, Seattle.

“Obviously we want to complete that deal, which we anticipate closing by early fall, so we can transition retail prices by the holiday season,” he said.

He cited three reasons why he anticipates a smooth transition for the AG deal: “First, we have had experience in this type of acquisition [when it bought United Grocers in Portland, Ore., in 1999]; second, and equally important, AG has a strong management group, some of whom we will retain; and third, we will continue operating that business almost ‘as is’ for a period of time, so we're not driving ourselves to eliminate inventories or install systems rapidly.

“We will do it quickly, but not hastily. We'll get all our ducks in line, understand the ramifications of what we do, and make timely decisions.”

Of equal priority with completing the AG deal is for Unified to grow its retail business in its other operating areas, which primarily encompass Southern California and Northern California. “Many of our members have plans to open additional stores, and we will spend a lot of energy making sure we maintain our high support activity,” Plamann said.

Also in Southern California, Stater Bros. is gearing up to move into a massive new distribution center and office complex in San Bernardino. The offices will relocate in late August, although the company will not begin shipping product out of the new facility until after the year-end holidays, Brown said. Until then, Stater intends to test the information systems and other circuits at the new warehouse to facilitate shipping next year, he pointed out.

“We will test systems through the summer, so when we begin shipments in February, we will already have worked the bugs out,” Brown explained.

“But the grocery warehouse will be ready to receive product during the second half of this year, and the refrigerated areas will be ready next June.”

Another California operator managing a major growth initiative is Save Mart, which is busy converting the 130 Albertsons it acquired last year, essentially doubling the size of the company. Save Mart began the conversion process in May.

As previously reported in SN, while most of the acquired stores will operate under the Save Mart name, the 75 or so stores in the Greater San Francisco Bay Area may operate under a new name “to accommodate the higher cost structure in that area,” Piccinini told SN.

Top priorities at Price Chopper during the second half of 2007 include looking for new headquarters space in Schenectady to consolidate its expanding corporate presence, while it also continues to expand its distribution center there. The company is also gearing up to open its eighth location in Connecticut, and is planning three or four major remodels.

At Reasor's, the chain is expanding its market penetration in the Tulsa, Okla., region with an Albertsons store it is acquiring from Albertsons LLC this month and another new, 80,000-square-foot store that it plans to open the following week. Two more stores are coming online next year — including one replacement store — that will expand the chain to 16 locations.

The company also recently converted to employee ownership through an Employee Stock Ownership Plan, or ESOP, and the company said it will take some time to begin to realize the benefits of that.

“It works very similar to a 401(k), where the value increases over time as the company does better,” Reasor said. “We have 2,100 employees, and now they are owners. I don't think that has really sunk in yet, but it will over time.

One of the company's other big initiatives in the second half will be the ongoing rollout of a customized DVD training system for workers.

“We still do hands-on training, but there's a lot of information we can get out to people this way, especially younger people who are used to using computers,” he said.

Training was also cited as a major initiative at other retailers contacted by SN, including Niemann's, which incorporates training as part of its hometown-style “Traditions” remodeling program.

“We're up to our eyeballs in the Traditions store remodels,” said Niemann. “We're constantly doing the renovations, at any time we have three or four under way, and we're doing one from the ground up. And it's not just brick-and-mortar work involved in that, but team-building and training. There's a lot to it.

“We're also working a lot with our fresh food presentation. We know we have to grow there, and get better and more consistent with what we're doing with our fresh and prepared foods.”
Reporting by Elliot Zwiebach, Jon Springer and Mark Hamstra

Product Safety on Front Burner

In the wake of the recent string of product recalls and food contamination reports, consumers are more concerned than ever about the quality of the food they buy in the supermarket, retail executives told SN.

That consumer concern is leading to some changes in the way those supermarket chains operate. Chandler, Ariz.-based Bashas' for example, has created a new position to oversee food safety.

“Food safety and product recall is top-of-mind at Bashas',” said Mike Proulx, president. “We have appointed a senior staff member to manage all issues and to coordinate action plans.”

At Stater Bros. Markets, Colton, Calif., the company has been proactive in communicating information with its customers. The chain was among those affected by a recall of ground beef last month.

“We shared all the information with any customers who called, and when the recall was expanded, we called everyone back to give them the new information, and that particularly impressed many customers,” said Jack Brown, chairman and chief executive officer.

That action, and keeping butchers informed to discuss the situation fully and honestly with customers, lessened the impact in the short term “and did not detract from consumers' faith in the safety of food,” he said.

Dick King, executive vice president of Associated Food Stores, Salt Lake City, said the company is taking steps to educate consumers and to better safeguard its offerings, although it has not been involved with any recalls.

“We're making sure we handle product properly, and emphasizing proper temperatures and proper handling with our people,” he said. “And we're cutting back on how much product is in the case at any one time.”

In addition, the company has instructed its butchers on how to talk with customers about E. coli.

Neil Golub, CEO of Price Chopper Supermarkets, Schenectady, N.Y., said that chain has been approaching food safety from a supply chain perspective by pushing for its vendors to adhere to the standards of Food Marketing Institute's Safe Quality Food (SQF) certification.

“We have been making a very aggressive drive for SQF,” he said. “It includes inspections of growing areas, growers, farmers, processing areas — we are aggressively, aggressively challenging our suppliers to be following the SQF standards, which we think can help us.”

Al Plamann, president and CEO of Unified Western Grocers, Los Angeles, is working with FMI to respond to food safety crises.

“We participate, on a voluntary basis, in an ad hoc group through FMI to see what the industry needs to do to bring credibility back on the consumer end that our food supply system is safe and reliable,” he said. “We clearly have to get control over private label, and all divisions have people that monitor getting products off the shelves when there is a recall.

“Consumers are really worried because they don't have enough information on how contaminants get into the food products, and they believe there aren't enough controls, with too few products ever tested, and all those concerns cause them to ask if we have a safe food supply chain. We'd be ill-served to lose the credibility that's taken so long to build.”

Plamann said those concerns do affect buying habits. “People are switching to organics and natural or locally produced products as retailers tell them those are ways to ensure they're getting safe products.

“We encourage our members to let customers know what they offer that's produced locally, and we have programs through our specialty supply company that puts local products in our members' stores.”

Jeff Maurer, president of Pierce's Supermarkets, Baraboo, Wis., also said he thinks consumers have become more cautious about the food products they buy.

“They want to make sure what they buy is as safe as can be,” he said. “They do read labels and watch dating very carefully, especially in the meat department.

“We have to be sure we're offering quality goods, on time. That's the niche we're building our company on — a higher-quality perishable product, because our primary competitor is Wal-Mart.”
— E.Z., J.S., M.H.