LAS VEGAS — Supermarket companies grew their sales by about 4.6% in 2007, while same-store sales grew 4.2% and net income hit a record high, according to the annual Food Marketing Institute Speaks survey, presented here at the FMI Show last week.
The mean 4.2% same-store sales figure matches the growth in food-price inflation for the year. Profits were the highest the survey has ever recorded, however: 1.91% of sales, according to data from FMI's Annual Financial Review.
“We have found a way to drop dollars to the bottom line in difficult times,” said Tim Hammonds, president and chief executive officer, FMI.
Although retailers said they were increasingly concerned about the economy, the review also found that 86% of respondents were either somewhat or very positive about the profitability outlook for the year.
Citing data from FMI's Trends report on consumer attitudes, Hammonds noted that shoppers actually showed a slight increase in satisfaction with their supermarket, giving the channel an 8.0 rating on a scale of 1-10, vs. a 7.9 score in the preceding year.
“It may not seem like that much of an improvement to you, but when you consider the pressure consumers are under with the economy, it's a victory that confidence didn't decline since the previous year,” Hammonds said.
Consumers continued to slowly shift toward alternative formats, however, the Trends survey showed. Eighty-six percent of shoppers said they had shopped for food in a supermarket in the last 30 days, vs. 87% in the prior year, 90% in the year before that and 93% three years ago. Meanwhile, supercenters were up to 45% in the same metric, vs. 35% three years ago.
“We're seeing supermarket share is continuing to erode somewhat, as people shift to value-based formats to stretch their dollar,” Hammonds said.
Food prices are one of the industry's biggest concerns, he pointed out, noting that the concerns about inflation among Americans are dwarfed by the problems faced in some countries that have seen commodity costs driven to new highs.
“Who would have thought 12 months ago that this would be such a hot topic?” Hammonds said. “Here in America, where we spend just under 10% of our income on all food, it's a problem, but if you spend 50% or 60% or 70%, it is a disaster.”
The price of rice, for example, he said, has “doubled in the last five weeks.”
In the U.S., consumers have had to adjust to paying more for many staples that for several years had seen little or no inflation.
“This is quite a different environment for supermarket operators,” Hammonds said. “Usually, when the consumer is under stress, the supermarket offers a source of relief. Now what we've seen is the very basic commodities that people trade down to — things like eggs and pasta — are the very same things that have seen some of the highest increases.”
He noted that even though recent food-price pressures have been greater than consumers experienced in the 1980s and 1990s, in the 1970s food inflation “was almost double what it is today.”
“This industry has coped with worse in the past,” Hammonds said, noting that some companies have sought to rehire buyers who worked through the soaring inflation of the 1970s to help cope with today's environment.
“Today, buyers are having conversations [with suppliers about deals] that they haven't had in more than 30 years,” he said.
He sees even more cost pressures in the pipeline, as many buyers on both the manufacturer and retailer sides have been able to delay some of their commodity cost increases through hedging contracts that only last from six months to a year.
He also said he does not believe the pressures will abate anytime soon.
“It's not temporary,” he said. “We have repriced food in America, and perhaps globally, and this is not going to settle back down in a few weeks or a few months. It may be a few years, and it may be a permanent shift.”
He cited several reasons, including rising health care costs for all companies, rising oil prices, the weak dollar, droughts in key areas of the globe, the increasing demand for gas in developing nations, and higher demand for meat-based diets in places like India and China.
“Health care costs are going up dramatically, and they will work their way into food costs,” Hammonds said.
The increasing wealth in India and China is causing many people in those long-impoverished nations to consume more meat, which not only drives demand for meat products, but also for the grains and water needed to raise them, and it also has been driving agriculture into less arable environments.
“Forty percent of the world's population is upgrading their diets,” Hammonds said.
He also laid much of the blame on the increasing pressures to use substitute biofuels for gasoline.
“Corn ethanol is a huge problem,” he said, noting that government subsidies of corn growers are at the heart of the problem, because ethanol demand is putting pressure on the supply side for food.
In this election year, Hammonds said, politicians have been quick to pledge support for corn farmers in corn-intensive states that had early primaries, such as Iowa.
In addition, society is “placing a huge bet” that biofuels will someday become more efficient, he said. Sugar cane, for example, shows some promise as a source for more efficient ethanol production.
“Someday there may be more efficient ways to use agriculture to produce fuel, but right now it's a big problem,” he said.
In an interview with SN after the presentation, Jerry Fleagle, president of the Iowa Grocery Industry Association and the winner of FMI's 2008 Donald H. McManus Award for service in the area of public policy, said he believes the subsidies for producing ethanol from corn will be reduced.
“We think the subsidies will be reduced for using corn to produce ethanol,” he said. “If you take away the subsidies, it becomes a free-market approach.”
Hammonds said some of the outcomes from higher food prices could include smaller portion sizes at restaurants, which he said could then be adopted by consumers at home and result in healthier eating habits at home.
In addition, he said the world could become more receptive to the use of genetically modified seeds in agricultural production, citing their ability to increase yields and present higher resistance to pests.