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Retailers Optimistic for 2008 Despite Inflation Pressures

The prospects of ongoing food-cost inflation and lingering economic malaise are of some concern to supermarket industry leaders, but such conditions have not tempered these executives' outlooks for prosperity in the year ahead. Supermarket chief executive officers from around the country interviewed by SN over the last few weeks said they expect pricing pressures to continue as fuel and commodity

The prospects of ongoing food-cost inflation and lingering economic malaise are of some concern to supermarket industry leaders, but such conditions have not tempered these executives' outlooks for prosperity in the year ahead.

Supermarket chief executive officers from around the country interviewed by SN over the last few weeks said they expect pricing pressures to continue as fuel and commodity costs remain high, but many are also continuing to see sales growth and are expecting continued expansion.

“We've grown same-store sales in strong single digits for several years, and we think we are still going to see strong same-store growth,” said Jeff Reasor, CEO of Reasor's, Tahlequah, Okla. “We think 2008 is going to be a strong year for us.”

Reasor, who also serves on the board of Associated Wholesale Grocers, Kansas City, Kan., said operators at a recent AWG sales meeting projected that food-price inflation would be about 4% in 2008, about the same as it was in 2007.

Some operators said they foresee some trading down by consumers amid the pressures of rising costs for fuel and other products, but some are also coping by expanding their private-label offerings and adding efficiencies to their operations.

Al Plamann, president and CEO of Unified Grocers, Los Angeles, said he anticipates slight sales gains in 2008 — something in the range of 2.5% to 3%, with most of the increase coming from inflation, “and with only a little extra in true sales gains as consumers begin trading down.

“We anticipate some trading down next year because everyone is so skeptical of where the economy will be,” he said. “Surprisingly, we haven't seen any trading down yet, but we expect it right after the holidays, as the euphoria of the season wanes.

“Historically, we haven't seen the economy really suffer in an election year, but we think it will be very soft in 2008, despite efforts by incumbents and the [Bush] administration to keep it strong.”

Plamann said profits, like sales, will rise only slightly in 2008. “We anticipate increases but only moderately so, because of margin pressures that will result from a combination of trading down and some inflation from commodity and energy prices as they work their way through the cost of goods.”

Rich Niemann Jr., CEO of Niemann Foods, Quincy, Ill., said consumers in the Midwest appear to be under a lot of pressure.

“The last half of 2007 seems like it will be the predictor of what will happen in 2008,” he said. “Our sales have been good and we expect to have good, positive sales in 2008, but we have to work pretty hard for those sales gains. I see our customers in our part of the country are under quite a bit of personal financial pressure. There's just a lot going on for people now.

“I'm not just talking about $4 milk or $3.50 gas,” he said. “Those are parts of it. But just about everything that people buy these days are recognizing price increases, and that weighs on their available cash, and it also weighs a lot on people's minds.”

Niemann's will continue to focus on creating differentiation for its County Market banner.

“We hope to be very busy, between doing major remodels, new stores and acquisitions,” he said. “We expect to do around six to eight big projects during the year, around the same as we did in 2007.”

Coping With Inflation

Michael Cianciarulo, CEO of Earth Fare, a natural-and-organic chain based in Fletcher, N.C., said one of the ways his company expects to cope with rising prices is through the expansion of private-label offerings.

“We're seeing a lot of inflation — it seems all the retailers are trying to do their best to keep it down, because the consumers can only take so much,” he said. “We've seen it in everything that corn touches, which is a lot of different things, and we've also had a lot of increases in the cost of a lot of gluten-free products. But we're bringing up more of our own-brand products internally, which will help keep the costs down.”

Earth Fare now has about 1,000 private-label items, Cianciarulo said.

The 13-store chain, which added two stores in 2007, expects to add another four locations in 2008, including its first store in Alabama, in the city of Auburn. The other stores are planned for South Carolina, North Carolina and Tennessee.

“We just see some markets that possibly aren't being served, and we see an opportunity to go in there,” Cianciarulo said.

The chain this year opened a new 60,000-square-foot distribution center, part of a new headquarters facility that also includes about 20,000 square feet of office space.

Jack Brown, chairman and CEO of Stater Bros. Markets, San Bernardino, Calif., said he anticipates increased profits in 2008 because of efficiencies from the company's new warehouse facility, though he was a little more guarded on sales expectations.

“Profits will be driven by our new, one-stop distribution center, which will enable us to increase our shipment efficiency, because all product is in one location instead of seven, which means we will be able to ship fuller loads,” he explained. “In addition, the new location gives us access to four major east-west freeways instead of just two at our former main facility, which should be helpful if there's a traffic tie-up on one, because we'd have three alternate routes — and the costs of distribution come not only from the length in miles but also from the time drivers spend in traffic.

“And most significantly, the new distribution center will mean we're able to forward buy for the first time in four years because of such limited space previously.”

Stater anticipates opening four new stores in 2008 and doing six major remodels, at a cost of $2 million or more apiece, Brown said. That compares with four new stores and seven major remodels in 2007.

Expansion has been slow the last year or so, Brown said, while the company was busy consolidating its warehousing, “but in 2009 we think we'll be able to open between six and eight new stores,” he said.

“Right now we're watching things carefully and reevaluating every site as needed to make sure nothing has happened that's negative. As we look at 2009, some sites do not have new homes opening on schedule, so we will hold back until rooftops appear. Our policy is to never open stores unless what's there can meet our bottom-line expectations.”

Brown said he expects inflation to remain at around 3%, “and that will impact us only to the degree that if competitors allow us to pass it on, we will do so, but if not, then we will tighten down further. But Stater has been able to exist on low margins for a long period of time.”

Eyeing Steady Sales

Mike Byars, president and CEO of Minyard Food Stores, Coppell, Texas, said his company will be satisfied if sales in 2008 are even with 2007.

“We're not looking for a sales increase,” he told SN. “As much as anything, given the economy and what we experienced with weather and immigration issues in 2007, if we can stay even, with maybe a little bit of growth, we'll be doing very well.”

The weather problems during the summer had to do with heavy rains, which prompted many Latinos who work in agriculture and home construction to go back to Mexico, “which made an already competitive situation more competitive, as everyone went after few customers,” Byars said.

Concerning immigration, while all Minyard employees are legal residents, many customers are not, and when there's a push against illegals, “some people pull back and move,” he said, “which means there's less potential business out there and more competition for what there is.”

Byars said he believes inflation will continue, “with no relief until at least the second half of the year. And inflation limits spending by our core customers and, again, makes the area more competitive.”

Minyard has been in a transition stage the last year or two, and it did not open any new stores in 2007, though it did remodel 11, Byars said. In 2008, it plans to open two new stores late in the year and to complete up to 10 remodels.

He said he expects competition to remain tough. “This market is over-stored right now, and we expect companies to become more aggressive. This is a hot spot for Wal-Mart in terms of supercenters, and everyone is trying to differentiate themselves and maintain the business they have.”

At Reasor's, the company opened one new store in 2007 and acquired an Albertsons location, but the company does not expect any additional openings in 2008. The company added some debt in 2007 when it implemented an employee stock ownership plan, or ESOP.

“We leveraged up a little bit to finance that, but our sales results and EBITDA [have] been ahead of schedule, and with the Albertsons coming online, which was a plus from day one, we think we may be able to reduce some debt, and maybe move some projects up a little bit,” Reasor said. “We've got three that we're working on, and I'm not sure any of them will come out of the ground in 2008 — they are probably 2009 projects.

“Market share is not a big deal to us,” he added. “We're more focused on the success of each individual store.”

Following the success of the Albertsons acquisition in 2007, Reasor said the company is also looking at some possible acquisitions in the market, although he declined to discuss details of the projects.

Kings Sees Growth Ahead

In the Northeast, Kings Super Markets is also eyeing growth opportunities, according to Bruce Weitz, CEO of the 26-store chain, based in Parsippany, N.J.

“We are looking at growing the business,” he told SN. “We have nothing to announce, but hopefully a year from now we will be a bigger company in terms of number of units and things like that. We're going to continue the things we need to do to secure our niche in the marketplace, and we're optimistic about what our people have done.”

The company, which was acquired by private equity in 2006, has not added any new stores but has remodeled about half a dozen locations in the past 18 months, Weitz said.

“We're happy with the sales results we're seeing chainwide, not only with the remodeled stores, but the other stores as well,” he said. “I think the sales growth in 2008 hopefully will be from new units that we will have.”

He said the company is looking at both acquisitions and possibilities for new-store development in and around the company's current market in the New York-New Jersey area.

Meanwhile, across the Hudson River in New York City, John Catsimatidis, CEO of the Red Apple Group, parent of the Gristedes chain, said his company posted same-store sales gains in 2007 for the first time in several years after the company sold off some underperforming units.

“In the old days, we would keep underperforming stores, just to keep a larger base,” he told SN. “These days, we are so large, we've decided to spin off underperforming stores, because the real estate value of those stores is so high. If you have a negative EBITDA on the stores, and a guy is going to pay you a very large number because of the real estate value, then you sell it.”

His company is continuing to look for opportunities, however.

“Gristedes has been around for 120 years, and Gristedes will continue to concentrate on the New York City market,” he said, although new openings are difficult in the city right now. “It's hard to open new stores when the price of real estate is $100 a square foot.”

He also said Red Apple Group recently formed a $500 million fund for acquisitions in the energy market, and is considering a fund of $300 million to $500 million to look for “undervalued food companies.”
Reporting by Elliot Zwiebach, Jon Springer and Mark Hamstra