The US retail market is arguably at the epicentre of the economic downturn and even though food retailers may be in a slightly less parlous position than their non-food counterparts, 2009 is set to be an extremely challenging year.


However, even in these troubled times some companies may be better placed to withstand the adverse market conditions than others, while one or two may even be able to turn adversity into opportunity.


just-food asked three US food retail analysts for their take on the year ahead.


 


Neil Stern, McMillanDoolittle



These are the worst of times for US retailing, with historically low consumer confidence driving some of the worst retail sales performance on record. The overall retail market actually contracted in 2008 with more of the same predicted for 2009.







So where does that leave the supposedly recession resistant grocery sector? In 2008, grocery retailing reported a 5.3% overall sales gain. This sounds impressive against the dismal retail backdrop but once food inflation, which was particularly significant through much of the year, is taken into account the final numbers for 2008 will likely reveal negative overall unit sales and at best nominal to slightly negative real growth. 2009 will likely be worse overall, based on slowing sales increases as the year progresses.  Overall sales growth might be 2-3%, erased by continued food inflation which is not expected to abate until mid-year.


What we are observing is the ‘Triple Trade Down’ effect. Consumers are eating out less and so potentially spending more in the grocery channel; in-store they are shifting their mix of purchases to more canned goods versus fresh, private label versus national brands, using coupons in greater numbers etc; in addition they are trading out of traditional grocery stores into more value-driven channels, such as dollar stores, supercenters and discounters.


Even in this bleak environment, there are winners and losers. In general, those who are positioned to deliver real value to the consumer will gain share in 2009.


Wal-Mart continues to produce positive like-for-like sales, driven by higher food sales. They are working to improve the in-store experience by cleaning up sales floors and will have a major re-launch of their core food private brand. We expect their momentum to continue well into 2009.


Kroger is reaping the rewards of a long-term repositioning to narrow the value gap against Wal-Mart. They continue to post the best like-for-like numbers in the industry as they execute their strategy.


While Aldi has a relatively small share in the US, they plan to grow at a greater rate than ever before, filling out new markets like Florida and targeting new geographies, such as the Northeast US.


SuperValu continues to struggle with the integration of Albertsons and is forecasting negative like-for-like sales as they head into 2009. The chain must unlock their value equation and continue to remodel stores while facing an adverse credit market.


Safeway flourished in an up economy over the past five to six years, remodeling the majority of their stores into an upscale, perishables-oriented ‘lifestyle’ format, but now must demonstrate better value to the customer.


Whole Foods is getting hammered by a confluence of unfortunate events. Their acquisition of Wild Oats appears ill-timed and is still hampered by US government opposition. And their upscale formats and reputation for high prices has significantly hurt them in the difficult economy, as consumers trade to more affordable options.


Tesco ’s Fresh & Easy is a bit of an enigma still. They have slowed expansion and talk of new market entries has slowed. Their no-nonsense, low-priced format should play well in this economy, but the format has yet to resonate with US consumers.


2009 is shaping up to be an extreme test for all US retailers. The grocery sector will be defined by who can deliver meaningful value to the consumer and garner the most share of what will surely be a declining market.



Karen Short, Friedman, Billings, Ramsey & Co.



The main factors influencing food retailers in the coming year will be the potential for deflation, vendor relationships and what the promotional environment is from a vendor allowance perspective, and what Wal-Mart does and what your positioning and exposure is to Wal-Mart.







Retailers are consistently saying they are not expecting deflation this year. They are not denying there will be deflation in some categories, but when it comes to packaged food and center store categories, vendors are telling retailers they are not willing to reduce prices. That may change. It’s hard for me to fathom not seeing deflation but pretty much any food retailer I’ve spoken with is saying there won’t be.


Whatever happens, there will be very few retailers seeing unit volume growth, almost none with the exception of Kroger. And, not coincidentally, Kroger has the narrowest price gap with Wal-Mart. It does have the largest exposure to Wal-Mart so it needs the narrowest price gap.


Kroger has been consistently gaining share and I don’t see that changing, gaining share more against other retailers than Wal-Mart itself. I anticipate Kroger will have a much better year than any of the other food retailers, but that’s all relative.


The question is which retailer is going to see top-line growth flowing through to bottom-line growth. If you had to place a bet on a retailer it’s going to be Kroger.


With regard to promotion and vendor allowances, we are seeing some willingness on the part of CPG [consumer packaged goods] companies to increase promotional spend with retailers with decent sales or dominant market share positions, either nationally or locally. If vendors remain reluctant to reduce prices but opt to increase promotional allowances, retailers with more dominant positions will derive greater benefit.


Regarding the impact of the downturn on spending, consumers are definitely cherry-picking and trading down within the store, away from branded and into private label. So there is potential for private-label penetration to increase which is of benefit to retailers from a gross profit dollar perspective but detrimental on the sales leverage side. They are more profitable but lower-ticket items.


Trading out of restaurants into supermarkets is not happening to the extent some imagine. Consumers that are switching from eating out to buying food in stores are buying ingredients for home cooking instead of buying prepared food.


Nevertheless, in general earnings declines for food retailers should be less severe than for non-food retailers and other sectors because food is a necessity, and because there is some switching from eating out to eating in.


I am less negative on Fresh & Easy than many analysts. If anything, this year will prove helpful because they can get better real estate. In fact, given the state of the real estate market and the way current economic conditions are weakening competitors, I would not be surprised if both Tesco and Wal-Mart roll out their respective Fresh & Easy and Marketside formats relatively aggressively during the coming year.


Whole Foods Market is going to struggle. There are a lot of cost-cutting opportunities. Labour costs in the stores are high and they have to adapt to a different operating environment. They have private equity from two different angles who have got involved with investments in the company and they are not in it to lose money. The UK store is losing a lot of money and my guess is that closing the store and exiting the lease even at a significant cost is probably a better decision than continuing to run it. I don’t know if that will be their decision but I can’t imagine how you can make those numbers work.


 


Ron Margulis, RAM Communications



During the last 18 months, the US industry has experienced a sea change. Several new entries from foreign and domestic retailers are re-creating the competitive landscape and based on their success the nation may soon see a more compact supermarket format as a viable competitor to the traditional superstores.







Tesco’s Fresh & Easy stores in California, Nevada and Arizona are perhaps the most notable new entries. The format – nearly 100 stores have opened since 2007 – emphasises produce and prepared foods, and promotes the Fresh & Easy private label throughout the store.


The appearance of Tesco’s Fresh & Easy stores has prompted Wal-Mart, Safeway and others to develop compact supermarket formats. Wal-Mart opened its Marketside grocery stores in Phoenix in October and Safeway opened a 15,000-square-foot store called “The Market” in Long Beach, California, last May. Like Fresh & Easy, these new stores also focus on fresh produce and prepared foods.


The compact supermarket still represents a tiny share of the US grocery retail market, but it is the fastest growing segment in the industry. With the economy tanking, the time for a conveniently located store that allows shoppers to quickly buy the products they want may be here.


As for other trends impacting the US food business, there will certainly be growth in private label as a result of the economy. The interesting thing here is that this growth will come not from the top national brands, but from the third and fourth brand in the category. Shoppers still want to be comforted in down times and will stay with certain brands they see as delivering more value than the private-label offering. Also, retailers will be conducting more in-store marketing activities to try to capture a greater share of the shopper’s wallet.