NexGen Advisors Point of View: Grocery Stores
By Carla Zilka
When the economy is good, grocery stores profit. When the economy is bad, grocery stores profit…well some of them that it is. Nothing is a better barometer of consumer spending than grocery stores. And nothing gives us a view into the average American household than the stores consumers flock to, in order to get something they cannot live without: Food. It is something we should pay close attention to when gauging the end of the recession. With the economy still an issue for most households, it’s not surprising that a recent survey by the National Grocers Association Consumer Survey Panel indicates that “low prices are considered a very important factor in choosing a supermarket”. A New York Times article conveying the results of a recent survey on July 8, 2008, states that 20% of shoppers switched to cheaper stores due to current environment. Proof positive is that Wal-Mart is now the #1 seller of groceries in the U.S. But some grocery stores are fighting back and winning share. Unfortunately at the expense of specialty grocers.
The decrease in shoppers and revenue at specialty grocers, like Whole Foods is no surprise, but the issue is that it took so long for Whole Food to react to the negative environment and they are paying for it now. When the economy went into a tailspin at the end of 2007, a plan of attack should have been executed immediately, and we saw this with many grocery chains. But some waited, like Whole Foods, whose plan wasn’t executed until 5 months later in May of 2008. Expecting customers to be loyal to you is risky and misguided during a time of financial uncertainty, especially when it involves “commodity” products like groceries. Sure, a small devout following will remain and continue to pay higher prices, but without incentives, promotions and lower prices, market share is certain to be lost. With SG&A as a percentage of revenue more than 10% higher than their competitors, Whole Foods has no room to falter. Spending time and money on technology that does not directly benefit sales, like creating and managing Facebook and Twitter, which Whole Foods says is for the customer, but is something that holds no true value to them. As mentioned above, price is all that matters right now. The good news is Whole Foods has instituted aggressive pricing and promotions, and made available private label products that meet customer’s needs, but at a reduced price.
Private label products overall have been a windfall for all grocery stores that sell them, especially Kroger. Sales have increased 4.4% yr. over yr., in large part due to the 14,000 private label products which make up 27% of all sales. Kroger private label brands are produced in their own manufacturing facilities dairies and bakeries, resulting in the lowest SG&A as a percentage of revenue (18%) than any of their competitors. All cost savings recognized through procurement or manufacturing innovation, go right back into lower pricing of their products. Private label products combined with the Kroger Frequent Buyer Card (can sign up for free) and other special promotions create a proposition value most families cannot ignore. A variety of products including organic, and low prices are just two of the elements that make up the “Customer First” business strategy Kroger has implemented, allowing them to gain market share from their competitors. This puts them in a great position to weather the downturn in the economy and see continued growth in a recovery. As with most customers, if you can get them to switch over to your brand, they are likely to stay as long as nothing in the product or price drastically changes.
SUPERVALU stores, which include Dominick’s and Harris Teeter to name a couple, also use private label brands to boost sales. With almost 3000 products, they have seen an increase in penetration of 21.8%. This allows them to keep their SG&A as a percentage of revenue in the 19%, excluding restructuring and litigation charges, but even with those included they still retain a respectable 21%. And the restructuring charges are actually related to customer centric and store remodels that are intended to attract and retain customers, which must be working because their customer service scores are increasing even in this tough environment.
Even Safeway is remodeling, focused on a Lifestyle Format that is meant to create a warm ambiance, inviting décor and stations to meets the needs of a broad range of customers with sushi, olive bars, etc. The remodels have cause their SG&A as a percentage of revenue to be one of the highest amongst their competitors at 25%, but sales are up 3.4% yr. over yr., in large part to their private label products. Self manufacturing generics is a key focus for them, as well as promoting generic pharmaceuticals, since their Cost of Goods Sold is lower than the branded products. Significant cost reductions are already in place with 50% of them locked in and completed as of 1Q09. An important component of the cost reduction effort is the re-organization of their product control, occurring at the national level instead of the regional level.
For an industry like grocery stores, where most of the products are commodities, it is the ones that really listen to the needs of their customers that will outshine all the others. In this economy, it is all about price, so if you can keep your expenses down and pass on the savings to your customers, you will be able to capture market share and increase sales. While an inviting atmosphere is also important to customers, the fact that Wal-Mart is the number one seller of groceries in the U.S., points clearly to the most important customer need…lower prices!
The decrease in shoppers and revenue at specialty grocers, like Whole Foods is no surprise, but the issue is that it took so long for Whole Food to react to the negative environment and they are paying for it now. When the economy went into a tailspin at the end of 2007, a plan of attack should have been executed immediately, and we saw this with many grocery chains. But some waited, like Whole Foods, whose plan wasn’t executed until 5 months later in May of 2008. Expecting customers to be loyal to you is risky and misguided during a time of financial uncertainty, especially when it involves “commodity” products like groceries. Sure, a small devout following will remain and continue to pay higher prices, but without incentives, promotions and lower prices, market share is certain to be lost. With SG&A as a percentage of revenue more than 10% higher than their competitors, Whole Foods has no room to falter. Spending time and money on technology that does not directly benefit sales, like creating and managing Facebook and Twitter, which Whole Foods says is for the customer, but is something that holds no true value to them. As mentioned above, price is all that matters right now. The good news is Whole Foods has instituted aggressive pricing and promotions, and made available private label products that meet customer’s needs, but at a reduced price.
Private label products overall have been a windfall for all grocery stores that sell them, especially Kroger. Sales have increased 4.4% yr. over yr., in large part due to the 14,000 private label products which make up 27% of all sales. Kroger private label brands are produced in their own manufacturing facilities dairies and bakeries, resulting in the lowest SG&A as a percentage of revenue (18%) than any of their competitors. All cost savings recognized through procurement or manufacturing innovation, go right back into lower pricing of their products. Private label products combined with the Kroger Frequent Buyer Card (can sign up for free) and other special promotions create a proposition value most families cannot ignore. A variety of products including organic, and low prices are just two of the elements that make up the “Customer First” business strategy Kroger has implemented, allowing them to gain market share from their competitors. This puts them in a great position to weather the downturn in the economy and see continued growth in a recovery. As with most customers, if you can get them to switch over to your brand, they are likely to stay as long as nothing in the product or price drastically changes.
SUPERVALU stores, which include Dominick’s and Harris Teeter to name a couple, also use private label brands to boost sales. With almost 3000 products, they have seen an increase in penetration of 21.8%. This allows them to keep their SG&A as a percentage of revenue in the 19%, excluding restructuring and litigation charges, but even with those included they still retain a respectable 21%. And the restructuring charges are actually related to customer centric and store remodels that are intended to attract and retain customers, which must be working because their customer service scores are increasing even in this tough environment.
Even Safeway is remodeling, focused on a Lifestyle Format that is meant to create a warm ambiance, inviting décor and stations to meets the needs of a broad range of customers with sushi, olive bars, etc. The remodels have cause their SG&A as a percentage of revenue to be one of the highest amongst their competitors at 25%, but sales are up 3.4% yr. over yr., in large part to their private label products. Self manufacturing generics is a key focus for them, as well as promoting generic pharmaceuticals, since their Cost of Goods Sold is lower than the branded products. Significant cost reductions are already in place with 50% of them locked in and completed as of 1Q09. An important component of the cost reduction effort is the re-organization of their product control, occurring at the national level instead of the regional level.
For an industry like grocery stores, where most of the products are commodities, it is the ones that really listen to the needs of their customers that will outshine all the others. In this economy, it is all about price, so if you can keep your expenses down and pass on the savings to your customers, you will be able to capture market share and increase sales. While an inviting atmosphere is also important to customers, the fact that Wal-Mart is the number one seller of groceries in the U.S., points clearly to the most important customer need…lower prices!
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