Deflation Just Adds To Growing List Of Challenges Retailers Continue To Face
Overstoring still creating gridlock? Check.
A wide variety of brick and mortar retail formats and styles from which consumers can choose? Check.
An increase in online delivery-driven shopping for grocery items? Check.
A growing portal of meal kit solution companies beginning to gain greater penetration? Check. Deflation in many perishable categories especially milk, eggs and meats? Double check.
Let’s step back and analyze. Virtually every urban and suburban marketing area in the Mid-Atlantic has been overstored for the past seven years and it seems every silo of food and drug retailing – supermarkets, specialty stores, ethnic markets, club stores, mass merchants, drug stores, c-stores and dollar stores – have all increased their grocery SKU load over the past 18 months. Amazon and its perishables unit have added more fulfillment houses in the past 12 months. Start-ups such as Blue Apron, Hello Fresh and Plated are making at least some headway with their meal kit offerings.
When will the insanity end? Other than the exit of Mars Super Markets last July, the divesting of about 70 Food Lion stores (in the Mid-Atlantic) last year and the final stages of withdrawal of Giant/Martin’s in Richmond, there’s been some staggering, but no other total collapses.
The additional burden of dealing with significant deflation in such a fragile environment made it almost impossible for most retailers to show any progress on the top line.
There were some exceptions – Aldi and Weis Markets defied the trend by adding both stores (Aldi with new units, Weis by acquisition) and improving ID sales. Wal-Mart had a solid year as well, primarily by improving in-store service levels and digging in deeper with its low retail price mindset. CVS, too, had a strong year, but the Rhode Island based company’s biggest gain came from its acquisition of 102 of Target’s in-store pharmacies in the Mid-Atlantic region.
So, without further adieu, here’s my progress report on the largest retailers in Food World’s largest marketing area.
Giant/Landover – While business did improve slightly for the perennial market leader during the last quarter of our measuring period, Giant still remained a company that should be doing better based solely on its superior locations. However, the B-W field has become overcrowded and everyone has chipped away at the Giant’s still strong (but declining) market share. President Gordon Reid has done a fine job improving morale internally. Giant is also set to launch its new decentralized merchandising program early next year, and that should help with more focused procurement and speed to shelf issues. However, until the division of Ahold USA gains a corporate commitment to add more labor in its stores and also improves associate training at its 161 supermarkets, it’s tough to imagine any significant improvements in ID sales and market share.
Safeway – A difficult year for the division of Albertsons that had begun to turn things around in 2015-2016. Overall market conditions were very challenging and Safeway suffered as much as any retailer from the effects of overstoring and deflation. The retailer’s Lanham, MD-based Eastern division also lost some of its pricing effectiveness and saw a dip in store morale, which had spiked after Albertsons’ 2015 purchase, and has returned to ordinary levels. With so much competition and diversity in the B-W market, trending toward the “mushy middle” can be harmful. New division president, and Safeway veteran executive, Dan Valenzuela, who replaced Steve Burnham last September, knows the challenges that lie ahead. It will be a tough fix, given market conditions, but improvement is certainly possible.
Wal-Mart – The needle actually began to move favorably in Wal-Mart’s direction last year when CEO Doug McMillon promised better store conditions. That meant cleaner units, more labor and a focus on improving what were poor in-stock levels. That effort continued into this year and when you add more intensity to its aggressive pricing platform, you’ve got a successful baseline for success. Wal-Mart opened no net new stores in the market (it opened replacement units in Frederick, MD and Prince Frederick, MD), but gained share by better executing its price-driven game plan more effectively. And while the expansion of Aldi and the debut of Lidl would seemingly (on paper) impact the Behemoth more than other non-discount merchants, Wal-Mart certainly will willingly engage them in a price battle while being content to take market share away from more conventional competitors.
Shoppers Food & Pharmacy – Now it really looks like the end is not far off. While parent company Supervalu CEO Mark Gross has not mouthed the word “for sale,” he’s made it abundantly clear that SVU’s focus going forward will be on its wholesale business. In the past year, Shoppers has essentially been given oversight of two even more struggling Supervalu banners– Farm Fresh and 22 Shop ‘n Save stores that were acquired from Food Lion – and Shoppers has been stretched more than it’s ever been. That’s very unfortunate given the fact that president Bob Gleeson is a talented leader and he’s got a solid team around him. But when you don’t adequately feed the kitty for more than a decade, you simply can’t compete in a market as competitive and diverse as the Baltimore-Washington.
Harris Teeter – Same store sales were relatively flat, but Harris Teeter’s customer counts remained steady, an indicator that the company that entered the market in 1998 to compete against Giant for the middle and upper-middle customer demographic, is on solid footing. When you add five new stores, you’re going to get a sales bang and HT’s volume improvement, other than Weis (which acquired 31 stores), was greater than any other retailer in the B-W market. With six more stores in its real estate pipeline, the very profitable division of Kroger is poised to take more share from the “big three” market share leaders. Harris Teeter president Rod Antolock continues to perform at a high level since taking the helm from the venerable Fred Morganthall two years ago.
Wegmans – Taking share from existing market leader is almost Wegmans’ middle name. From its first B-W unit in Sterling, VA in 2004, the Rochester, NY-uber retailer has been an instant success. Fifteen stores later, Wegmans continues to produce huge per-store volumes and impact every community it enters. This year, Alexandria, VA and Owings Mills, MD felt the earthquake and soon Chantilly, VA and Tyson Corner, VA will feel it too. Actually, Wegmans’ ID sales were relatively flat this year, but the weekly volume numbers are so big and the expansion effort is so impactful, a short term blip is nothing to be concerned about. One change worth noting and tracking: Danny Wegman has passed the CEO baton to his eldest daughter Colleen (Danny is now chairman). Can the next Wegmans generation continue to perform at the same high level of Danny and his father Robert?
Cuts To SNAP Benefits, Farm Subsidiaries
President Donald Trump’s new $4.1 trillion tax reform program, released on May 23, could have a significantly adverse effect on food retailers. That’s because, as part of the overall $1.7 billion in cuts, the president’s new plan calls for a $193 billion reduction to the federal SNAP (Supplemental Nutrition Assistance Program) food assistance budget over the next decade. Currently, 42 million Americans rely on SNAP benefits.
And in addition to those cuts, President Trump’s plan also calls for a fee that would charge retailers that accept food stamps. That fee, according to the Office of Management and Budget (OMB), would be assessed when stores sign up and would require renewal after five years. The fee would vary based on size and retail channel, but the OMB would generate $2.4 billion in additional revenue over the next decade.
And the new budget also calls for massive reductions proposed for Medicaid as well as for federal pensions and farm subsidies.
Political insiders believe the proposed cuts likely won’t pass the House and/or Senate in their current form, given likely bipartisan resistance to the measure. However, the deep level of proposed cuts ($800 billion alone in Medicaid) clearly signals an intention to dramatically cut federal food assistance to low-income Americans.
If passed at even a reduced level of trimming, this would mark the second time in four years that both consumers and merchants would face a level of fewer available funds in the food assistance benefits system.
“The president’s proposed budget seems to estimate that $2 billion in revenue to reduce expenditures on the Supplemental Nutrition Assistance Program would be generated for the first time, by imposing fees on retailers serving as the delivery mechanism for these benefits,” noted Leslie G. Sarasin, president and CEO of the Food Marketing Institute, the large food retailing trade association. “As the president’s proposal, it is meant to message priorities the administration views as important, such as additional spending on defense. The Congress will work through its budget process and will include additional priorities to serve as the basis for an agreed-upon framework. As this process goes forward, we look forward to working with the administration, the Budget Committee and the House and Senate Agriculture Committees to address concerns to the food retail industry, including the flawed policy of imposing fees on food retailers in order to reduce the cost of the federal government’s nutrition assistance benefits to the most needy in our society.”
In 2013, under former President Barack Obama, according to the U.S. Department of Agriculture, monthly SNAP benefits were cut 11 percent which translated into a $20 per month decrease in households that utilized food assistance benefits.
The president’s 2018 budget proposal states that the drastic reductions in SNAP funding will be achieved through measures that expand work requirements, narrower eligibility, and establishes a matching component for states to cover a portion of benefit, which may be seen as a potential first step toward block granting the program.
A nearly $200 billion pullback over 10 years would amount to a 30 percent cut, which would reduce average monthly household benefits from the current $252 to $173.
A steep reduction like this would put tremendous pressure on retailers that serve many low-income consumers. Despite an improving economy, many retailers have noted that recent reductions to SNAP benefits have hurt their bottom lines. That was the case the last time the SNAP budget was cut, during the Obama administration.
One of President Obama’s first successful pieces of legislation was the 2009 Recovery Act, which was designed to offset the economic challenges caused by the major recession of 2008. The Recovery Act, however, was a temporary measure and ended after four years. That termination resulted in benefits reductions for nearly every SNAP household. Then, in February 2014, President Obama signed a Farm Bill that cut $8.7 billion in food stamp benefits over the next 10 years, causing 850,000 households to lose an average of $90 per month.
According to the USDA’s economic research service, when households spend their SNAP benefits, the direct effects are increased economic activity by the producers of the goods and services being purchased, as well as by the retail, wholesale and transportation system that delivers the goods and services. In an economic downturn when resources are underemployed, increased SNAP benefits start a multiplier process with an economic impact that is greater than the initial stimulus.
That might be sound logic, but for most retailers, especially those operating in urban areas where the economic climate is often more challenging, more food assistance chopping will undoubtedly mean smaller basket sizes, declining average transactions and decreased per store annual sales.
‘Round The Trade
Just before presstime, Kroger reported its first quarter earnings and sales, and the big Cincinnati retailer continued its recent trend of slightly declining ID sales (negative 0.2 percent excluding fuel) while also posting a 21.6 percent drop in earnings. However, the overall report was hardly one of doom and gloom. Overall revenue rose 4.9 percent to $36.3 billion, and adjusted net profits were still a healthy $546 million. Kroger’s biggest issues over the past 12 months have been deflation, a heightening of overall market competitiveness (especially from Wal-Mart) and unrealistic financial market pressures to maintain the tremendous track record the big chain achieved for more than a decade. I believe CEO chairman Rodney McMullen summarized Kroger’s current situation accurately when he stated: “We remain focused on our strategy. This will make a difference for our customers and create value for our shareholders. We are running the business with an eye toward where the customer is going. Customers tell us they want to connect with us in multiple ways with the help of friendly associates to easily provide meals to their families at prices that enable them to stretch their budgets. We are committed to providing that experience, and we will not lose on price. We are driving our strategy of lowering costs to reinvest in ways that provide the right value to our customers. We’re pleased that identical supermarket sales in the last nine weeks of the first quarter were positive, and that has continued in the second quarter to date.” Unlike some other jumbo chains in the supermarket and other channels, Kroger has a diversified strategy to build sales and, as importantly, has the talent and culture to overcome these short-term hiccups…one such merchant whose issues I don’t believe are short term is Whole Foods Market (WFM), which recently learned that a Federal Appeals Court in New York overruled a lower court judgment and the company will now have to face a potential class-action lawsuit accusing the natural and organic retailer of overcharging Big Apple shoppers by overstating the weight of certain prepackaged foods in its New York City stores in 2015. Locally, the Austin, TX based merchant is in a nasty fight with its landlord, Wical LP, over rodent and bug infestation at its unit at 2323 Wisconsin Avenue, NW in the District. That store has been closed since mid-March after the DC Department of Health found problems with insects, rodents and other pests. The dispute heated up after Wical sent a letter to Whole Foods last month allegedly claiming that the retailer was in default of its lease, which Wical claims prohibits the store from closing for more than 60 days during any three year period. WFM’s suit says that the landlord’s intentions are to “strong-arm Whole Foods into paying additional rent and committing to a longer term (lease).”… another retailer in the “challenged” category is Sears – actually, they are more than challenged, they’re almost brain dead. Earlier this month, the inept retailer announced that it would close 72 more stores (16 Sears, 49 Kmarts and seven Auto Centers). That’s in addition to the 180 stores that the Hoffman Estates, IL-firm said it would already close in 2017. Eleven of those stores are in the Mid-Atlantic including three in Virginia (one Sears, two Kmarts); one in Maryland (one Kmart); three in Pennsylvania (all Kmarts); and four in New Jersey (one Sears, two Kmarts)…sadly, the Pennsylvania Commonwealth Court has upheld the legality of Philadelphia’s beverage tax. That ruling essentially dismisses complaints from The American Beverage Association (ABA), which argued that the soda tax duplicated the state’s already existing sales tax. “We are deeply disappointed in today’s ruling. But no ruling can obscure the pain Philadelphia’s beverage tax continues to inflict on families and local businesses,” said Anthony Campisi, a spokesman for Ax the Beverage Tax. Shanin Specter, ABA’s attorney said that the ruling would be appealed to the State Supreme Court. Our market study indicates that supermarket retailers in the city of Philadelphia have suffered sales declines of three to seven percent since the beverage tax was implemented in January 2017. And earlier this month, the Seattle, WA city council approved its own soda tax. This one calls for a whopping 1.75 cent per ounce tariff on sweetened beverages, including soda, energy drinks and other sweetened drinks. However, unlike Philly’s levy, the tax would exclude diet drinks. If passed, Seattle would join a growing list of cities, which includes Chicago and San Francisco, that are implementing more discriminatory taxes on the food industry…. Yahoo, Buckaroos! Earlier this month Wal-Mart renewed its annual tradition of bringing big-name entertainers to its annual shareholders meeting, which again was held at the Bud Walton Arena at the University of Arkansas in Fayetteville. Once Rascal Flatts and (in a private concert for associates only) Sheryl Crow performed, CEO Doug McMillon got down to real business in what was one of Wal-Mart’s best years in the last decade. “Together, we’re building a new Wal-Mart,” the youthful chief executive told the sold out house. “We’re going to make shopping with us faster, easier and more enjoyable. We’ll do more than save our customers. And, you, our associates, will make the difference. Looking ahead, we will compete with technology, but win with people. We will be people-led and tech-empowered.” Among the new digital-driven programs being tested by the Behemoth are online orders being delivered directly to customers by Wal-Mart associates (bad idea); digital “endless-aisles” shopping in stores; automatic pickup towers in stores for online orders; pickup stations in store parking lots; and robotics and image analytics to scan aisles for item availability and shelf presentation. McMillon also noted initiatives designed to create a better experience for associates and shoppers. Those include free two-day shopping on more than two million items with no membership fee; a discount for customers picking up online orders in stores (Click & Collect) and implementation of its new Jet Fresh delivery, which provides delivery of fresh groceries in one-two days which is now available to half the U.S. population and is expanding its geographic reach. And speaking about Wal-Mart’s newest prized possession, jet.com, that internet delivery unit will no longer carry any products under Costco’s Kirkland Signature brand. About 230 Kirkland Signature items could previously be found on jet.com’s website. But with Wal-Mart and Costco now seen as high volume retail rivals, it’s not surprising that this type of cross-selling would not exist in the long-term. According to published analytics data, jet.com accounted for 5.5 percent of Kirkland’s online sales in the first half of 2016…amid all of the hype surrounding the debut of Lidl in the U.S., you may have missed the news that supermodel Heidi Klum has inked a deal with the German discounter in which it will carry an exclusive apparel line under Klum’s name. While there is certainly a German connection between Klum and Lidl, I never thought I would use the words “supermodel” and “discounter” in the same sentence.
Wegmans has announced that it will build its first Washington, DC store in the sprawling 10-acre Fannie Mae headquarters complex on tony Wisconsin Avenue NW. The new store will be part of a huge mixed use project that will include other retail, residential and cultural arts facilities. The new Wegmans, which is slated for a 2022 opening, will be 80,000 square feet in size and will prove a huge competitive threat to Safeway/Eastern’s highest volume unit (“Social Safeway”) and two other big revenue producing stores operated by Whole Foods and Giant Food, all located on Wisconsin Avenue…Giant’s sister division, Giant/Martin’s, has finally announced that it will close its 10 remaining stores in the Richmond market by August 2. Four of the stores will close on July 10, five on August 2 and the Martin’s store located on Hull Street Road, will close on June 30 when its lease expires…also debuting in Washington, DC in December 2017 will be c-store powerhouse Wawa. Its first District store will unveil a new footprint – it will be the Wawa PA-based firm’s largest store to date at 9,200 square feet and it won’t sell gas. Wawa noted that it is looking to build as many as 10 new DC stores in the next three years…a change at the top at Acme Markets. Jim Perkins has officially taken the helm as president of Acme and will also retain his EVP title with parent company Albertsons. Dan Croce, who became president of the Malvern, PA regional chain in 2015, will slide back into his former post as senior VP-operations, a much bigger job than in the past because of the addition of more than 70 former A&P stores in the last 18 months…Mike Witynski has added the title of president of Dollar Tree stores. Many in the trade remember Witynski from his years at Supervalu before he joined the Chesapeake, VA discounter in 2010. He was promoted to COO in 2015 and will now oversee merchandising, marketing and store ops at approximately 6,200 stores…when compiling data for this big issue, I noticed one small blip in the thousands of sales figures we publish – that volume at the Roland Avenue Baltimore location of Eddie’s of Roland Park was down slightly (overall sales for the indie were overall up mainly because of a terrific remodeling at its other unit on Charles Street). I decided to visit the store and check things out for myself, especially since the small upscale unit has always experienced positive ID sales and is operated by one of the most dedicated and passionate merchants in the region – Nancy Cohen. Before I even entered the store, I knew what the problem was: new bike lanes which made parking more difficult and confusing. Just another reason why the City of Baltimore is arguably the most anti-business jurisdiction in the entire Mid-Atlantic…new store of the month – the Harris Teeter unit on Ritchie Highway in Severna Park, MD is really killing it. The 50,000 square foot unit is not only beautifully designed, volume during the first few weeks has averaged above $800,000… some notable deaths to report this month, including two from television and the movies. Film legend Roger Moore, the second best James Bond (after Sean Connery), has moved on to a greater spy mission. All told, the dapper British actor starred as the sexy MI-6 super agent in seven films from 1973 to 1985. Prior to that, he gained attention playing similar roles in the TV series “The Saint” and “The Persuaders.” In 2003, Moore was knighted primarily for his charity work, which mainly focused on his role as a UNICEF goodwill ambassador. During a career that spanned nearly 73 years, Moore, 89, appeared in nearly 100 movie and TV roles. Also passing on was Adam West, whose film career lasted more than 60 years. However, he will always be best remembered as the star of the campy TV series “Batman” (1966-68). West bounced around Hollywood for more than a decade playing bit parts before being cast as the Caped Crusader (aka Bruce Wayne) for a show many thought unlikely to be renewed for a second season. After the first episode aired in January 1966, an instant cult was formed with West and his sidekick Burt Ward as Robin fighting caricature-like criminals such as The Penguin, The Joker, Catwoman and The Riddler. However, the overnight success came at a cost – West found other roles over the years hard to come by. But West never became bitter, which is one of the reasons he was so admired by his fellow actors. “When you wear a mask and funny tights, it gets a little frustrating from time to time,” West once said. A good guy and one of my childhood favorites, Adam West was 88 when he passed. Bam!! Zonk!! Pow!!…the music world also suffered two losses in recent weeks. Entering musical heaven was Chris Cornell, 52, lead singer in Soundgarden and Audioslave. Cornell, who possessed a powerful voice with an amazing range (think Led Zeppelin’s Robert Plant), becomes yet another performer from the Seattle garage rock scene to have died much too young – joining Nirvana’s Kurt Cobain, Alice in Chains’ lead singer Layne Staley and Scott Weiland of Stone Temple Pilots. I was also devastated to hear about the death of Gregg Allman, 69, co-founder of the iconic Allman Brothers Band (ABB). The group that Gregg began with his late brother Duane created a distinct niche – Southern rock & roll that was tinged with soul and the blues. Gregg Allman’s deep, rich voice made him one of the most distinctive rock singers of the past 50 years and his bass-driven Hammond B-3 organ playing helped define ABB’s powerful and emotional sound. If you haven’t read his 2012 memoir, “My Cross To Bear,” it’s worth the effort and will help you better understand the complicated and amazing life Gregg Allman had. And if you don’t own a copy of ABB’s 1971 live “At Fillmore East” album, buy one immediately…I was very troubled and saddened to hear of the tragic news at Weis Markets. Earlier this month, an employee at its Tunkhannock, PA store shot and killed three fellow associates before taking his own life. Sometimes I think I’m becoming too inured by workplace violence in this country (there seem to be multiple episodes every week). But when when a tragedy of this magnitude hits home, it makes you shudder. My condolences to the families of the three victims. May they all rest in peace… just before presstime we learned of a key management change at Ahold USA. Effective at the end of the year, Giant/Martin’s president Tom Lenkevich will be retiring and Nick Bertram, who joined the big retailer in 2013, will be replacing him in January 2018; he will report directly to AUSA COO Kevin Holt. Bertram, currently senior VP-merchandising, most recently has been concentrating on the company’s commercial strategy as it relates to its shift to a more brand-centric organization. As for Tom Lenkevich – he’s simply one of the best retail executives on the planet with great leadership skills, a deep-rooted and diverse knowledge of the business, a tireless work ethic and off the charts people skills. Good luck to Nick on his new endeavor and to Tom with all of his future plans.