Opening up
Sep 1, 2008 12:00 PM, By Lauren Shepherd
With the economy faltering and sales at most retailers declining from year-ago levels, many firms are trimming growth projections, cutting back on new store development and closing down locations.
The major pressures on consumers — declining housing values, stagnating wages and employment and inflation in commodities prices — don't appear to be going anywhere any time soon. Most economists expect these troubles to persist well into 2009, if not further. True, gas prices have dropped from their precipitous heights in the past month. (The price of oil has dropped from a peak of $147 per barrel down to about $120.) Gas, however, still costs more than $4 a gallon in much of the country, higher than the level at which Americans have become accustomed.
But for at least one sector, the dark days of the summer of 2008 have been light indeed. Grocery stores — benefiting from high food prices — are thriving and some of the largest companies in the sector are poised to open more new stores than in the past two years. Many more are embarking on ambitious remodeling programs. Banc of America Securities analyst Christy McElroy says in a recent note to investors that “in-fill suburban supermarket-anchored strip centers are positioned well, as grocers have been able to pass through higher food prices.”
Unlike most food and beverage companies, which have suffered as consumers have altered spending patterns given the rising price of food, grocery stores have been able to reap benefits of this inflation. When commodity prices rise, food manufacturers pay more to produce goods. To recoup those costs, food makers pass along the price increases in the form of higher retail prices. The higher prices then show up on grocery stores shelves. The grocers, themselves, though don't bear any of the costs. They simply pass them along. And as long as consumers keep buying food, the higher prices lead to higher revenue and profit at supermarket companies, providing them with more cash to spend on expansion.
Furthermore, while some consumers are trading down and buying more of their food at dollar stores and discounters, supermarkets are gaining business at the upper end — in the prepared foods segment — as Americans eat out less.
Of course, the picture isn't uniformly rosy for supermarkets across the country. In markets where the run-up in housing prices was particularly steep or where too many new homes were built, there is more risk. Many California markets were rife with risky mortgage activity — such as excessive subprime lending and too many adjustable rate mortgages — could still face a painful readjustment as defaults, delinquencies and foreclosures work their way through the system. Florida, parts of the Northeast, Minneapolis and Baltimore also showed pockets of high-risk mortgage activity, according to Phoenix-based data provider Synergos Technologies.
Consumers struggling with mortgage payments may be more inclined to visit a local Wal-Mart Supercenter or discount store rather than a more upscale supermarket. Smart retailers, say analysts, are taking this to heart and focusing on opening new stores in areas that correspond to the needs of their customer base. “Retailers are slowing expansion plans, but continue to open new stores in good locations with the appropriate tenant mix to complement their brands,” according to McElroy.
Opening acts
Most grocers have not disclosed the markets where they plan to open new stores. But their expansion plans for the year show many are spending at or above what they did a year ago to open new stores and remodel existing ones.
Cincinnati-based Kroger Co., which operates 2,474 stores, spent $2.1 billion on capital expenditures in 2007 and opened 23 new stores. The company has not said how many stores it expects to open in 2008, but it did say it will likely spend between $2.0 billion and $2.2 billion for capital investments and will grow its total square footage by 2.0 percent to 2.5 percent before acquisitions. In 2007, the company posted $70.2 billion in sales.
