Thursday, July 3, 2008

Food and Grocery Industry is One of the Brighter Segments, particularly in the Western USA, in an Otherwise Currently Dim U.S. Economy

Despite the current gloom and doom U.S. economy, the retail food and grocery retailing industry is one of the very few if not at least bright sectors of the economy at present in terms of growth and new hiring, at least one of the brighter ones.

Overall, the general U.S. retailing sector is one of the four industry sectors, along with construction, manufacturing and financial services, that's accounted for the majority of the 438,000 U.S. jobs lost in the last six months, according to the U.S. Department of labor, as we wrote about in this piece published in Fresh & Easy Buzz earlier today.

The job losses in the overall retailing sector have been led primarily by home-centered stores, gift-oriented retailers, apparel sellers, and other more durable goods retailers that are suffering because in the current down U.S. economy consumers have dramatically contracted the amount of money they're spending on durable goods and non-essentials.

On the other hand, the food and grocery retailing segment has experienced very little if any job loss, especially at store level. Some large U.S. supermarket chains such as Bashas in Arizona and SuperValu, Inc., along with a few others, are laying off corporate headquarters employees as a way to reduce expenses.

Bashas recently laid off 100 workers at its Arizona corporate offices. SuperValu, Inc., the second-largest U.S. supermarket chain after Kroger Co., announced last week it's going to outsource most of its back office financial services work, which will result in the firing of numerous employees at its Minnesota-based corporate headquarters, as well as at regional offices throughout the U.S.

At store level though, very few if any workers are being let go for economic reasons by America's food and grocery chains, mass merchandisers like Wal-Mart and Target which sell groceries, or even by regional chains and independent grocers.

There are a few reasons this is the case.

First, compared to other format retailers, the food and grocery retailing industry is less hard hit by bad economic times like those present currently in the U.S. The old adage "people have to eat" is true; that's why its an old adage. However, while people do have to eat, they don't have to buy their food at "your" supermarket. Therefore, times are still difficult, mostly from a competitive standpoint, for America's food and grocery retailers. But they are nowhere near as difficult as they are for soft and hard goods retailers, especially gift and home centered retail companies.

Second, the vast majority of national and regional chain supermarkets in the U.S. are unionized. Retail company union contracts make it difficult for the chains to layoff store-level workers. Rather, most unionized supermarket chains and independents do two things in bad economic times: hire more part time workers who's hours, and thus labor costs, are variable, and reduce the weekly hours worked by their current part time employees.

Lastly, building a new supermarket takes time; easily two or more years from acquiring the land to getting the store up and running. Therefore, numerous U.S. supermarket chains and independent food retailers have new stores they decided to build two to three or more years ago, when the U.S. economy was running on multiple cylinders, coming on line at this point in time. As a result, we're actually seeing a spate of frequent new food and grocery (and mass merchandiser) store openings in this down economy, that is surprising to many observers who aren't intimate with the industry.

This is particularly true in the western region of the U.S., where Tesco has it current 62 small-format, combination basic grocery and fresh foods markets.

As we reported and wrote about in this June 25 piece, Tesco plans to hire about 750 new store-level employees in the next 90 days in Southern California, Nevada and Arizona. Since these three states have unemployment rates above the national average of 5.5%, these 750 new jobs will be welcomed with open arms, despite the fact they are part time jobs (about 20 -to- 30 hours a week) and pay $10 an hour.

A weekly wage of $250 before taxes (25 hours a week at Fresh & Easy) isn't going to replace the full time, relatively high wage jobs in construction, manufacturing and financial services that have been lost in the thousands in these three states by any means.

However, in this economy, the job can make a difference to a family struggling to make ends meet, along with offering retired people who can't make it on social security, pensions (if they are lucky enough to have one) and savings (if they have that) the ability to supplement their income and survive. It's also a fairly decent opportunity for mothers (or fathers) who need or want part time work and need to bring in a second income, along with college students working their way through school.

Tesco isn't the only retailer opening new retail food and grocery stores in California, Nevada and Arizona either in the down U.S. economy.

For example, just last week Whole Foods Market, Inc. opened a new natural foods supermarket in Reno, in northern Nevada. Whole Foods hired over 200 employees to staff the nearly 60,000 square foot natural foods emporium. The store is the natural foods grocery chain's first store in Reno.

Whole Foods also has plans to open new stores in Southern and Northern California between now and the end of this year, along with a new store in Las Vegas and another in Arizona.

Trader Joe's also has a couple new stores set to open this year in California; along with one in Arizona.

San Francisco Bay Area-based Safeway Stores, Inc., which operates stores under the Safeway banner in the Western U.S. states of California (Northern California only), Northern Nevada, Arizona, Colorado, Oregon and Washington, along with supermarkets under the Vons and Vons pavilions banners in Southern California, and Vons in Southern Nevada, is remodeling numerous supermarkets throughout the region, as well as opening new stores in all these states, including California, Nevada and Arizona.

Other food retailers opening new stores between now and the end of the year in the western region of the U.S include: Sprouts Farmers Market (1 or 2 new stores), Sunflower Farmers Market (2 or 3 new stores), Henry's Farmers Market, Wal-Mart, Inc. (Supercenters, Neighborhood Market supermarkets and its four new small-format Marketside community grocery stores in Arizona), SuperTarget, Raley's and a handful of others.

In comparison, most retailers in other segments are contracting; closing stores in many cases and putting new store building activity on hold in other cases. For example, coffee retailer Starbucks announced yesterday it plans on closing 600 of its cafes in the U.S., which will result in about 12,000 employees losing their jobs. A number of those Starbucks cafes are in the Western USA.

Of course, don't be surprised if we see a couple supermarket chains close existing stores as well. Many markets in states such as California and Arizona are already or near being over-stored--a phenomenon that always plays itself out more clearly in bad economic times--as evidenced by reports there are lots of underperforming food and grocery stores out there across many chains.

For example, Safeway Stores, Inc., which still has about 30% of its 1,750 U.S. supermarkets in to be converted to its Lifestyle format, is now taking a closer look at each store before it converts and remodels it.

Just two years ago, Safeway would convert even some underperforming stores to the Lifestyle format, taking a chance the extensive remodeling would result in better performance. However, in this down economy, the supermarket chain is rationalizing each store remaining to be converted much more closely, and is far more willing to close a underperforming store rather than convert it now than it was just a couple years ago.

Despite this potential for supermarket chains to begin closely more of their respective underperforming stores than has been the case in the last few years due to the tough economic times, the fact remains the industry is one of the few brighter economic lights in terms of new job creation and the related economic stimulus building and opening a new supermarket brings to a community, state and region.

Since food retailing also is the most price-competitive retailing sector in the U.S., as well as the best at containing operating expenses, its better prepared in the main for recessionary times than other format retailers generally are.

However, there is more price and value competition in the industry, especially in the Western U.S. markets, than at any time in recent history. Therefore, the strong food retailers are going to be the most likely to survive, and even thrive, while the less-strong have their work cut out for them.

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