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.

Food Retailing and the U.S. Economy Report: 62,000 More Jobs Lost, Unemployment Rate Near 7% in CA; Oil Price Soars; Food Price Inflation Ongoing

On the eve of Independence Day (July 4) U.S. employers cut payrolls by 62,000 workers last month, for the sixth straight month of nationwide job cuts, showing the U.S. economy is far from out of its deep trench, according to statistics released this morning by the U.S. Department of Labor. The overall U.S. unemployment rate remained at 5.5%, up nearly a full percentage point in the last 12 -to- 14 months.

The Labor Department report released this morning also includes a snapshot analysis of the business conditions across the U.S. corporate and small business spectrum. the report says employers are being hit hard by soaring fuel and energy prices; and even worse are extremely uncertain about how long the current severe economic downturn will last because of the combination of so many negative economic indicators and conditions--the soaring cost of fuel and energy, the continuing credit crisis, the housing foreclosure mess, record-high food price inflation, record government debt, and decreasing consumer spending and confidence in the economy.

So far this year the U.S. economy has lost 438,000 jobs, for an average of 73,000 lost jobs a month over the last six months, from January -to- June, 2008, according to the U.S. Department of Labor.

The employment sectors where the most job losses have occurred are: construction, manufacturing, financial services and retailing.

Most economists are predicting continued job losses and a poor economy for the rest of 2008, despite the $168 billion dollar economic stimulus rebate program in which the U.S. government put checks ranging from $300 -to- $1,200 in the hands of every American who filed a tax return. Every U.S. taxpayer who filed a return should have received (and probably spent) their economic stimulus rebate, according to the U.S. government.

Some economists fear that when the stimulus force (consumer spending of the money) of the rebates ends, the economy will be in for another rough patch. Those analysts worry that the economy--which has been coping with sluggish growth at best--will have a "relapse" and lose momentum near the end of this year.

In fact, many of these economists are predicting a higher national U.S. unemployment starting early next year, with the unemployment rate rising to 6% or slightly more in the first quarter of 2009. Nearly all of these economists attribute this rise to employers being reluctant to increase hiring even if the economy starts to show signs of improving because of all the uncertainty they have due to the multiple negative economic conditions and indicators described earlier in this piece.

Add to that uncertainty the fact that inflation concerns are growing. With inflation concerns growing, the Federal Reserve last week ended an aggressive rate-cutting campaign, started last September to shore up economic growth.

Fed Chairman Ben Bernanke and his colleagues are caught between risky crosscurrents of plodding economic growth and soaring energy and food prices that threaten to spread inflation. Lowering rates further would worsen inflation. But boosting rates too soon to fend off inflation could hurt the fragile economy. Its a Catch 22 situation in most ways.

Meanwhile, Oil prices today neared $146 a barrel for the first time, while gasoline prices hovered above $4 a gallon.

Additionally, food price inflation continues in the U.S. According to statistics just released this week by the United States Farm Bureau trade organization in Washington D.C., food costs are up overall in the U.S. by 8% in just the last 12 months. Further, prices of key food staples like bread, milk, eggs, cereals and most meats are up by double digit percentages, in many cases in the 20 -to- 25% range, over last year.

The U.S. food and grocery industry has been doing a pretty good job of holding the line on food price increases, despite getting hit with a tsunami of factors, including soaring ingredient costs and fast-rising fuel and energy costs.

Manufacturers and suppliers have been cost-cutting where they can and trying to limit price increases to retailers. In turn, retailers have been taking some margin hits rather than reflecting the total percentages of the price increases they receive from suppliers, especially on key items like bread, milk and other staples.

Despite these cost-containment and margin hits by suppliers and retailers, food inflation remains high, which demonstrates how powerful of a negative factor it currently is in the U.S. economy.

On the retail side, sellers of household goods like Bed Bath & Beyond, Room Source, Cost Plus World Market, Pier 1 Imports and numerous others are doing poorly and in many cases on the verge of filing for bankruptcy.

Food and grocery retailing generally does well, and sometimes even thrives, during a down U.S. economy because consumers shift a greater percentage of the food spending they previously did at restaurants (generally about 40% of all food spending dollars in the U.S.) to supermarkets (what's called at home spending) and other retail food stores. In other words, they cut back significantly on eating out and redirect that spending to supermarkets.

However, with soaring food and grocery prices, we're starting to see a bit of a different pattern emerge. Lower income and middle income consumers are cutting back significantly on how much money they spend at the supermarket, as well as overall on food. This is due in large part to the soaring cost of gasoline, which averages over $4 a gallon currently nationally and is nearing $5 a gallon in states like California.

Speaking of California, the western U.S. where Tesco has its current 62 Fresh & Easy Neighborhood Market small-format combination discount grocery and fresh foods grocery markets, is doing worse economically than the nation as a whole.

For example, the unemployment rates in California, Nevada and Arizona--the three states where the Fresh & Easy stores are located--are over 6% respectively, which is significantly above the national average of 5.5%.

California's unemployment rate for example just hit 6.8%, and in some parts of the state like the Central/San Joaquin Valley counties of San Joaquin (11%), Stanislaus (11.7%) and Merced (12.3%) counties its near double that, according to figures released this month by the California Employment Development Department.

California, Nevada and Arizona also are three of the states hit hardest by the housing credit and foreclosure crisis, which is driving the higher unemployment numbers in these three states due in large part to the near complete collapse of the residential housing and mortgage industries.

In terms of food and grocery sales, Tesco's no frills, limited assortment and low-priced focused Fresh & Easy grocery stores should be positioned to thrive during this serious economic downturn in the three western U.S. states where it operates stores.

Fresh & Easy's pricing is low, its neighborhood grocery concept is one in which consumers can shop frequently for reasonably priced groceries without driving miles to a Wal-Mart Supercenter and spending lots of money on gasoline for example, and its fresh, prepared foods are priced low enough, and yet offer a decent enough level of quality, to serve as a substitute for restaurant meals for consumers, while saving them lots of money.

The jury is still out though as to consumer response to the Fresh & Easy offering, which as we said should be super-popular in these bad economic times in Southern California, Arizona and Nevada. The fact is, the stores aren't performing as they should or could in this economic climate, which with high food price inflation and soaring gasoline prices is an economy in many ways made for a no frills but yet somewhat fashionable upscale format like Fresh & Easy.

If Tesco can seize on better positioning, merchandising and marketing for Fresh & Easy, it has the potential to thrive in this down U.S. economy. Of course, since value is now the key in food and grocery retailing, every grocer from SuperValu, Inc., Kroger Co. and Safeway Stores, Inc., to regional supermarket chains and even Whole Foods Market, Inc., is embracing the value and lower prices mantra in various ways and adjusting their retail merchandising and marketing accordingly.

And, no food and grocery retailer is doing so more than the world's largest retailer, and the now number one national seller of food and groceries in America, Wal-Mart, Inc.

If you've talked with Wal-Mart suppliers and vendors like Fresh & Easy Buzz has over the last couple months, you'll know the first and last message given to supplier sales reps when they sit across the desk from a Wal-Mart buyer, is that part of doing business with the brawny big box retailer (and soon to be small box too with its new Marketside stores in Arizona) from Bentonville (Arkansas) in the current bad economic downturn in the U.S. is for that supplier, big or small, to suck up as much margin as it can--and then some--when it comes to giving increases to Wal-Mart.

Supplier price increases to Wal-Mart are currently being met with immediate buyer phone calls to that supplier's Wal-mart rep, the content of that buyer phone call being: the price increase is too high; you need to lower it or eliminate it. In large part, this is why Wal-Mart is thriving in the current economy, as its most recent sales and profit numbers demonstrate.

Lee Scott (Wal-Mart CEO) and company at Wal-Mart have decided to seize on the economic downturn in the U.S. to not only firmly establish the retailer as America's premier discount or value retailer, but to use its huge buying clout to steal market share in the food and grocery categories away, for what it hopes is the long term, from other grocery chains. Thus far it seems to be working.

Of course, a considerable percentage of U.S. consumers just plain hate Wal-Mart. However, it appears many of these consumers are being persuaded to take a second look at the retailer in this down economy.

Meanwhile, Tesco has the potential to become the anti-Wal-Mart in Southern California, Nevada and Arizona with Fresh & Easy--a small box rather than a big box, conveniently located rather than miles away from where people live, low-priced yet not overwhelming--despite having its own segment of anti-Tesco consumers back home in the UK, where as that nation's dominant retailer it serves as the evil "Wal-Mart of the UK" for its own respective consumer segment.

In terms of achieving that, the jury is still out for Tesco's Fresh & Easy. However, the time to begin doing so for the British-based retailer come to America is in the current recessionary or near recessionary U.S. economy.