Deflation Isnât The Only Reason Retailers Are Struggling
The retail food business â so tenacious, so fickle. And lately, the tenacity has become even more intense and the fickle finger of fate isnât bringing much joy.
While identical store sales have been declining for the past 12 months for most retailers, the sales declines have become more noticeable in the past three months, and even some of the perennial best performers have been adversely impacted.
Letâs take Kroger, the industryâs supermarket darling for the past five years, and examine its most recent fiscal second quarter ended August 13.
The good news is that the Cincinnati-based juggernaut continued its impressive record of achieving positive ID sales – now for 51 consecutive quarters – and that the company has a rock solid long-term outlook led by a stellar management team.
The disappointing news is that Krogerâs quarterly results for both identicals â 1.7 percent (ex-fuel) and earnings per share of $0.40 â were both lower than they were in last yearâs corresponding period.
And while Kroger and its peers have cited deflation – especially in meat, dairy and pharmacy â as the largest areas impacting lower retails, the fact is there are several other important reasons retailers have been struggling since the first of the year.
Primary among all factors remains overstoring. As often as I write about it, the competitive element is unyielding. Even with some attrition and consolidation, what generally remains in most metro markets is a group of diversified heavyweights with deep enough pockets to continue to slug it out. Occasionally, weâre reminded that this continual grinding creates change (The Fresh Market sale to PE firm Apollo Global Management or the demise of A&P and Bottom Dollar Foods), but it always seems as though some other entity is willing to pick up the scraps of those mortally wounded companies.
Shopping patterns have changed dramatically over the past decade with millennials and Gen-Yers gladly willing to cross-shop at every opportunity to save money or visit retailers who can best offer a clear point-of-difference experience.
And even though I still donât believe that online shopping (for retail food) will ever exceed 15 percent of the total grocery pie, I must admit that web-driven merchants have improved their execution and offered creative nuances that have attracted younger shoppers.
Adding to the pressures that many retailers face is the how Wall Street negatively views all this turmoil. Krogerâs share price has dropped 25 percent since the first of the year, Whole Foodsâ price has dipped 15 percent during that same time frame and Costcoâs share price decline has been about five percent. Only Wal-Mart among the industry leaders (by channel) has seen its stock price rise during 2016. And those gains have been made after three years of below average performance. Wall Street is also the main reason why Cerberus Capital management has not been able move its two prime grocery holdings â Albertsons and Save-A-Lot (part of Supervalu) which have been seeking to launch IPOs for more than a year.
However, this is not a gloom and doom long-term picture since we know that there is no more cyclical business than food retailing. Those stalwart companies that I noted will be around for many years and other great privately-held retailers such as Wegmans, H-E-B, Publix and Market Basket have demonstrated that they have the savvy, talent and capital to remain vital factors even when the going gets tough.
In the meantime, itâs just so damned hard and unrelenting to have to battle so fiercely every day.
End Of An Era, As Baltimoreâs Food Kings Beckenheimer, Meizlish Agree To Sell
Youâll never see it again in the history of the retail food business: a partnership that combined for 120 years of service to the food industry.
With an agreement in principle to sell their two remaining Food King Baltimore stores, Herb Beckenheimer and Bernie Meizlish will exit the grocery business after a wonderful partnership that began in 1955 (Beckenheimer began his career several years earlier).
Itâs not that the âSunshine Boysâ need their monthly Social Security checks – Beckenheimer is 94 and Meizlish is 79, their health is remarkably good and theyâve been successful for many years â but business conditions have changed so dramatically over the past few years and, after an inviting offer to sell their stores was made, both figured the time was right to bow out gracefully.
And if you know anything about Herbie and Bernie, you know that grace along with class, humility and wisdom are key reasons why theyâve been lifelong friends and great business partners. Itâs also why they are so respected by their associates and their vendors.
The tentative new buyer is Elido Torres, a New York-based independent retailer and real estate investor who operates grocery stores in Metro New York, Philadelphia and Florida under several banners including C-Town and 7 Brothers.
Returning home to Baltimore after World War II, Herbie opened his first grocery store (Brownâs Supermarket) on Chase and Wolfe Streets in Baltimore. Bernie worked at the store while still in school, and when a second store opened a few years later, he was given some equity. Their operation, which could serve as a prototype for urban independent retailing, eventually grew to six stores before they sold to B. Green in 1986.
Herbie then retired to Florida and Bernie continued to serve as general manager of the operation (now called Big B) until 1986 when the notorious Jack Millman acquired the stores, adding to his Farm Fresh base.
Meizlish left at that point and Beckenheimer, who hated retirement and missed the business, wanted to return to Baltimore. A personal relationship with Jack Luetkemyer, owner of the Reisterstown Road Plaza Shopping Center who wanted a supermarket tenant after Food Fair exited, led them to return to the business as Food King. From that unlikely reconnection in 1990, the âSunshine Boysâ expanded their operation to as many as nine stores in Baltimore.
Theyâve been downsizing for several years and all that remains are the units on Annapolis Road and Wabash Avenue.
I know Herbie probably wonât like retiring too much now, either, but what a tremendous career he and Bernie have both had. They are legends and are legendary. They epitomized what independent retailing is all about – executing the mechanics of the business, admiration from their associates, strong relationships with their customers, respect from their suppliers, and a dedication to philanthropy and community.
Herbie and Bernie â youâre the greatest!
âRound The Trade
Walgreens is now acknowledging that it will likely have to divest as many as 1,000 stores if it hopes to win regulatory approval from the FTC in its attempt to acquire rival Rite Aid Corp. for $9.4 billion. Originally, the nationâs largest drug store chain estimated that it would not have to sell more than 500 units to win regulatory approval. The Deerfield, IL-based merchant still hopes the deal will be completed later this year and expects to realize synergy savings of more than $1 billion within 3-4 years after the deal is consummated. Iâd still be mildly cautious about FTC approval, given the recent rejections of Syscoâs attempted purchase of US Foods and Staplesâ attempted acquisition of Office DepotâŠas we reported earlier, it looks like the final days for Sears and Kmart are imminent. According to Moodyâs Investor Services, the retail organization doesnât have enough money or access to new capital to continue much longer. Moodyâs estimates that Sears Kmartâs negative cash flow will be $1.5 billion this year. Sears said last month that its cash and equivalents have fallen to $276 million from $1.8 billion a year ago. Want some jaw dropping numbers? In 2000, Searsâ annual sales were $41 billion. Last year they plunged to $15 billion. Kmartâs revenue stream is even worse with sales diving from $37 billion to $10 billion in that same time frame. Company officials continue to deny the seemingly inevitable outcome, citing a large real estate portfolio and strong brand presence with names such as Craftsman, Diehard and Kenmore. Yeah, rightâŠthe American Beverage Association has filed suit in an attempt to block the ridiculous and unfair soda tax that the City of Philadelphia will be imposing on its residents come January 1, 2017. âThe tax will meaningfully diminish the everyday purchasing power of Philadelphia residents â particularly those on a limited or fixed income â and will put the cityâs businesses that sell soft drinks at a material competitive disadvantage relative to comparable businesses just outside the cityâs borders,â the lawsuit stated. Additionally, beverage industry groups, restaurants and consumers who joined in the suit claimed the soda tax duplicates the state sales tax already imposed on soft drinks. Expect a multi-year battle over this pitiful piece of legislationâŠfrom the âgang that canât shoot straightâ file comes this ditty. Hampton Creek, the San Francisco-based company reportedly backed by significant Silicon Valley money ($90 million) is being investigated by the SEC for organizing a 2014 plan to buy back large quantities of its plant-based mayonnaise-like product Just Mayo from the shelves of grocery stores arguably creating the perception of larger sales than were real. The issue at hand is whether the âbuybackâ created false representation to those investors who agreed to finance the start-upâs initial growth. Two years ago, Hampton Creek was sued by Unilever for using the word âMayoâ on its packaging (mayonnaise is officially defined as an egg based product; Just Mayo contains no eggs). That suit was later dropped and the company agreed to make changes to its label. Just Mayo is actually an innovative, good tasting product. However, its buyback program, which Hampton Creek was part of an internal quality control analysis, sounds like a bit a stretchâŠand sadly, the Howard Johnson restaurant in Bangor, ME closed earlier this month. That means that thereâs only one final HoJo that remains operational. That unit is located in Lake George, NY. From its beginning in Quincy, MA in 1925, the orange- roofed eateries once totaled more than 1,000 before beginning a significant decline in the 1980s. Goodbye 28 flavors of ice cream. Adios fried clams.
âRound The Trade
Weis Markets has begun the conversion process for its 38 recently acquired Food Lion stores as part of the Ahold Delhaize merger store divestiture mandate. Beginning on September 11, the Sunbury-PA-based regional chain converted five Maryland stores (Cumberland, Frostburg, Owings Mills, Eldersburg and Reisterstown). Those units reopened on September 16. The following week Weis converted former Food Lion Maryland units in Columbia, Elkridge, Mitchellville and two in Gaithersburg. The process of converting about five stores per week will continue through the end of October. âOnce the conversions are completed over the next two months, we will have nearly doubled our Maryland store count and expanded into Virginia and Delaware,â said Kurt Schertle, Weis COO. âOur goal is to build on our advantages as a locally focused retailer that offers a strong combination of quality, value and service. As part of this commitment, we plan to expand variety in every department.â The closely-held merchant plans to hire more than 2,000 former Food Lion associatesâŠlots of news coming from Weisâ chief rival, Ahold USA and its newly combined parent Ahold Delhaize (the two retailers will continue to report earnings separately for its U.S. stores). Prior to the finalization of the merger, Ahold USA posted ID sales growth of 1.2 percent (ex-fuel) while maintaining its 3.9 percent underlying operating margin. Net sales for the period ended July 17 were $5.53 billion, a 3.4 percent increase at constant exchange rates. (Overall revenue was primarily achieved through the acquisition of 25 former A&P stores in the Metro New York market.) At Delhaize America (Food Lion, Hannaford), comp store sales increased 2.9 percent while underlying operating margin also increased from 3.9 percent to 4.1 percent. âWe have started our new chapter as Ahold Delhaize with good momentum, with these two strong sets of pre-merger results,â said Ahold Delhaize CEO Dick Boer. At the follow-up analyst conference call after the financials were released last month, Ahold Delhaize executives said that sales will be finalized by the end of 2016 for about two-thirds of the 86 stores identified as potential anti-trust conflicts by the FTC. Deals for the remaining unsold – but agreed to be sold – stores, most of which were acquired by Publix in Richmond, will be completed by the first half of 2017. Ten remaining unsold Martinâs stores in the Richmond market will be disposed of and the Martinâs banner will exit the area while Food Lion will continue to operate about 45 stores in the Richmond market. Ahold officials also confirmed that they will be negotiating with their vendor partners to seek more favorable deals for the combined company. Those negotiations have already begun in the U.S. and several key CPG companies have complained that Ahold USA and Delhaize America are asking for renegotiated trade dollars that are not realistic. It seems that Ahold Delhaizeâs negotiations in Europe are a bit testier. The Dutch Food Industry Federation (FNLI) plans to file a complaint with the Steering Committee for Fair Trading in the Netherlands alleging that the newly merged company is acting unfairly in its attempt to gain stronger pricing leverage from its suppliers. More locally, Giant/Landover has signed a multi-year partnership agreement with Monumental Sports & Entertainment to become the exclusive grocery partner for the Verizon Center, including sports teams the Washington Capitals, Washington Wizards and Washington MysticsâŠmore than a dozen small independent retailers in the Baltimore area have been federally charged in connection with a $16.5 million food stamp and wire fraud scheme. According to U.S. Attorney Rod J. Rosenstein, the accused retailers illegally exchanged Electronic Benefits Transfer (EBT) benefits for cash. To avoid detection, they debited the funds from cards in multiple transactions in a period of hours or days, or called a different store where the transactions were processed manually. Stores allegedly involved included Mariaâs Market Place, Royals Food Market, Shop ân Save, Kelyn Grocery, Monroe Food Market, Y&J Grocery, Corner Groceries, Quick Stop Convenience Store, New York Food Market, Barclay Food Mart, Shafiq Corporation, New Sherwood Market, Martin Mart, Rosedale Mart, M&A Mart, M&N Mini Mart, Mega Mart 1 and C&C Market. All told, 14 individuals were arrested. They face a maximum sentence of 20 years in prison for each count of wire fraud; a maximum of five years in prison for conspiracy to commit food stamp fraud and wire fraud; and a maximum of five years in prison for food stamp fraud…speaking of crime, thereâs an interesting story in the August 17 issue of Bloomberg Businessweek detailing the growing major crime problem at Wal-Martâs U.S. stores. The gist of the story focuses on Wal-Martâs inability to control criminal issues in its stores, noting that as Wal-Mart has cut labor and security costs, serious criminal activity in its stores has increased, creating frustration for local law enforcement which often has to serve as the crime force for Wal-Mart. The story notes that more than 200 violent crimes, including attempted kidnappings, murders, multiple stabbings and shootings, have occurred this year alone within the network of the nationâs 4,500 Wal-Mart locations. That doesnât include last monthâs discovery of a meth lab inside a 6-foot high drainage pipe under a Wal-Mart parking lot in Amherst, NY. In more mundane news from the Behemoth, more than 7,000 back-office jobs will be eliminated over the next few months. Those affected will be given the option to transfer to jobs on the sales floor at store level. Wal-Mart has also confirmed that it has withdrawn plans to build a new SuperCenter at the former Frederick Towne Mall in Frederick, MD, according to company spokesman Phillip Keane, who said, âAs we evaluate opportunities to better serve our Maryland customers, we have made a business decision to no longer pursue the proposed store at the Frederick Towne Mall site.â Wal-Mart recently will soon open a relocated and expanded SuperCenter in Frederick at Liberty Road and Monocacy BoulevardâŠwe have several obits to report this month, including Shirley Klein, the matriarch of the Kleinâs ShopRite retailing organization. Shirley, who with her husband Ralph (who died in 2014) helped build one of the strongest independent franchises in the Mid-Atlantic, passed away earlier this month. For many years, Kleinâs has been the dominant retailer in Harford County and Shirley and Ralphâs intelligence and tireless work ethic helped grow the company to its present nine stores. She was also a major philanthropist, contributing millions of dollars to local charities including the Upper Chesapeake Health Foundation. She is survived by her three sons – Andy, Howard and Michael, who now run the business – and eight grandchildrenâŠour condolences to the family of Ken Gore, who passed away earlier this month at the age of 85. I first met Ken when he and his late partners â Beryl Muchnick and Tyler Kohler â operated the successful food brokerage firm of Kohler Gore Muchnick. Kenny Gore was highly intelligent with a dry, cynical wit that always made for great dinner and barroom conversation. He was an avid airline pilot who also served as the president of the Maryland Food Brokers Association and the Baltimore-Washington Frozen Food Association. One of the good guys, Iâll miss Ken GoreâŠthe great comic actor Gene Wilder has also left us. While known to most people for his iconic role as Willy Wonka in the 1971 movie âWillie Wonka and the Chocolate Factory,â Wilderâs best roles â in my opinion â were in three classic Mel Brooks movies, âThe Producersâ (1967), âBlazing Saddlesâ (1974) and âYoung Frankensteinâ (1974), in which he played three of the absolute funniest characters in movie history â Leo Bloom, The Waco Kid and Dr. Frederick Frankenstein (or Frankenschteen), respectively.
