Efficient Operations, Smart Inventory Management Help Food Retailers Endure Tough Times, According to FMI's 'Annual Financial Review, 2002-2003 Nov 25, 2003 WASHINGTON, DC — November 25, 2003 — During one of the most challenging periods in the recent recession, food retailers turned in a resilient economic performance, according to the Annual Financial Review, 2002-2003 released here today by the Food Marketing Institute (FMI).Operating income increased to a five-year high of 3.34 percent in the fiscal year from April 1, 2002, to March 31, 2003. “This figure reflects disciplined and efficient management at the store level,” said Tim Hammonds, FMI president and CEO. “Supermarkets are spending their dollars on technology to improve productivity and on the products and services that customers value.”The industry also posted a five-year high in another key indicator, gross margin return on inventory (GMROI), at 409 percent. “This result shows smart inventory management,” Hammonds said, “For over a decade, the industry has focused intensely on reducing inventory costs. We’re now seeing progress, especially among the smaller companies.” For retailers with sales below $100 million, the GMROI increased to 530 percent, up from 470 percent the previous year.Astute inventory management was also evident in the 3.33 percent asset turnover rate, another five-year high, along with inventory as a percentage of assets — 22.03, down from 26.64 a decade ago.In what many economists regard as the best measure of operational strength, earnings before interest, taxes, depreciation and amortization (EBITDA), the industry scored 5.08 percent — the second straight year in the past five that this figure surpassed the 5 percent mark.Net Profits Fall Below 1 Percent Mark for the First Time in a DecadeBy other measures, the industry’s performance tracked the U.S. economy. Net profits dropped below the 1 percent mark for the first time in a decade. Hammonds attributes this to several factors: “The predominant reason had nothing to do with industry operations. Large companies changed accounting practices and wrote off significant extraordinary expenses. If these costs are discounted, industry profits were well within the recent range of 1.3 percent.”“Despite the industry’s resilience, competition continues to constrain both top and bottom line growth,” he said. “Price-driven competition remains relentlessly intense, and today just about every retailer — from big box stores to gas stations — is selling food.“The winners in this trend are consumers, who are benefiting from low food inflation rates going back to the early 1990s.” From 1992 to 2002, yearly food inflation averaged 2.4 percent, according the consumer price index. As of September 2003, food prices were growing at the same compound annual rate.Rising health care costs also affected the bottom line, according to a survey of industry financial executives conducted for the Annual Financial Review. These costs ranked second after competition as a key concern.The report provides cause for optimism in the performance of the top 25 percent profit leaders, Hammonds said. “These companies are investing profits in their stores with capital expenditures nearly twice that of industry norms (4.71 percent vs. 2.67 percent). They’re outpacing other companies by even greater margins in return on assets (7.64 percent vs. 3.04 percent)and return on equity (24.48 percent vs. 10.60 percent).”“While it’s hard to imagine a more challenging marketplace, retailers of all sizes are solving the puzzle for growth and thriving. They are using technology strategically to streamline operations and meet customer needs faster and more precisely.“Retailers are beating price competition with products and services that deliver convenience, quality and variety. They are pumping gas, for example, filling prescriptions and counseling their customers about nutrition. They are selling ethnic and organic foods, tapping into the fastest-growing markets. And they are preparing meals for the singles who don’t want to cook or don’t know how and for couples who lack the time and energy.“Food retailing is an industry in transition, much like it was when the first supermarkets arrived 70 years ago. The pace of innovation and change is even faster and, as always, those who know their customers best will prevail.”The Annual Financial Review, 2002-2003 is based on data collected from 147 companies operating 11,839 stores. To purchase the report ($40 for FMI retailer/wholesaler members, $102 for associate members and $120 for nonmembers), please download a copy from the FMI Web site (www.fmi.org/pub/) or contact the FMI Store (202-220-0723).