Total industry net profits averaged 1.16 percent, crossing the 1 percent mark for the first time in three years. The profit leaders reported net earnings more than three times the average at 3.68 percent.
“In a highly price-competitive market, companies earned their profits through increased efficiency and lower debt,” said FMI President and CEO Tim Hammonds. “They are investing profits in departments and services that deliver convenience and fresh foods, and upgrading technology to optimize productivity and more precisely tailor assortment to consumer demand.”
The leaders’ results far exceeded industry averages by many key measures of financial performance:
- Earnings before interest, taxes, depreciation and amortization (EBITDA) — 6.36 percent of sales for the leaders to 4.38 percent for the industry overall.
- Capital expenditures — 2.49 percent to 2.24 percent.
- Return of assets (ROA) — 14.16 percent to 3.75 percent.
- Return on equity (ROE) — 25.34 percent to 11.08 percent.
- Asset turnover — 1.99 to 0.79.
- Debt-to-equity ratio — 0.79 to 1.99.
“Companies of all sizes are performing extraordinarily well during what many regard as the most competitive era in the industry’s history,” said Hammonds. “Many companies are opening smaller stores to target people at specific income levels, and shoppers seeking ethnic foods, gourmet delicacies, and organic and nutritious products to promote wellness.”
Industry Optimistic About the Future
A large majority of the financial executives surveyed for the report (85 percent) are optimistic that their companies will perform well in the 2005-2006 fiscal year, including 30 percent who are “very optimistic.”
A substantial number hold a positive outlook about the U.S. economy with 40 percent believing it will improve this year. Only 9 percent think it will worsen, while 51 percent project the economy will stay about the same.
High Fuel Costs Affect Retailers and Consumers Alike
Financial executives cited the cost of fuel as an industry concern for the first time in recent years. Of the 11 percent reporting cost containment as a top concern, most mentioned fuel in particular.
Even before the fuel-cost spikes of late 2005, retailers reported changes in consumer shopping when they completed the survey questionnaire in the middle of the year. The most notable changes reported by executives, especially among customers with less disposable income:
- More bargain shopping — 27.1 percent.
- Fewer trips to the store — 21.5 percent.
- More items purchased per trip — 15.9 percent.
Some reported that customers are less willing to drive longer distances to supercenters and warehouse club stores that typically attract customers from a larger geographic area. These trends could continue or increase if fuel costs remain high, according to the FMI report.
Their foremost concerns remain competition (37 percent), particularly from supercenters (14 percent), and healthcare costs (17 percent), followed by cost containment and credit card fees (8 percent).
Rebound Returns Industry Performance to Normal Levels
Overall, the industry’s financial performance returned to normal after two years in which the figures were skewed by unusual events. These included large accounting adjustments in 2002-2003 and the prolonged West Coast labor strikes the following fiscal year, which affected some of the largest food retailers.
The Annual Financial Review 2005 is based on data from 140 companies operating 19,558 stores totaling $380 billion in sales — more than three-quarters of all U.S. retail food sales. The report was jointly prepared by FMI and FMS, a financial accounting firm specializing in the retail food industry.
To purchase the report, download a copy from www.fmi.org/store/ ($50 for FMI retailer/wholesaler members, $100 for associate members and $150 for nonmembers). To buy a hard copy, visit the Web link above or call 202-220-0723; there is an additional $20 fee to cover printing, handling and shipping costs.