Supermarket Industry Profits Higher Despite Energy Cost Spikes and Without Major Price Increases Oct 26, 2006 2005-2006 FMI Annual Financial ReviewWASHINGTON, DC — October 26, 2006 — Efficiency, technology and consumer-driven inventory management helped boost supermarket industry profits to the highest levels in many years during the past fiscal year, according to the Food Marketing Institute (FMI) 2005-2006 Annual Financial Review released here today. Total industry net profits averaged 1.46 percent, up from 1.16 percent the previous year — and is the highest figure recorded in the 37 years FMI has been tracking the industry’s financial performance. Large and small companies had strong years: profits for retailers with less than $100 million in sales averaged 1.16 percent (up from 0.90 percent in 2004-2005), and profits for companies with higher sales averaged 1.56 percent (up from 1.24 percent)."It is particularly impressive that the industry achieved these gains during a period of minimal food inflation and higher fuel costs," said FMI President and CEO Tim Hammonds. Grocery or at-home food prices increased only 1.9 percent in 2005 and dropped to an annual rate of 1.2 percent over the first half of 2006, according to the Bureau of Labor Statistics."Retailers absorbed sharp energy cost increases," he said. "They tightened inventory using technology to reduce oversupplies and align product assortment with consumer demand. More companies are using e-commerce to speed transactions and reduce invoice errors."The industry’s financial performance was strong across many key measures:Return on assets (ROA) increased to 4.62 percent, from 3.75 percent.Return on equity (ROE) increased to 14.55 percent, from 11.08 percent.Inventory as a percentage of assets declined to 19.62 percent, from 20.54, a six-year low.Earnings before interest, taxes, depreciation and amortization (EBITDA) remained steady at 4.29 percent, compared with 4.38 percent the previous fiscal year.Rising interest rates caused a significant decline in liquidity, one of the few weaknesses revealed in the report. The current and quick ratios, which measure the ability to meet short-term obligations, decreased to 1.05 and 0.45, respectively. Retailers with sales of less than $100 million reported the steepest declines.Plastic Payment Interchange Costs Increase by Double DigitsA significant financial issue for all companies is the continuing rise in credit and debit card interchange costs, which increased by an average of 14.9 percent from 2005 to 2006. These costs increased by as much as 700 percent for some companies over the past 10 years.Credit and debit cards are now used in 45.6 percent of supermarket transactions, far more than cash (30.7 percent) and checks (17.6 percent). The industry can do little to control interchange costs since credit card companies continue to increase the fees to encourage banks to issue their cards, and plastic is fast becoming the predominant way that consumers pay for goods and services.Energy Costs Increase Across Industry OperationsRising energy costs rippled across the industry, from warehousing to transportation to store operations. Retailers spent an average of 1.72 percent of sales on energy in 2005, the first year the report provided this figure. Most of the companies surveyed (87.5 percent) reported an increase in energy costs from the previous year.Energy cost spikes hit store operations the most with nine in 10 reporting increases, averaging 9.5 percent. Transportation was hit hardest with seven in 10 retailers seeing increases that averaged 15.4 percent. Energy inflation increased warehousing costs for about half of the respondents, averaging 4.6 percent.The majority of retailers (57.1 percent) did not pass along these increases to customers and do not plan to do so. Instead, many are taking action to ease the impact and even launching gas-related promotions to increase sales. About half of the companies surveyed (50.9 percent) operate gas stations and many (61.5 percent) are promoting sales in the store through discounts at the pump.Energy-saving measures include:Minimize leaks in refrigeration systems — 83.7 percent. Adjust store temperatures to reduce heating and cooling costs — 73.5 percent.Create more energy-efficient stores when building or remodeling — 64 percent.Lower store lighting costs — 50.2 percent.Reengineer store delivery frequency — 52.1 percent.The industry remains optimistic about the future despite continuing increases in energy and interchange costs, along with health insurance premiums, an ongoing financial concern. As many as 39 percent of the executives surveyed are "very optimistic" about the company’s profitability outlook, and 50 percent are "somewhat optimistic."The 2005-2006 Annual Financial Review is based on data from 155 companies operating 19,558 stores totaling $380 billion in sales. To purchase the report, download a copy from the FMI Store ($75 for FMI retailer/wholesaler members, $125 for associate members and $175 for nonmembers). To buy a hard copy, visit the website above or call 202-220-0723; there is an additional $20 fee to cover printing, handling and shipping costs.