Supermarket Industry Focus on Consumers, Efficiency and Technology Boosts Profits Despite Sharp Cost Increases
ARLINGTON, VA — November 29, 2007 — Food retailers overcame continuing sharp increases in energy, healthcare and other costs to post a median after-tax net profit of 1.91 percent in fiscal year 2006-2007, up from 1.46 percent the previous year, according to the Food Marketing Institute (FMI) Annual Financial Review 2006-2007, which was released here today.
The smallest and largest companies reported strong bottom-line results. Retailers with annual sales under $100 million had a median net profit of 1.83 percent, and those with sales of $1 billion or more 1.93 percent. Mid-sized retailers with sales in between did not fare as well with profits of 1.10 percent.
"Satisfying consumers each and every day is the key to improving financial performance," said FMI President and CEO Tim Hammonds. "Retailers are serving consumers with the right mix of products, keeping items in stock and controlling inventories.
"Retailers are driving down costs with the speed and efficiency of e-commerce," he said. "They can focus on providing optimum service to the American consumer, saving time and money through faster, more accurate inventory management and fewer errors on electronic invoices and orders."
"Also noteworthy," he added, "is that the industry achieved these gains before food inflation began to rise in mid-2007. In addition, the majority of retailers absorbed energy cost increases over the past two years." This report found that 56 percent did not pass along these energy cost increases to consumers in 2006, and 57 percent did not do so in 2005.
The industry’s financial performance was strong across many key measures:
- Return on assets (ROA) increased for the fifth straight year to 5.85 percent, up from 4.62 percent in 2005-2006.
- Return on equity (ROE) reached a four-year high at 16.79 percent, from 14.55 percent.
- Inventory as a percentage of assets declined to 18.32 percent, from 19.62 percent, a seven-year low.
- Earnings before interest, taxes, depreciation and amortization (EBITDA) increased to 4.80 percent, up from 4.29 percent, the highest mark in four years.
- Interest expenses dropped to 0.66 percent of sales, from 0.87 percent, the lowest level in two decades.
Energy Costs Deal Companies a Triple Blow
The relentless rise in energy costs hit the industry hard in three areas: transportation, warehousing and operations. Retailers spent an average of 1.7 percent of sales on energy in 2006, and nearly nine in 10 (87.3 percent) reported cost increases, the same as the previous year. Energy costs increased by double digits in all three areas:
Store Operations — The increase averaged 11.9 percent among retailers that reported a rise. This figure is up from 9.5 percent in 2005. Stores use energy in heating, air conditioning, lighting and refrigeration systems.
Transportation — 14.6 percent, down slightly from 15.4 percent in 2005.
Warehousing — 10.9 percent, up significantly from 4.6 percent.
Companies are taking many measures to reduce energy costs, led by:
- Minimize leaks in refrigeration systems, 96.0 percent.
- Adjust store temperature to reduce heating and cooling costs, 82.6 percent.
- Lower store lighting costs such as using LED fixtures or reducing light levels, 81.6 percent.
- Create a more energy-efficient store when remodeling or building a new one, 70.2 percent.
- Reengineer store delivery frequency, 56.3 percent.
Smaller Companies Prevail Among the Profit Leaders
The report’s review of the top 25 percent net profit performers found that retailers with sales below $100 million reported the best results across key measures. For example, they:
- Achieved net income averaging 2.78 percent, compared with 2.69 percent for retailers with higher sales.
- Exercised tighter inventory controls with their inventory valued at 11.51 percent of assets, compared with 14.41 percent for larger retailers.
- Held down interest expenses to 0.45 percent of sales, compared with 0.66 percent.
Future Outlook Positive
The industry remains resilient in a high-cost, extremely competitive environment. Nearly nine in 10 retailers (86 percent) are optimistic about their profit outlook for fiscal year 2007-2008. The report did find some hedging: the number of executives who are “very optimistic” declined to 30 percent, compared with 39 percent the previous year, and those “somewhat optimistic” increased to 56 percent, from 50 percent.
The Annual Financial Review 2006-2007 is based on data from 109 companies operating 12,852 stores totaling $246 billion in sales.
To purchase the report, download a copy from www.fmi.org/store/ ($95 for FMI retailer/wholesaler members, $145 for associate members and $195 for nonmembers). To buy a hard copy, visit www.fmi.org/store/ or call 202.220.0723.