FMI’s State of Food Retailing 2010: Economy’s Impact on Business and Fierce Price Competition Remain Top Concerns for Supermarkets Nov 9, 2010 ARLINGTON, VA — November 9, 2010 — Supermarket sales grew a meager 0.12 percent in 2009, and same-store sales decreased 0.82 percent, illustrating the complex and challenging marketplace in which food retailers operate every day, according to the 2010 Food Retailing Industry Speaks: Annual State of the Industry Review released today by the Food Marketing Institute (FMI). When adjusted for inflation, the industry lost ground for the second year in a row. (See Graph 1.) “Shoppers’ overwhelming focus on price and value has led to fierce price competition among food retailers,” said Leslie G. Sarasin, FMI President and Chief Executive Officer. “As a result, supermarkets are focused on trying to distinguish themselves from the competition by fine tuning their private label strategies, SKU reduction and price differentiation in order to retain their current customers and attract new ones.” The industry experienced a median loss for identical-store sales of 0.82 percent, down 4.3 percentage points from 2008 when food-at-home inflation stood at more than 5 percent, compared to virtually flat food prices in 2009. (See Graph 2.) More than half, 56.9 percent of retailers, reported negative identical-store sales growth, which is up significantly from only 16.9 percent in 2008. An even higher 61.1 percent reported growth numbers below the rate of food-at-home inflation. Independent retailers (companies with 1-10 stores) were the most likely to grow sales and profits during the recession with overall sales increasing by 1.39 percent; and same-store sales increased 1.62 percent. “Our research shows that as shoppers altered their grocery shopping behavior, some formats benefitted from this change and others have struggled to grow sales, same-store sales and profits,” said Sarasin.The tough sales climate resulted in a drop in net profit among retailers from 1.43 percent in 2008 to 1.22 percent in 2009. A closer look shows that 12.1 percent of stores posted net losses. Retailers also experienced a drop in net income before taxes and extraordinary items at 1.62 percent of total 2009 sales, down from 1.80 percent in 2008. While profit results have moved up and down over the past decade, 2009 marks the lowest point. (See Graph 3.) Economy, Competition and Healthcare Costs Still WorrisomeIn both 2009 and 2010, retailers reported record-level anxiety about the impact of the local and national economy on their businesses. On a scale of 1 to 10, with 10 being the highest, retailers rated the economy 8.7 out of 10. Retailers pointed to the recession and its far-reaching effects as being the greatest barrier to grow sales and profits. The level of worry increased for nearly every other issue and for the first time since the question was asked in 2004, three issues exceeded the 8.0 mark — the economy, competition and healthcare costs — reflecting their extreme impact on food retail operations. Retailers are expecting an even more difficult business environment in 2010. Competition is the second greatest worry for retailers, scoring an average of 8.1. Retailers name supercenters and other full-service supermarkets in their immediate market areas as the top two formats impacting their business, but the impact of nearly every format increased worry levels from 2009 to 2010. In fact, only 33 percent of retailers believe store loyalty is at least as strong in 2010 as it was in 2009, a year when store loyalty took a considerable large hit. (See Graph 4.)Food retailers continue to differentiate themselves from the competition by emphasizing quality produce, fruit, meat and poultry. This is the most used strategy and also the highest rated differentiation technique among operators of full-service supermarkets. Increased focus on private brands is the second most popular way to create a differential advantage used by more than 90 percent of retailers. Many retailers believe that the increased interest in private brands will remain even when the economy recovers. Private brand sales accounted for an average of 15.7 percent of total sales in 2009 and accounted for nearly 10 percent of the total SKUs in the store. Price differentiation is used by 86.9 percent of retailers to attract shoppers away from the competition.Rounding out the top three worries for retailers is healthcare spending, scoring 8.1 on the 10-point worry index. Food retailer healthcare costs increased an average of 8.1 percent between 2008 and 2009. More than one-third of retailers reported a double-digit increase in cost. Retailers will be watching the next Congress to see if healthcare reform will be repealed or modified as a result of the new leadership.Competing on Health and Wellness and SustainabilityFocus on health and wellness is on the rise again as a point of differentiation for retailers. Pre-recession, the vast majority of retailers described its impact on their marketing and merchandising as profound. In 2010, 74.3 percent of retailers say it is one way they seek differentiation in the marketplace, up from 68.4 percent in 2009. However, it is still down from 84.9 percent in 2008, demonstrating that retailers’ efforts in health and wellness are subject to price and value in the current marketplace. They are addressing health and wellness in their stores in a number of ways, including:Promoting healthy items from all departments, fresh and dry grocery.Educating consumers on nutritional values of food products.Marketing healthy products and events with a team of registered dietitians in the community and through media outlets.Supporting and promoting in-store pharmacies. Meanwhile, retailers and suppliers are learning to capitalize on the growing demand for energy-efficient, organic, sustainable, environmentally-friendly and socially-conscious products and services. Retailers are making strides in this area with 41 percent already in the process of implementing a comprehensive sustainability program. Methodology and Purchasing InformationThe data for this report are based on surveys of 76 food retailers operating 24,075 stores, in addition to filings with the Securities and Exchange Commission, financial data from an additional 2,000 independent operators, information from the U.S. Bureau of Labor Statistics and the U.S. Census Bureau. The analysis is also based on other FMI research, including 2010 U.S. Grocery Shopper Trends and Annual Financial Review 2009. To purchase The Food Retailing Industry Speaks: The Annual State of the Industry Review 2010, ($150 for FMI Retailers/Wholesaler Members, $250 for FMI Associate Members and $350 for nonmembers), contact the FMI Store by calling 202-220-0723 or visit the FMI Store.Graph 1. Graph 2. Graph 3. Graph 4.