Safeway Inc. (SWY) executives say things are looking up for the grocery industry, but their optimism isn't all that convincing given the obstacles they face.
Like its peers, Safeway is grappling with more competition as dollar stores, drugstores and mass-market retailers like Wal-Mart Stores Inc. (WMT) expand their grocery departments.
Traditional supermarkets are also stacked up against specialty, organic shops like Whole Foods Market Inc. (WFM), putting the future of America's largest grocery chains in to question.
A lot of eyes were on Safeway Thursday, as the company was the first among traditional grocers to report their latest quarterly earnings. Safeway said its sales volumes declined once again and its established locations didn't sell as much as the grocer expected a few months ago.
The news doesn't bode well for the industry, which is also seeing its profit margins squeezed by increasing food costs and a hesitance among consumers to spend.
"In our view, the volume being lost by Safeway and other traditional grocers are going to competitors new and old, whose relative price, increasing capital investment, and current consumer trends do not seem cyclical," said Janney Capital Markets analyst Jonathan Feeney.
Safeway--which operates several regional chains such as its namesake stores, Vons, and Randalls--is hoping to stand out among the crowd of mainstream grocers with its new loyalty program and a "wellness initiative" that it will bring out later this year. It's also adding gas stations in hundreds of store parking lots through a partnerhip with Chevron (CVX).
Safeway says that as a result of these initiatives, its sales at established locations are up 1% so far in the current quarter. But analysts question whether that's sustainable, given that the company overestimated its potential in the third quarter.
"We believe that number will grow," Chief Executive Steve Burd said on a conference call Thursday. "Now what you're probably thinking is that we were in a similar position when we announced our second quarter," but August turned out to be a "horrible month" for all food retailers and Labor Day didn't live up to last year because of the timing of consumers' pay checks, he added.
Still, Mr. Burd's effort to justify last quarter's results hints at disappointing earnings to come from Safeway's peers.
Thom Blischok, a grocery industry consultant at Booz & Company, said traditional grocery stores are trying to "step up their game" to win back customers, but that takes time and money. "They're not going to change overnight, so earnings are not always going to be what they'd like in the meantime," he said.
Supervalu Inc. (SVU) has been in search of a buyer since July and is struggling to turn around its image. Kroger Co. (KR), meanwhile, says it has already evolved to compete in the new shopping environment, and has fared better than its peers. Supervalu is scheduled to report earnings next week, and Kroger will follow in late November.
So far this year, Supervalu's stock has fallen 77%, while Safeway's is down 26% and Kroger's has dropped 3.7%.
Mr. Blischok thinks that in order for traditional chains to stay relevant, they have to have an easy-to-understand value proposition, better-quality products, and create more of an experience in the store, augmented by things like cooking classes or wine bars.
"That's the cost of entry today," he said. "It's not how much you have on your shelf, it's how you display it."
Some industry titans, such as Mr. Burd, expect inflation to boost sales the rest of this year by allowing stores to raise prices without hurting customer purchases. But others worry about the looming "fiscal cliff" on which the economy rests.
"My bet would be that things get better than they are right now, certainly in the U.S. And we are not expecting a fall-off," Mr. Burd said Thursday.
"But if there is a fall-off, it will affect everybody," and Safeway will have the advantage of differentiation "so our market share should be strong, and should grow" no matter what happens in the economy, he added...
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