Supermarket Operators Worry About Economy, Competition

(MoneyWatch)  Last year, food inflation helped wipe out profits for all but the smallest supermarket operators, however this year the economy could make things worse for the entire grocery store industry.

In fact, for the first time in the six years the Food Marketing Institute has tracked grocery store operator concerns as part of its State of the Food Industry review, two issues rated eight or higher on its scale of the worrisome. Those two were the economy, naturally, and competition.

In 2008, supermarket industry sales grew by 5.2 and identical-store sales rose 4.5 percent, but one of the factors that boosted sales outstripped the benefit it provided. Food-at-home inflation hit 5.7 percent, which, when adjustments were imposed, made for a 0.5 percent decline in total and 1.2 percent slide in identical store sales at supermarkets. Identical store sales are those for stores open at least a year, excluding renovations and relocations.

Net profits declined to 1.43 percent from 1.82 percent based in part on increased cost of goods but also intensifying competition as the economy deteriorated, rising health insurance charges and the impact of credit card interchange fees. The little guys -- independent retailers operating one to 10 stores ?€" led the supermarket industry with net profits and identical-store sales gains of 1.9 percent and 5.11 percent, respectively.

Take into consideration, though, that independents have been bearing the competitive brunt of supermarket industry consolidation, including the emergence of mega-chains such as Kroger with tremendous economies of scale, as well as the expansion of warehouse clubs and supercenters. Weaker independents have been driven out of the market and many of those that remains, from Andronico's in San Francisco to Grace's Marketplace in New York, are gourmet purveyors or those offering convenience meals for harried consumers, or both.

Yet the factors that are worrying grocers may play against independents. The economy and competition were the two biggest worries in last year's study, with the economy at 7.8 on a scale that rates 10 as most worrisome concerns, while competition came in at 7.4. This year, the economy rates 8.7 and competition eight.

With consumers spending less and visiting supercenters, clubs and even dollar stores to save money, traditional supermarket operators may find themselves in a deeper bind. Upscale independents whose offering is the most discretionary among food retailers in an economy that's made discretionary a four-letter word may be particularly cursed.

Interestingly, the two other issues that have jumped most in significance are health care costs to 7.6 from 7.2 and government regulation to 7.1 from 5.9. Supermarkets are relatively labor intensive, and it seems as if the health care reform debate and new costs to employers that might be associates with it are weighing on the minds of grocers.