Sector Overlook: Food Retail Sub-Industry

Analysts and experts believe that food retailers have developed strategies focusing on differentiating themselves from competitors through diverse products and services rather than low prices. The low prices is going to hurt the industry and make it unsustainable for most. By providing niche products and services food retailers have avoided a price war. As a result of these strategies, analysts believe traditional grocery chains will be gain sizable market share, with average comparable store sales growth of 5-6% in the fiscal year 2007.

Remodeling Existing Stores
Improving sales trends will continue to reflect food retailers’ progress in differentiating store offerings from those of low-price competitors. Most food retailers will focus on remodeling their existing stores, rather than opening new ones. This will help ease the air of competition, and enable the industry stay focused.

Labor Union Contracts
With newly renegotiated labor union contracts and improved sales growth will help the industry offset more competitive pricing and increased promotional activity. This would help the industry gain healthy margins. Newly renegotiated labor contracts should also help control wage and health care expenses.

In addition, consolidation could ease competitive pricing pressures in some markets, as well as improve operating profitability over the intermediate term for active participants, by further leveraging overhead expenses over a greater number of stores. However, risks remain high as differentiation strategies are rolled out, and margin pressures may result as pricing competition remains intense in some markets.

S&P Food Retail Index
Year to date through June, the S&P Food Retail Index increased 13.0% compared to a 6.8% rise in the S&P 1500 Composite Index. In 2006, the sub-industry index rose 15.2% versus a 13.3% increase in the S&P 1500. Out-performance in 2007 reflects improved comparable store sales trends due to food retailers shifting operational strategies, which we think are becoming increasingly focused on differentiation through product and service offerings rather than low prices.

Keep An Eye
Few companies that fall in this sector are

WFMIWhole Foods Market, Inc. engage in the ownership and operation of natural and organic foods supermarkets. It offers produce, seafood, grocery, meat and poultry, bakery, prepared foods and catering, specialty (beer, wine, and cheese), whole body, floral, pet products, and household products. The company operates 171 stores in US; 3 stores in Canada; and 7 stores in the UK.

OATSWild Oats Markets, Inc. operates a natural foods supermarket chain in North America. The company operates 110 natural foods stores. It offers natural, organic, and gourmet foods, such as dry grocery, meat, poultry, seafood, dairy, frozen, bakery, and prepared foods; environmentally-friendly household products; natural vitamins, supplements, and herbal and homeopathic remedies; and body care products.

IMKTAIngles Markets, Inc. operates a supermarket chain in the southeast United States. It provides food products, including grocery, meat and dairy products, produce, frozen foods, and other perishables; and non-food products, such as health and beauty care products and general merchandise, as well as private label items. The company also offers various products through the development of book sections, media centers, floral departments, coffee kiosks, certified organic products, bakery departments, and prepared foods, as well as operates fuel centers and pharmacies at select store locations. The company operated 46 pharmacies and 36 fuel stations. In addition, Ingles Markets operates fluid dairy processing and shopping center rentals businesses. It operates 197 supermarkets, as well as 74 neighborhood shopping centers.

RDKRuddick Corporation operates a chain of supermarkets in the US. Its supermarkets offer groceries, produce, meat and seafood, delicatessen items, bakery items, and wines, as well as nonfood items, such as health and beauty care, floral, and pharmacies. The company operates 152 supermarkets. It also manufactures and distributes industrial sewing thread, embroidery thread, and technical textiles to manufacturers of apparel, automotive materials, home furnishings, medical supplies, and footwear.

WMKWeis Markets, Inc. engages in the retail sale of food. Its retail stores sell groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, prescriptions, deli/bakery products, prepared foods, fuel, and general merchandise items, such as health and beauty care, and household products. The company also offers services, such as third parties providing in-store banks, laundry services, and take-out restaurants. It operates 156 retail food stores.

PTMKPathmark Stores, Inc. operates a chain of supermarkets. The company operates 141 stores. It offers an assortment of foods and general merchandise, as well as in-store pharmacies and in-store banks.

Overall analyst believe the fundamental outlook for the food retail sub-industry is positive.


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