Recent SUPERVALU (SVU) News Highlights Major Underlying Grocer Problems (KR) (SWY)
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What's wrong with grocers?
Given that humans need food as one of several key staples to survive (others include: earth, fire, wind, water, and heart), you might assume grocers have it easy. But, competition is looming, and from some unexpected places.
Following the recent announcement that SUPERVALU (NYSE: SVU) will be seeking strategic alternatives, many investors were left in the dark. What happened? Are folks gaming to pay more for groceries? Can I friend these "folks" on Facebook?
Investors should really be asking why consumers would go shop at a food-specific store when there are options like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and others, which will let you browse the produce aisle one minute, and grab another plasma HDTV the other. Need Kraft (NYSE: KFT) Mac 'n Cheese and a three-pack of Fruit-of-the-Looms T-Shirts while you're out? Boom. Wal-mart.
Heck, you can even get groceries off of Amazon.com (Nasdaq: AMZN).
On its conference call, SUPERVALU CEO Craig Herkert said he's hoping his store's prices come back in line, eventually narrowing the gap with other grocers.
Even without pricing adjustments, SUPERVALU is still being weighed-down by the 2006 acquisition of Albertson's for $11.3 billion in cash and stock. Last year, SUPERVALU reported revs of $37.5 billion, but margins of 4.9 percent and debt costs forced the chain to report a loss of $1.1 billion.
The WSJ notes that the increasing gap between the wealthy and no-so-wealthy is also hitting food retailers, with the affluent shopping at Whole Foods (NYSE: WFM) while budget-minded buyers purchase a privately-held Aldi or Dollar General (NYSE: DG).
That leaves names like Kroger (NYSE: KR) and Safeway (NYSE: SWY) in limbo, though Kroger is said to be doing better than most (comps were up 4.2 percent in June, with much of that attributed to a strong loyalty card program). Great Atlantic & Pacific Tea Co. recently came back from bankruptcy, while Winn-Dixie was recently acquired for $560 million.
Consolidation may still be on the menu, with input prices (corn, wheat, others) continuing to move higher. The recent drought hitting much of the Midwestern U.S. hasn't helped and government subsidy cuts and adjustments are driving some growers into new, more profitable crops.
For Wal-mart, groceries now account for 55 percent of U.S. sales, up markedly from 40 percent just four years ago. The increase comes as less and less consumers are buying physical media goods like CDs and DVDs (read: Blu-rays), or shopping for those goods via e-Commerce websites.
Is there a secret formula for SUPERVALU, Safeway, and others? Probably not, at least not without a lot of sacrifices being made near-term. Competitive pricing and a strong customer base are key, but with Wal-marts and Targets popping up all over the place, the competition isn't resting.
In fact, the competition looks extra hungry.
Shares of SUPERVALU, Wal-mart, and others are indicated for a stronger open Friday.
Given that humans need food as one of several key staples to survive (others include: earth, fire, wind, water, and heart), you might assume grocers have it easy. But, competition is looming, and from some unexpected places.
Following the recent announcement that SUPERVALU (NYSE: SVU) will be seeking strategic alternatives, many investors were left in the dark. What happened? Are folks gaming to pay more for groceries? Can I friend these "folks" on Facebook?
Investors should really be asking why consumers would go shop at a food-specific store when there are options like Wal-Mart (NYSE: WMT), Target (NYSE: TGT), and others, which will let you browse the produce aisle one minute, and grab another plasma HDTV the other. Need Kraft (NYSE: KFT) Mac 'n Cheese and a three-pack of Fruit-of-the-Looms T-Shirts while you're out? Boom. Wal-mart.
Heck, you can even get groceries off of Amazon.com (Nasdaq: AMZN).
On its conference call, SUPERVALU CEO Craig Herkert said he's hoping his store's prices come back in line, eventually narrowing the gap with other grocers.
Even without pricing adjustments, SUPERVALU is still being weighed-down by the 2006 acquisition of Albertson's for $11.3 billion in cash and stock. Last year, SUPERVALU reported revs of $37.5 billion, but margins of 4.9 percent and debt costs forced the chain to report a loss of $1.1 billion.
The WSJ notes that the increasing gap between the wealthy and no-so-wealthy is also hitting food retailers, with the affluent shopping at Whole Foods (NYSE: WFM) while budget-minded buyers purchase a privately-held Aldi or Dollar General (NYSE: DG).
That leaves names like Kroger (NYSE: KR) and Safeway (NYSE: SWY) in limbo, though Kroger is said to be doing better than most (comps were up 4.2 percent in June, with much of that attributed to a strong loyalty card program). Great Atlantic & Pacific Tea Co. recently came back from bankruptcy, while Winn-Dixie was recently acquired for $560 million.
Consolidation may still be on the menu, with input prices (corn, wheat, others) continuing to move higher. The recent drought hitting much of the Midwestern U.S. hasn't helped and government subsidy cuts and adjustments are driving some growers into new, more profitable crops.
For Wal-mart, groceries now account for 55 percent of U.S. sales, up markedly from 40 percent just four years ago. The increase comes as less and less consumers are buying physical media goods like CDs and DVDs (read: Blu-rays), or shopping for those goods via e-Commerce websites.
Is there a secret formula for SUPERVALU, Safeway, and others? Probably not, at least not without a lot of sacrifices being made near-term. Competitive pricing and a strong customer base are key, but with Wal-marts and Targets popping up all over the place, the competition isn't resting.
In fact, the competition looks extra hungry.
Shares of SUPERVALU, Wal-mart, and others are indicated for a stronger open Friday.
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