LifePreservers

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=110 BGCOLOR="#666699" TEXT="#080000" bgproperties="fixed" background="04900840erlcjm.png"> <div> <B> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="600" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="LEFT" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 103 ><NOBR><div> <A HREF="index.htm" TARGET="_top" TITLE="Hoytnet Home"><U><B><IMG SRC="063775a0.jpg" border=0 width="119" height="90" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></U></A></div> </NOBR></tD> <tD VALIGN=TOP><NOBR><div> <B>Hoyt & Company</B></div> <div> <A HREF="services.htm" TARGET="_top" TITLE="What We Do"><U>What We Do</U></A> | <A HREF="who.htm" TARGET="_top" TITLE="Who We Are"><U>Who We Are</U></A> | <A HREF="articles.htm" TARGET="_top" TITLE="How We Think"><U>How We Think</U></A> |<A HREF="contact.htm" TARGET="_top" TITLE="Contact Us"><U> Contact Us</U></A></div> </NOBR></tD> </tR> </TABLE></B></div> <bR> <div> </div> </td> </tr><tr> <td valign="top" width=165 BGCOLOR="#CCCCFF" TEXT="#080000" background="04311c00egdysm.png"> <div> <A HREF="articles69.htm" TARGET="_top" TITLE="Chris Hoyt Articles"><U><B>Back to Articles</B></U></A><B>:</B></div> </td> <td valign="top" height=370 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I><B>Reveries.com - September, 2004</B></I></div> <bR> <div> <I><B>Life Preservers </B></I></div> <bR> <div> BY<B>: Chris Hoyt</B></div> <bR> <div> <B>I was a mathematics major. One of the things I like to do to relax and take my mind off the business is work on classic, insoluble math problems (no, I haven’t solved any!). So here’s one for you:</B></div> <bR> <div> <I>"How does a company reduce prices to a level lower than their operating expenses and still make money?"</I></div> <bR> <div> Well, this is exactly the problem that most supermarkets face today. Wal-Mart's 2004 average <I>gross margin</I> at 22.5 percent is now<I> </I>lower than Kroger's, Albertsons', and Safeway's <I>operating expenses</I> which were 22.7 percent, 24.9 percent and 26.0 percent respectively. Apparently, these folks aren't looking at these numbers because every pronouncement we hear from these supermarkets (or so it seems) is fixated on continuing to lower prices to compete.</div> <bR> <div> Thus, last week, we get the following from Steve Burd, Chairman and CEO of Safeway: "Safeway expects vendor allowance income to decline in the next five years as it seeks more dead-net pricing from vendors," said Burd. "We think the way supermarkets typically buy goods is more complicated than it should be" … "Our goal is to get down to a net cost so allowances go away and price reductions are reflected in the cost of goods." This, from a company who, according to JPMorgan, managed to extract over $2.3B in allowance money from suppliers in 2001, which was equivalent to 95.85 percent of Safeway's operating profits in that year.</div> <bR> <div> What Mr. Burd doesn't seem to understand is that even if Safeway were able to accomplish this, what it would be left with at the end of 2009 is an EDLP strategy that – based on current numbers – would still put Safeway at an average 3.5 percent price disadvantage versus Wal-Mart. In addition, Safeway would literally have no ammunition left to create excitement in an already boring and commoditized shopping environment.</div> <bR> <div> How boring? IRI reports that this Spring, the total number of different items carried in eight different departments by Albertsons, Kroger and Safeway were 28,584, 28,843 and 28, 693 respectively – a difference of less than 1 percent between the highest and lowest item counts.</div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="228" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP HEIGHT= 133 WIDTH="213"><bR> <div> <B>A constant fixation on lowering prices is killing supermarkets with virtually no meaningful results in return. </B></div> <bR> </tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="133" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> </tR> </TABLE></div> <div> But let us not pick on Safeway. In another announcement last week, Kroger reported that its second quarter 2004 earnings of $142.4MM have dropped a whopping $48MM or 33.7 percent below its second quarter 2003 earnings. This, according to Kroger, was due, in part, to "heavy investments in pricing and promotion intended to drive sales in a slow retail landscape." </div> <bR> <div> Kroger's second quarter same store sales barely got over the water line at 0.6 percent, leading Kroger to conclude this conference with the advice that it would not meet its previous estimates of a 1.3 percent food store growth in FY 2004. Immediately upon conclusion of this conference, Kroger's stock dropped (another) 5.7 percent.</div> <bR> <div> Albertsons also chimed in last week, advising that its second quarter earnings were 22.8 percent below 2003's while its same store sales had plunged to a -- 2.9 percent.</div> <bR> <div> Both Kroger and Albertsons did not hesitate to attribute a substantial part of their woes to the now five month past California strike which, conveniently, has provided a virtually inexhaustible reservoir of excuses for covering up poor performance and poor management by not only Kroger and Albertsons but Safeway as well.</div> <bR> <div> This constant fixation on lowering prices is simply killing supermarkets with virtually no meaningful results in return. Consider the following: </div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="573" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=CENTER HEIGHT= 57 WIDTH="7"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0"><A NAME="ole_link2"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A>Between 2002 and 2003, Kroger’s gross margins declined from 26.9 percent to 26.3 percent; Albertsons’ from 29.1 percent to 28.6 percent; and Safeway’s from 31.2 percent to 29.6 percent. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 76 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">During this same period, operating profits for all three of these retailers just tanked. Kroger’s plunged from 5.0 percent to 3.6 percent; Albertsons’ from 5.00 percent to 3.69 percent; and Safeway’s from 7.32 percent to 3.66 percent.</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 76 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Meanwhile, consumers keep deserting the ship. Between 2003 and mid-2004, average trip frequencies to supermarkets dropped from 72 per household per year to 70 -- a loss of another 219MM trips in total – while average transaction size remained flat at $33.00.</div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 115 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="115" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="115" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In 2002, supermarkets won the distinction of being the only channel where, for the first time, fill-in trips outnumbered stock-up trips (4,136M versus 3,503M, according to IRI). This underscores the unfortunate fact that supermarket relevancy has defaulted to convenience status for virtually all edible and non-edible grocery items except (perhaps) for perishables.</div> </tD> </tR> </TABLE></div> <div> Our question: If winning on price is unachievable, how about winning on consumer relevance?</div> <bR> <div> We don't think there is any time in recent memory when the consumer landscape offers more opportunities to latch on to changing trends than at the present time. </div> <bR> <div> While we recognize and acknowledge that supermarkets <I>are</I> physically constrained and perhaps even locked-in by such things as store size, layout, format, aisle spreads, shelving and case space, we do have difficulty understanding why companies with the size, assets and cash flow of Kroger, Albertsons and Safeway cannot package and market themselves to appeal to one or more of the plethora of changing consumer needs emerging at present. For starters, here are some traction points: </div> <bR> <div> <TABLE BORDER="0" CELLPADDING="1" CELLSPACING="1" WIDTH="573" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="VOID" RULES="NONE" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=CENTER HEIGHT= 76 WIDTH="7"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In 2002, only 23.6 percent of U.S. households could be considered "traditional families" -- that is, consisting of a married (male and female) couple with at least one child under 18 (versus 44.3 percent in 1960) -- a drop of 39 percent. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Conversely, unmarried adults now head over 48 percent of total American households and, at present growth rates, will soon comprise a new "unmarried majority." </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 38 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The number of one-person households in the U.S. now actually outnumbers the couples with children under 18. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 76 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Between now and 2010, the number of people in the U.S. between the ages of 45 and 64 will outnumber those between the ages of 25 and 44 by 26.5 percent to 26.2 percent and comprise the largest single segment of the American population. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 38 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Hispanics will grow to 15.2 percent of the population by 2010 (versus 12.5 percent in 2000) and command over 1 trillion in buying power. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Hispanic shoppers <I>already</I> make more trips per household to Target, SAM's and Costco than non-Hispanics and just as many to Wal-Mart (IRI, Summer, 2003). </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 57 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="57" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Sixty percent of women 16 years and older are now in the work force and unavailable for cooking leisurely meals at home. 50 percent of women 16 years and older now work full time. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 38 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="38" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">The number of families with both parents working has grown from 50 percent to 77 percent of the population since 1970. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 96 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="96" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="96" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Food as a percent of personal consumption expenditures has declined from 17.4 percent in 1960 to 10.1 percent in 2003, suggesting that all smart retailers try to make the shopping environment more exciting because food is now what behaviorists call a "low involvement purchase." </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 76 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="76" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">In 2002, consumers spent $620 billion on recreation and entertainment -- almost 3 X's what Americans spent on education and research in 2002 and 46 percent more than they spent for all clothing, accessories and jewelry combined. </div> </tD> </tR> <tR> <tD VALIGN=CENTER HEIGHT= 96 ><NOBR><IMG BORDER="0" SRC="1x1.gif" HEIGHT="96" ALIGN="bottom" WIDTH="7" HSPACE="0" VSPACE="0"></NOBR></tD> <tD VALIGN=CENTER WIDTH="8"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="96" ALIGN="bottom" WIDTH="8" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=CENTER WIDTH="548"><div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Men are now emerging as a force in grocery shopping. ACNielsen reports that men accounted for 36 percent of all grocery trips in 2002 while MediaMark reports that, in 2000, men comprised 30.3 percent of all home makers -- defined as the person who does most of the shopping -- up from 15 percent in 1985. </div> </tD> </tR> </TABLE></div> <div> Surely, there must be something in all of this that offers supermarkets a life preserver. Based on history, the alternatives look grim: Of the 100 largest companies in the U.S. in 1900, only 16 exist today. </div> <bR> <bR> <bR> </td> </tr></table></body>