June 2008

Inflation, recession and the ensuing trading down led to one of the most volatile years that the food industry has faced in several decades. For the first half of our annual retail market study measuring period (which runs from April 1, 2007 through March 31, 2008), inflation was relatively moderate but steady and many retailers took advantage of price increases to bolster top-line sales and profits. However, since the fourth quarter of 2007, prices of key commodities such as fuel, corn and wheat have played havoc with the ability of food retailers and suppliers to keep their pricing structures in line.

Viewing the entire food spectrum, there’s little doubt that the foodservice segment has been hit the hardest. Typically, that’s welcome news for food retailers who in past economic downturns have taken advantage of increased eating-at-home opportunities. That was certainly the case in the last major economic slowdown in 1990. But, this time around, supermarket operators have lost some ground because of the impact of other value-oriented channels, most notably mass and club. Making the most headway in same-store sales gain in those channels over the past six months have been Wal-Mart and Costco. Notable supermarket retailers that performed above the curve during that period have been Giant/Carlisle, Farm Fresh and Harris Teeter.

One of the supermarket operators that continued to struggle on several fronts was Giant/Landover. The large supermarket unit of Ahold remained the overall Mid-Atlantic market leader, however, sales dropped nearly $137 million during the past year while the retailer operated 178 stores, nine fewer than in 2007. While parent company Ahold will have owned Giant/Landover 10 years this November, the celebration is expected to be muted as store conditions, employee morale and a less-than-stellar performance of its “Value Improvement Program” continue to plague the chain. During the past several months, some positive steps have been taken to staunch the bleeding. Giant committed to spend $100 million as part of its “Project Renew” store improvement program in the Baltimore-Washington market. Additionally, the company hired veteran retail executive Robin Michel to oversee all operations at the Landover, MD chain. This could be a make or break year for the company.

Food Lion maintained its second place hold on the $38.3 billion Mid-Atlantic marketing area. The Salisbury, NC unit of Delhaize is undergoing a transition of its own. It fully cycled its revamped operations in the Washington market where about 40 Bloom (perishables-oriented) and Bottom Dollar (extreme value) units were converted. By the end of 2007 in Tidewater, Food Lion had also unveiled those multiple banners, with a heavier emphasis on its Bottom Dollar format. Currently, it is beginning work on a similar banner diversity/remodeling program at its Richmond stores. Overall, Le Lion enjoyed a solid sales year, amassing estimated sales of $3.59 billion at its 323 Mid-Atlantic units.

Holding on to third position in the region was Safeway. The Pleasanton, CA based retailer operate 140 units, primarily in the Baltimore-Washington region, good for approximately $3.42 billion in sales. The company continued to convert its convention stores to its modern, Lifestyle format, a chain-wide project that should be completed in about two years. During the past 12 months, former Safeway eastern division president Hank Cominiello was transferred to a corporate headquarters post and was replaced by Steve Neibergall, another Safeway veteran executive who was given his first opportunity to oversee an operating division.

Gaining sales ground while strengthening its number four position in the market was Wal-Mart. From a competitive viewpoint, it was a rather mild year of SuperCenter openings for the Behemoth. The company only opened four new SuperCenters, all in Maryland (net new combo stores in Baltimore County and Anne Arundel County and replacement/expansions in St. Mary’s County and Baltimore County). However, Wal-Mart has another dozen Mid-Atlantic stores slated to open in the next two years, and all will be SuperCenters. Moreover, in this economic climate, Wal-Mart has done the best job of leverage its low price image. With its 123 stores now open in the Mid-Atlantic (including 61 SuperCenters), the Behemoth rang up estimated extrapolated sales(food and drug) of $3.16 billion.

While Wal-Mart may be the mass merchandiser leader, the king of Mid-Atlantic drug chains remains CVS, which in the past year acquired the large prescription benefits company Caremark. The Woonsocket, RI based drug chain opened 15 net new stores in the region over the past 12 months while continuing its store replacement program which features additional grocery and perishables selections. CVS currently operates 441 drug stores in the region with estimated sales of $2.06 billion.

Ranking sixth among all retailers was Shoppers Food & Pharmacy. The discount regional supermarket chain, a unit of Supervalu, enjoyed a solid year in its core Baltimore-Washington market with sales of $1.98 billion at its 64 stores. The Lanham, MD based firm opened one new store during the past year, a high volume unit in the under-served Mondawmin section of Baltimore city.

One of the best supermarket operators in the region during the past decade has been Giant/Carlisle. The modified EDLP unit of Ahold continued its strong sales trend despite a flagging economy. Its sole new store in the region, a store that opened in Chambersburg, PA. On the executive side, Carl Schlicker completed his first full year as the company’s CEO, replacing the retired Tony Schiano. Giant/Carlisle currently operates 52 area stores that garnered sales of $1.75 billion.

One of the major news stories of the past year was Rite Aid’s acquisition of Eckerd Drug. After divestitures and some store closings, Rite Aid has nearly completed absorbing its former drug rival, including changing Eckerd’s banners to Rite Aid. That deal vaulted the Camp Hill, PA drug chain from 11th to seventh among all retailers in the Mid-Atlantic with estimated sales of $1.34 billion at its 418 area stores.

For the first time in almost a decade, Target’s quick sales climb was slowed a bit. Earnings were similarly affected. Still, the Minneapolis, MN based mass merchant continued to open stores in the region, cutting the ribbons on nine new units, all with expanded grocery offerings. One of those stores was a Super Target combination unit in Fredericksburg, VA, the third food and drug effort in the area.

Rounding out the top 10 was the region’s leading convenience store retailer 7-Eleven. The nation’s largest c-store chain is slowly modernizing its stores, many of which are franchised. Estimated sales for the area’s 942 7-Eleven units are $1.12 billion.
Other retailers that were factors in the region included Weis Markets with $1.01 billion in sales at its 66 Mid-Atlantic stores. Weis also named Dave Hepfinger as its new president and COO. He is viewed as a potential successor to long -time chief executive Norm Rich, who will retire at the end of the year.

Farm Fresh approached the billion dollar sales mark at its 45 Tidewater area stores. The Virginia Beach, VA unit of Supervalu rang up sales of $949 million in the region’s most competitive market, an increase of $89 million over last year.

Costco remained the Mid-Atlantic leader among all club operators, posting estimated extrapolated sales of $931.3 million at its 23 locations. Costco’s aggressive pricing program helped make it one of the top same-store sales leaders in the region.

Another retailer on the move was Harris Teeter. The Matthews, NC subsidiary of Ruddick Corp. opened eight new stores during our measuring period and increased sales by nearly $200 million to an estimated $599.2 million at its 28 stores. Additionally, the Teeter is expected to open another dozen Baltimore-Washington units over the next three years as it attempts to take market share away from Giant/Landover and Safeway.

Another expansion minded retailer over the past year was Walgreens, which opened 22 new stores, giving the Chicago area drug chain 131 stores in the Mid-Atlantic and estimated sales of $571.1 million.

The region’s top independents included Mars Supermarkets, with 18 stores that amassed estimated sales of $233 million. The Baltimore based family owned regional operator had a challenging year as it faced heavy competition from Wal-Mart and the recent resignation of its CEO Vito D’Anna.

Other Mid-Atlantic independents whose annual sales surpassed the $100 million mark included B. Green corporate stores (six units, $110.36 million), Klein’s Family Markets (seven stores, $107.3 million), Magruder’s (seven stores, $106.7 million), and Karns Prime & Fancy Foods (seven stores, $102 million).

Taken as a group, the 18 independent supermarket retailers who operated fewer than 19 stores ran 93 units which tallied $1.15 billion in annual revenue. That represented 2.97 percent of the region’s sales.

The region’s 48 chains, across all channels, operated 4,329 units which represented $37.03 billion in annual sales, or 96.59 percent of the Mid-Atlantic region’s total business.