Safeway is a major rival to Publix. Safeway operates more than 2,000 food and drugstores across North America under the brand names Safeway, Vons, Randalls, Tom Thumb, Genuardi’s, and Carrs. Safeway also operates floral, pharmacy, coffee shops, and fuel centers within their grocery and drugstores. The company also operates 156 food stores in Mexico with a 49-percent interest in Casa Ley, S.A. de C.V. Headquartered in Pleasanton, California, Safeway was founded in 1915 and has 178,000 employees.
Safeway recently divested its gift card business, Blackhawk Network Holdings, in a planned initial public offering (IPO). Spin-offs generally benefit a firm’s stock price because the parts of the original firm are usually valued more than the whole. Safeway’s stock price to earnings ratio of 8.6 in September 2012 is below Kroger’s 21.5, Whole Foods Market’s 41.3, Harris Teeter Supermarkets’ 19.4, and The Fresh Market’s 47.7.
Unlike most retailers, food retailers measure financial performance based on gross profit margin as opposed to gross profit dollars. The difference can be attributed to the volatile price of foods, which are subject to droughts, insect plagues, and high or low inflation. For example, food inflation only rose 0.3 and 0.5 percent in 2010 and 2009, respectively, but rose 6.4 and 4.2 percent in 2008 and 2007, respectively. However, in 2011, food prices rose 6.2 percent with partly the result of an 11-percent rise in fats and oils, 9 percent in dairy, and 7.4 percent in meats and eggs. Inflation or even deflationary constraints are a common battle among food retailers. Excessive heat or cold or severe droughts can lead to rapid rise in food prices.
Consumers are cutting back on discretionary purchases even among grocery items. Customers are visiting grocery stores more often but are buying less at each visit because their visits are targeted at finding items on sale or promotions. A related trend that may benefit Publix is that customers are increasingly buying store-branded products instead of the more expensive brand names. However, customers are also increasingly trading down to lower-priced dollar stores for food items. Well-off customers still have money, however, and have not altered their shopping habits as much as the average customer.
Natural and Organic Foods
Focusing more on natural and organic food is one viable strategy to counter higher food inflation and less disposable income among customers. Typically, customers who purchase natural and organic foods are loyal customers who believe in the perceived benefits of such a diet and are less willing to accept adequate substitute products. Most customers of natural and organic foods belong to a higher income bracket, and in 2010, foods in this category rose 7.7 percent whereas overall grocery items only rose 1.0 percent. Currently, however, organic foods only account for around 2 percent of total food sales worldwide, but the market is growing at a much faster rate than the overall grocery market both in both developed and undeveloped nations. This is somewhat surprising considering organic foods typically range between 10 to 40 percent more than their respective nonorganic products.
Interestingly, the United Kingdom’s Food Standards Agency recently stated that although consumers may elect to purchase organic fruits, vegetables, and meats for their perceived health benefits, research so far does not support in any way that these foods are more nutritious than nonorganic counterparts. Nevertheless, with the growing health-minded public, increasing offerings of organic and natural foods should remain a viable strategy and component to any food-related business.
Labor costs are one of the greatest operating costs for supermarkets, accounting for more than 50 percent of total operating expenses. Part of the expense can be attributed to the unionization of many supermarket chains but even without a union, supermarkets must strive to keep labor costs low just to breakeven.
Hy-Vee is the only grocery chain in the country that posts a registered dietitian in almost every one of its 235 stores. In rural areas, some of its more than 190 dietitians serve a cluster of stores. A phenomenon sweeping the grocery business is to capitalize on growing consumer awareness of the role food plays in health and wellness and to find new ways to fend off competition from specialty markets like Whole Foods, and even big-box stores such as Walmart. “There’s been an explosion of interest in having a dietitian among grocery store retailers in the last three or four years,” said Annette Maggi, chairwoman of the supermarket subgroup of the food and culinary professionals practice group at the Academy of Nutrition and Dietetics and a consultant to the retail and food manufacturing industries. Jane Andrews at the grocery chain Wegmans is the most renown of supermarket dietitians, becoming the first dietitian on its staff in 1988 and now supervising a team of six. Other regional chains like Meijer, Giant Eagle, Bashas’, and H-E-B also have dieticians. Kroger, which already has dietitians on staff, is adding more of them to its King Soopers chain in the west. Publix might should consider this new feature.
A reasonable question is how can a grocery store calculate the financial return on its investment in dietitians. Grocers increasingly find that dietitians bring customers into stores, offering in-store consultations and store tours with customers, holding cooking classes, assembling take-home meals, taking biometric screenings, doing presentations in schools, businesses, and civic events, working with merchandisers, helping set up community gardens, assessing products for nutritional value, and a variety of other things. The dietitian’s role is expanding, said Phil Lempert, a grocery industry expert and author of the blog Supermarket Guru. “The field of nutrition is getting more and more complicated,” Mr. Lempert said. “Merchants used to buy on price and promotion, but you can’t buy that way any more with all the product claims. You need someone around who understands whether products can really deliver, whether they’re safe.”
Publix plans to open 24 new supermarkets in 2013. Many analysts contend that traditional grocery retailers such as Publix may not survive long term because big-box grocery stores such as Walmart are offering groceries at significantly lower prices, largely to drive traditional grocery chains out of business. Also, pharmacies such as Walgreens, CVS, and Rite Aid are increasingly selling groceries at cost to drive traffic into the stores. Furthermore, discount chains such as Family Dollar, Dollar General, and Dollar Tree are taking more and more business from traditional grocery store chains. For these and other reasons, the grocery chains that are most diversified, such as Kroger, are doing best.
Publix is trying to diversify further, conducting trials of various boutiques, including a cologne and perfume fragrance department, in conjunction with Camrose Trading. Publix is experimenting with a gourmet deli at its Lake Mary Collection store in Lake Mary, Florida. Publix has grown rapidly for much of their existence but the world is changing more rapidly now. Should Publix continue to expand across the Southeast, entering new markets where customers may have never heard of Publix and have no brand association with the company? Or would it be better for Publix to focus on increasing store locations and attracting customers in their current markets? Which of Publix’s segment businesses, if any, should the firm add more of in the future, and why?
Publix is a well-known ESOP company with only employees having the opportunity to purchase stock. Is it time for Publix to list their stock for public sale on an exchange? With the low margins in the industry, would this enable Publix to more effectively finance operations? With the growing trend in heath conscious customers, should Publix increase their organic and natural food offerings and attempt to attract this style of customer and build more GreenWise Market stores? How rapidly and where (if anywhere) should Publix add new stores?