As late as this spring, some market analysts thought a sharp rise in food and energy prices would actually benefit a giant supermarket company like Supervalu Inc.
Belt-tightening consumers, the thinking went, would react to rampant inflation by eating out less and cooking more with fresh food purchased at grocery chains like Cub Foods and Albertsons. Besides, some argued, Supervalu was large enough -- particularly after its acquisition of Albertsons in 2006 -- to pass on higher costs to shoppers.
But investors who listened to these Wall Street experts would have gotten hammered. Shares of Supervalu have plunged 31 percent this year as consumers fundamentally changed the way they shop for food.
U.S. consumer prices have surged 5 percent in the past year, the largest jump since 1991, largely on rising food and energy costs, the U.S. Labor Department said July 16.
In response, people are buying cheaper, generic products instead of the more expensive national brands. They're also buying more items on sale, and using more coupons. In retail jargon, this is called "trading down," and it's occurring to a degree that few experts expected even a year ago.
"The consumer mind-set has completely changed, and it's affecting food retailers of all stripes," said Mitchell Corwin, an equity analyst who covers supermarkets for Morningstar.
Even Supervalu chief executive Jeffrey Noddle has been surprised by the magnitude of the changes.
On Tuesday, he revealed in a conference call that higher fuel and grain costs have penetrated "almost every food category" and were not entirely foreseen by the company.
Supervalu -- the nation's second-largest supermarket company -- said its annual profit will rise less than it had forecast.
"Today's economic environment is quite different than we anticipated just a few months ago," Noddle said. "The current economic downturn, as well as energy and food inflation, have had and continue to have a major impact on consumer purchasing behavior."
Like its rivals, which include Wal-Mart, Kroger and Safeway, Supervalu is fighting back by promoting its cheaper store brands more aggressively. The company in April introduced its own line of organic food, Wild Harvest, designed to be priced at or below its competitors'.
And next month the company will introduce another private label brand of ready-made entrees and side dishes geared for price-conscious consumers who want a quick meal that is a cheaper alternative than restaurants.
In an interview Tuesday, Noddle also said the company is working more closely with food manufacturers to design innovative promotions and coupons. However, he said that foodmakers are struggling with higher commodity costs and also are pressuring retailers to show better results.
At the same time, Noddle made it clear that he won't allow current economic constraints and a recent slowdown in Supervalu's sales growth to disrupt the company's longterm strategy.
The company remodeled 43 stores in the first quarter and plans to finish more than 300 remodels by year's end, Noddle said. On average, he said, sales rise 8 percent in the 12 weeks following a remodel.
"Consumers are saying they're pretty stressed, and we're not hiding from that fact," Noddle said. But he said that would not change the company's plans to integrate with Albertsons.
For now, though, changing consumer behavior means investors should be prepared to accept lower profit margins and sales growth, analysts said. According to a recent survey by the NPD Group, a consumer marketing research firm, more than half of all adults who described themselves as "financially concerned" said they are using up leftovers and stocking up when items are on sale. Seventy-eight percent of consumers are combining shopping trips, according to a recent Nielsen survey. That benefits big-box stores such as Wal-Mart and Costco and hurts supermarkets, analysts said.
Supervalu's grocery business showed considerable weakness in the first quarter, with sales at stores open at least a year -- a key retail metric known as "same-store sales" -- declining 0.9 percent, excluding fuel. The Eden Prairie-based grocery giant, which owns Albertsons, Shaw's and Save-A-Lot and owns or franchises Cub stores, said in a statement that earnings per share for the year will be $3.04 to $3.20, down from a previous forecast of $3.10 to $3.25, excluding acquisition-related expenses.
Same-store sales are expected to rise 0.5 percent, lower than its previous forecast of 1 to 2 percent, Supervalu said.
"The ongoing weakness in the economy, combined with higher food and energy inflation, has created conditions that make us take a more cautious view for the balance of the year," Noddle said in a prepared statement.
The company said profits for the first quarter ended June 14 rose 9.5 percent to $162 million, or 76 cents a share, from $148 million, or 69 cents a share, a year earlier. Net sales were virtually flat at $13.3 billion.
Supervalu stock fell Tuesday by $1.83 to $25.99 a share, a drop of nearly 7 percent.
Chris Serres • 612-673-4308
1st quarter FY2009, 6/14
2009 2008 % chg. Revenue $13,347.0 $13,292.0 +0.4 Income 162.0 148.0 +9.5 Earn/share 0.76 0.69 +10.1 Figures in millions except for earnings per share.
