Small Food Retailers Outpace Larger Chains in 2003-2004

03/15/2005

Smaller food retailers with sales under $100 million posted six-year highs in net profits (1.45 percent) and return on equity (20.38 percent) in fiscal year 2003-2004, according to the Food Marketing Institute (FMI) 2004 Annual Financial Review released March 15. The net profit for the total industry declined to 0.88 percent, down from 0.95 percent the year before.

The overall decline was due mainly to figures posted by large food retailers, particularly those still recovering from the prolonged labor strike in southern California. In addition, health insurance costs increased 19 percent in 2003-2004, and a majority of the companies surveyed for the report expect further increases of up to 14 percent in the next fiscal year.

“Without a doubt, this is a tough, competitive market,” said FMI President and CEO Tim Hammonds. “Companies are squeezed by fierce price competition and continued double-digit increases in the cost of heath benefits — a major expense for an industry as labor intensive as ours.”

Industry Optimistic About the Future

“Most encouraging, however, is that many retailers are finding solutions,” Hammonds said. “Supermarkets are continuing to find ways to operate more efficiently as reflected in reduced inventory levels and strong asset turnover rates. And the top performers are investing in technology, consumer service and new products that should sustain growth in the years to come.”

The survey for the report found that 90 percent of retailers are optimistic about their future economic outlook, including 35 percent who are “very optimistic.”

Among the most significant findings in key financial ratios for fiscal year 2003-2004:

• Earnings before interest, taxes, depreciation and amortization (EBITDA) — regarded by many as the truest measure of operating performance — 4.20 percent, down from 5.08 percent.
  
  
• Return on assets (ROA) — 3.20 percent, up slightly from 3.04 percent.
  
  
• Return on equity (ROE) — 9.38 percent, from 10.60 percent.
  
  
• Reflecting increased efficiency, inventory levels declined to a five-year low at 20.67 percent of assets, as did accounts payable, which dropped to 15.79 percent.
  
  
• Many companies improved their liquidity with cash as a percentage of assets up to 6.62 percent, from 4.01 percent in 2002-2003.
  
  
• Long-term debt continued to decline, to 37.12 percent of assets — two points lower than the two previous years. The debt-to-equity ratio also dropped, to 2.29, from 2.43.

“All together,” said Hammonds, “these results show that the industry is repositioning itself for growth. The most progressive retailers are learning how to prosper in a largely price-driven marketplace.”

Benchmarks for Success

Retailers searching for pathways to success can find the benchmarks in the report’s financial profile of the top 25 percent profit leaders. Their after-tax net profit was 3.48 percent and EBITDA 6.72 percent.

“Most telling,” said Hammonds, “the profit leaders reported holding less cash than their less profitable counterparts (4.50 percent) — mostly likely because they have made significant capital expenditures investing in their future, spending nearly twice the industry norm at 4.20 percent.

“As the supermarket celebrates its 75th year, it’s inspirational to see this industry continuing to marshal its historic passion for marketing, for innovation and for service that have made the industry world class.”

The 2003-2004 Annual Financial Review is based on data from 166 companies operating 12,789 stores totaling $253 billion in sales — half of all U.S. retail food sales. Data are broken out by company size and by profit leaders. To purchase the report, please download a copy from www.fmi.org/store/ ($50 for FMI retailer/wholesaler members, $100 for associate members and $150 for nonmembers). To buy a hard copy, contact FMI Publications and Video Sales (202-220-0723); there is an additional $10 fee to cover printing, handling and shipping costs.