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Tough to Step in Front of Falling ID Sales: Stay
Neutral on KR, SWY, RDK, SVU; Underweight WFMI
Broadlines & Food Retailing
Charles Grom, CFA, CPAAC
(1-212) 622-6527
charles.grom@jpmorgan.com
Radina L Russell
(1-212) 622-8738
radina.l.russell@jpmchase.com
Paul Trussell
(1-212) 622-5671
paul.e.trussell@jpmorgan.com
Aaron Stein
(1-212) 622-6654
aaron.d.stein@jpmorgan.com
J.P. Morgan Securities Inc.
See page 31 for analyst certification and important disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision. Customers of J.P. Morgan in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
Table 1: J.P. Morgan Supermarket
Universe
Company Ticker Rating
Kroger KR N
Safeway SWY N
SuperValu SVU N
Ruddick RDK N
Whole Foods WFMI UW
J.P. Morgan estimates.
While secular food-at-home trends have turned favorable for the supermarket space,
we think the combination of (1) rising unemployment and (2) falling food prices will
spell trouble for identical store sales (ID sales). Along these lines, we are modeling
IDs noticeably softer (~50% lower YOY) in 2009 – with a group average of 1.2% (vs.
2.3% in 2008) with the highest expectations for Kroger (+4.0%) and lowest for Whole
Foods (down 3.3%). Moreover, competitive pressures from both Wal-Mart and the
warehouse clubs (Costco, BJ’s, and Sam’s Club) are as strong as ever. Net, in
conjunction with our initiation on December 16th, 2008, we remain cautious on the
grocery store arena, with Neutral ratings on Kroger, Safeway, SuperValu, and Ruddick
and an Underweight rating on Whole Foods.
In this report we address our 2009 outlook on the supermarket industry as well as
provide a comprehensive overview of the various puts and takes impacting the sector
today. Specifically, we shed light on “hot-button” topics including: (1) small-box
stores, (2) private label trends, and (3) natural/organic foods. Finally, we
compare/contrast the five supermarkets in our coverage universe.
• Macro Indicators – Mixed Signals. Although defensive economic characteristics
have made this sector attractive in previous economic downturns, this time around
could be different, in our view. To this end, we expect a number of negative macro
factors to weigh on the industry in 2009, including: (1) increased foreclosures, (2)
high unemployment, and (3) the effect of declining food inflation. Importantly, ID
sales are inversely correlated with unemployment (negative 56.9% since 1992) and
positively correlated with food inflation (supermarket price index; 42.6% since
1993) and the outlook is ominous on both fronts. That said, the decline in food
prices may be stickier than some expect, and note that historically when processed
food price growth turned negative, the negative inflection point lagged the inflation
peak (most recently August 2008) by 11-32 months. On a brighter note, we expect
food expenditure trends to continue to shift away from restaurants and towards food
at home, which will help offset the aforementioned ID risk to some degree.
• In this Light, Stock View = Sidelined. Although sales-driving initiatives are
beginning to take hold and cost-reduction plans have been formed, we still think
industry headwinds are formidable and therefore prefer to take a wait-and-see
approach on the stocks. Overall, we believe the group could remain under pressure
for most of 2009. That said, we think Kroger will continue to be the best-in-class
competitor, but given the high bar the company has set, we’d prefer to wait on the
sidelines to get a more attractive entry point.
• Proprietary Market Share Analysis. We believe meaningful market share in
attractive geographies combined with large, stable cash flows and efficient
operations will give large supermarket chains the ability to weather the current
economic storm and keep share intact. Enclosed we analyze the Top 25 U.S.
markets – ranking the Top 3 players in each domicile. Excluding Wal-Mart, which
ranks in the Top 3 in 14 markets, Kroger, SuperValu, and Safeway have top-ranking
positions in 10-11 markets apiece.
2009 Outlook.............................................................................3
Food-at-Home Expenditures on the Rise . . . ...............................................................3
. . . But Unemployment Also Increasing......................................................................3
Food Inflation Expected to Compress . . .....................................................................5
. . . and Drag Down Identical Store Sales ....................................................................6
Industry Snapshot....................................................................8
20 Years of Growth . . .................................................................................................8
. . . But Players Have Changed as Consolidation Took Place......................................8
Alternative Formats Becoming Increasingly Important.............................................10
National Players Must Exhibit Local Market Strength ..............................................11
Market Share: A Closer Look at the Top 25 DMAs ..................................................12
Breaking It Down – Store Dynamics .....................................13
No Two Formats Are Alike .......................................................................................13
Remodels – The New Trend to Stay Relevant ...........................................................14
Small-Footprint Stores...........................................................16
Small-Box Retailing Is Not a New Concept ..............................................................16
Small Stores Not a Major Near-Term Growth Vehicle..............................................17
Private Label Acceptance Gains Traction ............................19
Natural and Organic Food Outlook .......................................20
Compare & Contrast...............................................................21
Company Snapshots..............................................................22
Kroger (KR; Neutral).................................................................................................22
Safeway (SWY; Neutral) ...........................................................................................23
SuperValu (SVU; Neutral).........................................................................................24
Whole Foods Market (WFMI; Underweight) ............................................................25
Ruddick Corporation (RDK; Neutral)........................................................................26
Appendix I: Food Retail M&A Activity ..................................27
Appendix II: Major Supermarket Players..............................29
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