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James
Russo
Client Director
ACNielsen
Every look forward begins with a look back. This holds true
for the 2003 ACNielsen Retail Outlook, which begins with a
review of the 2002 macro-economic climate and the factors
that shaped the marketplace. From Wall Street to business
confidence. From industrial output to the labor markets. From
monetary policy to corporate earnings. From productivity gains
to consumer spending.
Drawing on more than 40 separate data sources, ACNielsen has
assembled a mosaic of the economy, along with projections
for early 2003 performance and a list of economic and retail
developments that may determine the strength of the back half
of the year.
Troubled Waters
Like a bad headache, economic recovery refuses to cooperate
with short-term remedies. Slightly better than predicted levels
of consumer spending (up 3.4% over a year ago), driven by
record levels of housing activity and strong auto sales, managed
to keep a sluggish recovery on the rails, despite a lack of
job creation. Now it’s up to businesses to add fuel
to the recovery in the form of more aggressive capital spending,
improved corporate earnings based on revenue generation and
reinvigorated investor confidence.
Déjà vu All Over
Again
Economic pundits bill early 2003 as “2002 all over again,”
with now-familiar geopolitical and economic uncertainties
front and center. The relatively strong showing on the fourth
quarter corporate profit line, with the average of S&P
500 corporations reporting a 10–11% gain, has been attributed
to a potent combination of cost-cutting, 50-year high productivity
gains and weak 2001 comparisons.
The overall consensus view calls for gradual acceleration
during the second half of 2003 as the economy shrugs off the
effects of the third successive year of market declines, the
tenth post-WW II recession and the looming threat of a double
dip in the market. At the close of 2002, interest rates remained
at 40-year lows, supported by aggressive monetary policy,
which resulted in record levels of housing sales and refinancing
activity.
Critical Events
Negative headlines dominated the financial press throughout
2002, beginning with the January bankruptcy filings of Kmart
and Enron, followed quickly by Global Crossing. Even the bellwether
performer General Electric reported falling sales, a precursor
to the downward earnings guidance reported across sectors
in 2002 [See chart 1].
Corporate governance scandals continued apace with names like
Tyco, Imclone, Adelphia and Worldcom in the news.
In November, the Federal Reserve sliced interest rates by
a surprising 50 basis points in an attempt to further stimulate
corporate and consumer spending. Given all the negative news,
the U.S. economy still grew a respectable 2.4% driven by resilient
consumer spending.
Consumers Weigh In
According to the Consumer Confidence Index, consumer sentiment
bullwhipped from an all-time high in September 2000 to a nine-year
low by October 2002. Fortunately for many retailers, consumer
spending followed a different trajectory, as aggressive financing
offers and promotional activity resulted in an upward trend
for the year [See chart 2].
Consumer spending fueled the U.S. economic engine in 2002,
revitalizing 1.4 million retail establishments, employing
more than 20 million people, accounting for two-thirds of
the Gross Domestic Product and ringing up retail sales exceeding
record 2001 levels of $3.5 trillion.
Yin and Yang
Wal-Mart will continue to define the ebb and flow of retailing
in 2003. The marketing behemoth serves 100 million consumers
weekly, and is now the 19th largest economic power in the
world. Wal-Mart’s goal is clear: achieve at least a
30% share in every category where it competes and double sales
within five years.
Kmart represents the opposite end of the retail success spectrum.
Battling back from bankruptcy, federal investigations and
internal investigations will prove more challenging than ever.
Over-stored and under- merchandised, Kmart needs a distinctive
point of difference to win back consumers.
Trend Shapers
Proponents of EDLP (everyday low prices) have found that low
prices readily translate into higher customer satisfaction.
The question remains: is this strategy sustainable?
Information continues to explode on all fronts: retailers,
manufacturers and consumers. To realize the promised ROI,
retailers must learn how to mine the data resident in corporate
databases and loyalty programs and develop niche marketing
strategies.
Porous Lines of Demarcation
The consumer appetite for variety evidences in many ways.
One of the most profound is through channel blurring. While
grocery still enjoys a 100% household penetration rate, followed
by mass merchandisers and drug stores, relative upstarts like
dollar stores, supercenters and warehouse clubs have made
significant inroads [See chart 3].
Time-constrained consumers continue to place a high value
on convenience—for example, looking to pick up a home
meal replacement at the convenience/gas store. This preference
has resulted in declining trip frequency at more traditional
formats such as grocery (a loss of 10 trips per year since
1998) and mass merchandisers (five fewer trips in just four
years). Supercenters, with their broad product assortment
and services, gained one trip per household per year during
the same timeframe.
Population Explosion
Supercenters posted super performance on another measure as
well, growing from 148 to 1,212 stores between 1993 and 2001.
Dollar stores also enjoyed an increased popularity, more than
doubling the number of outlets from 3,652 to 9,133. The warehouse
club population grew by 37%, and convenience/gas stores registered
a modest five percent increase [See chart 4].
Walgreens, Costco and Dollar Tree
Whether a result of aggressive expansion activity, strong
business fundamentals or a market position that resonated
with consumers, many retailers in 2002 outperformed the market
and then some. Leading the pack were channel leaders Wal-Mart,
Walgreens, Costco and Dollar Tree. As a whole, the dollar
channel continued to achieve strong sales gains across the
major players: Dollar Tree, Dollar General and Family Dollar
[See chart 5].
The much-anticipated fourth quarter earnings proved even more
revealing. The sales leaders noted above, plus several others—most
notably Target, Eckerd and CVS—generated strong net
income results through a combination of bottom line cost cutting
and topline revenue results.
Mass Merchandisers: Business Review
Responding to the consumer clamor for convenience, the mass
merchandiser format is evolving toward one-stop Supercenters.
With an eye on innovation, mass merchandisers continue to
pursue advantages like unique store formats, aggressive pricing,
niche ethnic marketing and attractive in-store merchandising.
There remains room for geographic expansion given the relative
underdevelopment of supercenters in the western half of the
U.S.
Wal-Mart. Practically a channel unto itself, Wal-Mart remains
innovation central and the technology leader by a long shot.
From gas stations to used car sales, from car rentals to financial
services, from a dedicated in-store TV network, Wal-Mart is
willing to experiment with non-traditional service lines that
deliver on the convenience proposition.
Already massive, Wal-Mart continues to pursue an aggressive
expansion plan calling for the addition of 200–210 supercenters,
40–55 discount stores, 40–45 Sam’s Clubs
and 20–25 neighborhood stores. If all goes according
to plan, Wal-Mart could very well double sales within five
years to an unbelievable $438 billion.
Target. Cheap chic. That’s the strategy that has enabled
Target to thrive in the wake of Wal-Mart and draw in upscale
consumers. Attractive stores and strong licensing agreements
with design mavens such as architect Michael Graves in housewares
and Mossimo in women’s clothing enable Target to deliver
the goods for roughly eight percent less than supermarket
chains. However, their supercenter performance has been under
close scrutiny as they have under-performed expectations.
On the drawing board are plans to add 94 stores at a cost
of $3.4 billion, with one-third of new construction dedicated
to SuperTargets.
Kmart. Since its January 2002 bankruptcy filing, Kmart has
shuttered 609 stores and absorbed losses of more than $4 billion
across 2001 and 2002. With a renewed focus on the bottom line,
Kmart has been conducting a rigorous SKU rationalization analysis,
accompanied by frequent promotions and markdowns. As a result,
December ended on a relatively positive note—a $349
million profit.
Chain Drug: Business Review
The pressure is on chain drug stores, caught in the squeeze
between managed care margin constraints and inroads made by
competitors attracted to the larger rings associated with
Rx trips. Prescription sales increased 18% in this $208 billion
industry, due to an aging population seeking OTC palliatives,
productivity and operational improvements, with bottom line
yield, and enhanced brand development strategies [See chart
6].
To compensate for downward pricing tension, chain drug stores
are increasing the number of stand-alone outlets, focusing
on front-end sales and expanding into non-traditional merchandise
departments as they seek to position themselves as a convenience
oriented format.
Walgreens. This retailer has literally raised the bar on its
own expansion plans, lifting the goal from 6,800 stores by
2010 to 7,000 outlets. Advanced pharmacy technology has helped
to keep the lid on operating costs. New service offerings
aimed at invigorating the brand include a grab-and-go food
line at select locations featuring the Welcome Home Café.
CVS. Executing an effective block-and-tackle plan to emerge
from their restructuring plan announced in the third quarter
of 2001, CVS set its sights on increasing front-end sales
by eight percent in 2002. The company also selected a lead
agency to help re-stage the venerable brand.
Rite Aid. Private label sales should spur Rite Aid along the
path to improved front-end performance while the company unveils
more than $120 million in capital expenditure plans. Potential
threats lies in the wings: an ongoing FTC investigation related
to consumer privacy issues and mounting legal costs resulting
from the 1999 scandals.
Eckerd. Rumors continue to circulate about a potential sale
of the Eckerd chain. Nevertheless, $425 million has been budgeted
toward capital improvements, with a stated plan of opening
approximately 230–250 news stores in 2003. And an aggressive
marketing effort is underway to improve circular quality and
launch broadcast ads featuring photo, beauty and prescription
products.
Grocery Stores: Business Review
Wal-Mart is redefining grocery retailing, and with total company
food sales of $80 billion, has become a formidable market
force. A recent UBS Warburg study found that typical supermarket
prices were as much as 39% higher than Wal-Mart. When a supercenter
entered the trading area, grocery prices fell by 13 percent.
Apparently, Wal-Mart’s strategy is working, as reported
supercenter food sales were up 25% in their latest fiscal
year. In an effort to undergird weak margins, grocers are
rushing to add fueling stations and develop unique reasons
to shop.
Looming large on the competitive front is Wal-Mart’s
Neighborhood Market format with a strong convenience focus—many
are open 24 hours. One-third of the store dedicated to general
merchandise and health/beauty products and 20–25% allocated
to pharmacy sales including a drive-through window. Wal-Mart
currently operates approximately 49 Neighborhood stores with
plans for 500 in 3–5 years.
Natural foods and fuels, accompanied by price cuts, cost cuts
and store closures constitute the Kroger strategy for 2003.
Albertsons plans to exit under-performing markets like Houston,
overhaul marketing campaigns, enter an aggressive cost cutting
effort and spend more than $185 million in Northern California
to renovate stores and minimize the impact of Wal-Mart’s
onslaught. Also on the books is an almost $1 billion program
to expand the Jewel/Osco footprint.
On the heels of pallid earnings and slowing same-store sales,
Safeway reduced its capital expansion plans, selling off its
Dominick’s divisions and re-tooling pricing strategies
to protect its strong gross margins—highest in the industry—from
Wal-Mart erosion. Ahold, the third largest grocery retailer
in the world, staged a reorganization at four of its six U.S.
retail companies in an attempt to carve out a more viable
competitive position.
Warehouse/Club Stores: Business
Review
The club store juggernaut may finally be decelerating under
the combined force of market saturation, the stalled economic
climate and intense competition. Warehouse club same-store
sales in December 2002 were an anemic 0.4%. Ancillary services
such as pharmacy, optical, film, gas, tire installs and upscale
gourmet assumed heightened importance from the margin perspective.
BJ’s will rework its strategies in 2003, concentrating
more on the consumer, expanding pharmacy operations and self-checkout.
Cheap gas will be used as bait to attract customers to the
store. Sam’s Clubs will follow the lead of a newly-installed
president, recruited to rectify disappointing sales and earnings
results.
Costco pared its 2003 capital expenditure programs to under
$1 billion and 17 new stores sited near existing locations.
While December 2002 saw the first Costco Home furniture outlets
debut, it has put plans for a gourmet grocery club on hold.
Dollar Stores: Business Review
Dollar stores moved into the top slot as the fastest growing
retail segment. Fostered in rural markets, dollar stores are
poised to encroach on urban turf and expand their appeal to
the middle market. On the competitive horizon for these players
is Bentonville’s testing of an in-store boutique.
Crossing the 6,000
store mark at the end of 2002, Dollar General has steamrolled
into new markets and increased its outlet base by more than
100% since 1996. Family Dollar enjoyed record sales and earnings
in 2002. Analysts anticipate an even brighter future as Family
Dollar rolls out new technology, adopts automatic replenishment,
implements sophisticated sales forecasting tools, enters urban
markets and takes on California.
Dollar Tree counts on expanding its retailing sales footage
by some 22 percent in 2003, a necessary precursor to reaching
sales and earnings growth targets of more than 15 percent.
eCommerce: Business Review
Alive, well and poised for growth, the shakeout has occurred,
and eCommerce sales increased more than 34 percent in comparative
third quarters of 2001 and 2002. This can be attributed in
large part to the success of the Amazon.com and eBay virtual
malls strategy. Disaffected analysts returned to the flock
when Amazon reported a profit in the fourth quarter of 2002.
2003 Scouting Report
With an analysis of over 200 different economic surveys, the
consensus appears that—provided a geopolitical resolution
is achieved—all indicators point to a gradual strengthening
of the economy in the second half of 2003.
Consumer spending
may decelerate as housing and refinancing activity abates,
with the Federal Reserve expected to correspondingly raise
the Federal Funds Rate. Key measures tied to those measuring
manufacturing activity, such as the ISM Manufacturing Index,
will become critical barometers of economic health and forecasting.
On the retail front, keep an eye on reorganizations, the reallocation
of capital expenditures and renewed focus on the consumer.
Current year-end predictions for 2003 (provided there are
not major shocks to the market):
- Unemployment rate will decline to 5.2%
- Consumer Price Index will nudge up to 2%
- Return to approximately $25 a barrel crude oil prices
- Federal funds rate will jump to 2.14%
- Gross Domestic Product will climb to 3.7 by the fourth
quarter.
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