Food Industry Continues To Serve As Politicians’ Economic Whipping Boy
A $15 an hour minimum wage for Baltimore City? Baltimore City? A one-and-a-half cents per ounce tax on both sweetened and artificially sweetened beverages in the city of Philadelphia?
After years of taking it on the chin (in smaller doses), the past few months have served as living hell examples of what happens when needy municipalities and their politicians engineer tax plans at the expense of the grocery industry to fill a need that only marginally applies to those being penalized.
In the case of the $15 an hour minimum wage, that bill came closer to becoming law as the Baltimore City Council earlier this month approved the measure by a 12-3 margin. That bill now moves closer to the desk of new Baltimore Mayor Catherine Pugh, who had earlier expressed support for the measure, but more recently has cited the bill’s potential adverse impact on businesses.
She should be concerned. Although wages would increase on a step basis (with the $15 an hour level reached in 2022), all food retailers that operate both in Baltimore City and in other jurisdictions acknowledge that operating city stores is significantly more costly than running supermarkets in adjacent jurisdictions. In fact, the $15 an hour rate would eclipse the rate of all the surrounding counties to the City by almost $5 an hour.
After speaking with several retailers who attended the hearing, their disappointment was obvious, claiming that it was clear in their minds that many of the council members paid little or no attention to the challenges supermarkets face operating stores in a city where population is declining, crime is increasing and the margins in their core business have never been big.
A couple of retailers noted that the comments of Councilman Bill Henry were particularly insensitive and off base.
“If your agenda is to ram the ‘need’ for $15 an hour minimum wage down our throats, from a socio-economic perspective, I intellectually understand that view, although I disagree with it from my job as a small business owner,” said one independent retailer. “But to imply that my salary is somehow connected to his agenda to raise money for the city by any means, is plain wrong and insulting. I work hard every day and have created a lot of jobs for Baltimore City residents for many years. His level of entitlement was disingenuous and his attitude was certainly disrespectful.”
Ninety miles to the north in Philadelphia, the battle has left the legislative chambers and the horror show is now playing out daily at supermarkets all over the city. While the soda tax is different from the minimum wage issue, its genesis is similar: “Our city needs more revenue (a sad reality), we can’t create enough incentive for more business opportunity, so let’s punish those businesses that have rewarded us for years with jobs and revenue.”
In this case the social/moral argument gets thrown in, too – “There’s too much obesity, so let’s target the purveyors of fat.” In my view, it is the consumers who make unenlightened choices. But, don’t blame them, because it is their right to choose – I don’t believe that law has ever been challenged, much less overturned.
Unsound logic or no logic at all? It doesn’t matter, because food retailers and beverage manufacturers and distributors are bearing the sole burden. And it’s really a big burden when you consider that beverage sales have diminished about 50 percent at Philadelphia stores since the law went into effect on January 1. More than 3,000 items are now eligible to be taxed, including flavored waters, sports drinks, teas and lemonades.
And as often happens, the lawmakers (City of Philadelphia) played the social sympathy card by noting that most of the estimated $90 million of revenue (Mayor Jim Kenney’s projection) amassed from the soda tax would be directed to pre-kindergarten related improvements.
First of all, the $90 million tax gain was a fantasy land number from the beginning. Now with soda (and related products) consumption down so significantly, the city will be fortunate to raise even half of its false estimate. And even at that, what will be the final dollar contribution to those pre-K needs?
I sense these two events (and other legislative shakedowns in other cities) have awakened the sleeping giant.
In Philadelphia, Pepsi and Canada Dry have announced job layoffs, as have several retail organizations. Expect more of the same from others as well as the diminishment of service levels to occur very soon.
Also on the docket shortly will be the industry lawsuit claiming that the soda tax is actually illegal because it creates a “double taxation” standard that conflicts with Pennsylvania’s existing 6 percent sales tax. This time, the case will be heard at the state Supreme Court level in Harrisburg, not in front of a hometown judge from the Philadelphia Court of Common Pleas, who dismissed the case without even a full hearing.
In Baltimore, if the minimum wage law is enacted, the results will be similar, or perhaps even more painful. After years of trying to entice supermarkets to enter its underserved municipality and fill the void of food deserts, those efforts could be quickly undone.
Trust me, it won’t be a big stretch for not only those new entries to vacate Baltimore City but other merchants that have operated stores in Baltimore City for years to significantly decrease their workforces and possibly abandon operating in the city altogether.
Baltimore, Philadelphia, DC, Chicago, Los Angeles, Seattle, San Francisco – the industry message is becoming a lot clearer – “We’re mad as hell and we’re not going to take it for much longer.”
Wal-Mart Changing The View With Best Identicals In Almost Four Years
Wal-Mart is back. After struggling with a myriad of issues ranging from associate relations to in-stock conditions which resulted in a nearly four year sales slump, the world’s largest retailer (2.3 million associates worldwide) posted its best comparable store results at its U.S. stores in more than four years.
When chief executive Doug McMillon, who has spent his entire career at the Bentonville, AR merchant, took the helm three years ago, he promised he would make the only company he’s ever worked for more progressive and flexible. That meant restructuring the executive team, creating better morale at store level and investing heavily in e-commerce, where Wal-Mart was getting pummeled by online giant Amazon.
It’s taken the 50-year old CEO nearly 36 months to make those radical and sometimes painful changes, but financial results over the past year have indicated that Wal-Mart has measurably regained the spring in its step, which will make them even tougher to defend against in an already overcrowded marketplace.
In its fourth quarter ended January 31 (which included the busy holiday shopping period), Wal-Mart’s comp store revenue increased 1.8 percent in the U.S. (vs. 0.6 percent in last year’s fourth quarter) and its domestic e-commerce volume jumped 29 percent, aided by its $3.2 billion acquisition of jet.com in September. Mark Lore, co-founder of jet.com, is now spearheading Wal-Mart’s e-commerce business.
Other strong U.S benchmarks included a 2.8 percent sales gain in overall Wal-Mart bannered stores (to $83.7 billion), 1.4 percent traffic increase and a 0.4 bump in average transaction.
At its other U.S. banners – Sam’s Club and Neighborhood Market – the news was equally as good.
The company said that its grocery, health and wellness, and apparel were some of the top-performing categories at its U.S. stores, despite a slow beginning to the quarter for cold-weather merchandise. Electronics, media and gaming were soft.
At its long beleaguered club store operations, comps (ex-fuel) increased 2.4 percent and overall sales jumped 3 percent. Additionally, in-store traffic and average transaction size both grew 1.2 percent.
And at Neighborhood Markets, the fastest growing Wal-Mart banner, comps surged 5.3 percent in the 13-week period.
On a global basis, the Bentonville Behemoth rang up fourth quarter sales of $130.9 billion (a 3 percent increase, excluding currency variables). Total sales for its fiscal year were $496.9 billion (a 3.1 percent gain, excluding currency variables).
If there was one somber note to Wal-Mart’s Q4 financial performance it was that earnings were slightly down. In its core U.S. stores, profit dipped by 2.5 percent to $4.99 billion and on a worldwide analysis, earnings dipped 3.4 percent. However, many analysts felt the decline could be attributed to much higher than usual cap-ex spending to improve infrastructure and bolster its e-commerce initiatives.
Wal-Mart also noted that it generated $11.9 billion in operating cash flow and returned $3.6 billion to shareholders through dividends and share repurchases.
“We’re moving with speed to become more of a digital enterprise and better serve customers. We had a very solid fourth quarter with U.S. comp sales growth of 1.8 percent and U.S. e-commerce GMV growth of 36 percent. Our international business is consistently delivering solid sales growth in constant currency, and Sam’s Club posted its best comp sales growth of the year. I want to thank our talented associates for their work. We have more work to do, but I’m pleased with our progress,” said McMillon.
‘Round The Trade
Good news for our friends at Burris Logistics, the large family-owned provider of public refrigerated warehousing and freight consolidation services. The Milford, DE-based logistics firm earlier this month announced that it has successfully completed the purchase of a 55-acre property in McDonough, GA (33 miles south of Atlanta) and will soon begin construction of a 250,000 square foot, public refrigerated warehouse (PRW) with 28,000 pallet positions, and an attached office on the property. The facility will create more than 75 local jobs for Phase I when construction is completed in January 2018. The Georgia warehouse will allow the company to further enhance a growing network of refrigerated warehouses, strengthening customer service. “Burris continues to evolve to meet the needs of our current and potential clients,” said Donnie Burris, company CEO. “Our expansion into the Greater Atlanta region highlights the growth, popularity and diversification we are experiencing throughout our entire operation. We are selected for our commitment to service, leading-edge technology and solid core values. We welcome new and expanded relationships.”…private equity firms Leonard Green and Partners and CVC Capital Partners, which own club operator BJ’s, are reportedly looking for a way to unload the investment they acquired in 2011 for $2.8 billion. Given that six years is within the framework of a PE “dump” this potential move shouldn’t be surprising. Certainly the inroads that Amazon and now Wal-Mart have made against all club operators offer another potential reason for BJ’s to find a new home, too. The Wall Street Journal reports that the Natick, MA-based merchant is looking at either a sale or a possible IPO. BJ’s, which operates 213 units primarily on the East Coast (and Ohio), was a publicly-traded enterprise before its purchase by Green and CVC…Aldi said it will spend $1.6 billion to remodel its 1,300 U.S. stores. Aldi’s new redesigned model, which now exists in about 300 units, features wider aisles, raised ceilings, sleeker refrigerated doors and windows and more natural lighting. The new store design adds about 20 percent more floor space (to about 20,000 square feet) and an expanded perishables presence…it looks like Stop & Shop is attempting to enter the apartment building business. In a filing with the Boston Planning and Development Agency, the biggest division of Ahold USA is seeking permission to redevelop its existing store at 60 Everett Street in the Allston section of the city. As part of a broader plan, called Allston Yards, Stoppie would also build 1,010 residential units (apartments) and offer office space and ground floor retail and restaurant space. “Stop & Shop has been proud to call Boston our home for over a century and we believe that Allston Yards project represents a terrific opportunity for us to better serve the neighborhood and community,” said the talented Mark McGowan, president of Stoppie…if Whole Foods Markets is banking on its trendy “365” concept as a growth portal, don’t count me as a fan. I was finally able to visit my first “365” store while recently in Los Angeles and I wasn’t too impressed. The good news was that pricing is much more aggressive than traditional WFM units and the perishables departments are solid, not spectacular. But the overall store layout, lighting and merchandising I thought were subpar. I may be wrong, but I found it hard to imagine that this format would translate well nationally…according to the New York Post, in an effort to trim operational costs after its emergence from bankruptcy last July, Fairway Market is considering selling the prepared foods commissary and bakery distribution center in the Hunts Point section of the Bronx which opened in 2010. The “like no other market” merchant, which debuted its first new store in nearly three years in Brooklyn last month, is now controlled by PE firm GSO Capital Partners, an arm of the Blackstone Group…Brazilian PE firm 3G – owner of Kraft Heinz – whose appetite for growth is almost as aggressive as its broad cost-cutting measures, is dropping its efforts to acquire Unilever. The Dutch manufacturing giant already had already rejected 3G’s $143 billion bid and offered this explanation: “Kraft Heinz had the utmost respect for the culture, strategy and leadership of Unilever.” Sounds like a “face saving” exercise from the private equity firm to avoid potential litigious and costly battle, one that 3G would likely lose…the first new ShopRite corporate store (SRS) under the helm of Brett Wing (who was named president of ShopRite Supermarkets in January) will open in North Greenbush, NY (Rennselaer County) later this year. The 55,000 square foot store will be SRS’ fourth Albany area location. The corporate store arm of Wakefern Corp. currently operates 34 supermarkets overall. More Wakefern news: at this year’s FMI Midwinter Executive Conference, chairman and CEO Joe Colalillo was presented with the Robert B. Wegman award, which was given to the supermarket executive for “exercising entrepreneurial leadership in the design of retail strategies and imaginative merchandising.” This honor is much deserved because Joe’s vision and leadership skills are unparalleled in an industry with so much talent. Plus, he’s one of the really good guys in the entire grocery biz.
Local Notes
On March 9, Weis Markets cut the ribbon on its long-awaited 65,000 square foot store in Enola, PA. This new unit offers several notable wrinkles for the Sunbury, PA-based merchant, including its first in-store pub, an ice cream shop and juice bar encompassed in a “community market” design. Weis will need to be on its “A” game considering that rival Giant/Carlisle operates one if its best stores, a 76,000 square foot replacement unit that opened in late 2014, directly across the street…it was a busy month for earnings and we’ve got some highlights (and lowlights) to report.
While we’re on the subject of Weis Markets, the regional chain’s numbers were very good for its fourth quarter and 2016 year end. Adjusting for the extra week in 2016, the company’s fourth quarter sales increased 17.6 percent while comparable store sales were up 3.4 percent. “In 2016, we acquired and converted 44 stores in 96 days and generated more than $3 billion in sales for the first time in our 10- year history,” said Jonathan Weis, Weis Markets chairman and CEO. “We continued to improve every aspect of our operations in 2016, including supply chain, merchandising and in-store experience, which resulted in a year of strong sales and earnings growth.” During the 14-week period ended December 31, 2016, the retailer’s fourth quarter overall sales increased 26.0 percent to $925.1 million compared to $734.1 million for the 13-week period ended December 26, 2015. Fourth quarter net income increased 148.2 percent to $41.1 million. During that period, Weis Markets realized a one-time gain of $23.9 million on the purchase of the 38 Food Lion stores. Fourth quarter operating income increased 4.9 percent to $27.0 million compared to the same period in 2015. For all of fiscal 2016 and also adjusting for the extra week, the company’s 2016 sales increased 6.9 percent while comparable store sales increased 2.9 percent. With the extra week added, its 53-week period revenue increased 9.0 percent to $3.1 billion compared to $2.9 billion for the 52-week period in 2015. Year-to-date net income increased 46.9 percent to $87.2 million, while earnings per share increased 46.6 percent to $3.24 compared to $2.21 in 2015. Year-to-date operating income increased 8.3 percent to $98.3 million. Weis attributed its comparable sales and net income increases in 2016 to continuing price investments, disciplined sales promotions, an enhanced customer experience and improved supply chain efficiencies. It also benefited from strong increases in its pharmacy and fresh department sales, the company noted. Also reporting solid fourth quarter earnings in the U.S. was Ahold Delhaize. At its Ahold USA unit, operating margin was 4 percent, but as previously reported comp store sales declined 0.2 percent at its nearly 800 stores. The star of the show was Delhaize America’s contribution (Food Lion, Hannaford) where comps increased 2.2 percent and underlying operating margin was 3.6 percent. There’s no question that the newly formed Ahold Delhaize machine knows how to make money. As for AUSA, its ongoing reorg should lead to improved sales, too (if you believe their rhetoric). But as I’ve said many times, efficiencies and backroom enhancements will mean little if more attention isn’t paid to the stores – particularly staffing and training. At Food Lion, which just began its “easy, fresh and affordable” remodeling program at its160 store Greensboro, NC division, the upcoming onslaught of Lidl openings will be the biggest challenge that Le Lion has faced in years. Also reporting fourth quarter earnings recently was Publix. The employee-owned juggernaut, which will enter the Richmond market later this year, posted a solid 2.2 percent comp store increase (about the peer group average) while growing earnings by 4.5 percent to $544.5 million. “I’m proud of our Publix associates – the owners of Publix – for continuing to make us a leader in our industry and providing a great shopping experience,” said Todd Jones, CEO of the Lakeland, FL-based chain which operates 1,143 units in the Southeast. On the negative earnings track were Target and Sears Holdings. Target posted its third consecutive comp store decline (negative 1.5 percent in the quarter, 4.3 percent for the full year) in its recently completed fourth quarter ended January 28. With profits also decreasing 13.5 percent, CEO Brian Cornell went on the offensive, noting that the Minneapolis-based mass merchant would “accelerate investments in a smart network of physical and digital assets as well as our exclusive and differentiated assortment, including the launch of more than 12 new brands, representing more than $10 billion of our sales, over the next two years.” According to the former Pepsi, Safeway and Wal-Mart executive, Target’s ramp-up pf a focus on small-format stores will yield more than 100 such locations expected to open within three years. Another 600 stores are set for overhauls over the same timeframe, to better reflect the brand. “We have some old, tired stores that haven’t been updated in years,” Cornell told financial analysts in the post-earnings conference call, adding that “it’s unrealistic to ask people to shop the way their parents did.” And at Sears Holdings, fourth quarter numbers continued to resemble a train wreck. The Hoffman Estates, IL-based firm posted a $607 million loss in the period; same store sales fell an incredible 10.3 percent, all leading to a 58 percent share decline over the past 12 months. However, CEO (Slow) Eddie Lampert apparently has a new idea that he believes will provide some relief. Last month, the bedraggled operator unveiled its first DieHard Auto Center (Driven by Sears) in San Antonio, TX. I’m not certain if the new concept and brand were derived from the car battery of the same name or whether the company was describing its ongoing descent into the inevitable…often one of the byproducts of disappointing earnings is an ensuing reduction of staff, and such is the case at Kroger, which has offered buyouts to approximately 2,000 associates. The company said about 1,300 employees are expected to accept the voluntary separation package and the Cincinnati-based supermarket chain said it will announce the amount of saving generated by the buyouts in its Q1 earnings report in June. While the big K may be currently undergoing some in-flight turbulence, I for one have not lost any confidence in the ability of the industry’s biggest pure-play supermarket operator to do what’s needed to get back on course. And that’s primarily because, in my book, fundamental soundness almost always overrides shorter term issues like deflation and price wars…Acme Markets, which has struggled with assimilating the approximately 75 stores it acquired from A&P 18 months ago (particularly in Northern New Jersey, New York and Connecticut) recently held a vendor meeting at its store in Pennsville, NJ. Primary speakers were president Dan Croce and Albertsons EVP Jim Perkins (who preceded Croce as Acme president). As usual, both men gave candid, honest views of the company’s current status, acknowledging that every day retails were too high and that continuing attention has to be paid to upgrade the store base. These dudes don’t waste time. In the two weeks since the meeting was held, Acme has lowered hundreds of prices while also accelerating their store remodeling agenda and reset program. Twenty-five grand re-openings are slated for 2017 (some have already been completed) in addition to 23 remodels and two new stores. And before the year has ended, Acme will have completed about 100 center store resets, a company record. In fact, Croce stated that Acme will receive more cap-ex dollars than any other Albertsons division in 2017…Wegmans and other retailers (and some trade journalists) have long understood that when it comes to politics, we all should emulate Switzerland. After the Prince William (county), VA chapter of the National Organization for Women pressured the Rochester, NY-based uber-retailer to stop selling five varieties of Trump Winery products (formerly Kluge Estate winery based in Charlottesville), Wegmans stuck to its age-old policy of letting its customers decide. “Our role as a retailer is to offer choice to our customers,” said Jo Natale, VP-media relations (and one of the best in business).” Individual shoppers who feel strongly about an issue can demonstrate their convictions by refusing to buy a product. When enough people do the same and sales of a product drop precipitously, we stop selling that product in favor of one that’s in greater demand.” Apparently that boycott effort has
backfired. According to the Richmond Times-Dispatch, all varieties of Trump brand wines at nine of Wegmans’ 10 Virginia units are out-of-stock and the remaining inventory at its newest Old Dominion unit in Charlottesville is very depleted. As noted, politics and sales are usually not good bedfellows…FreshDirect, the online grocery delivery service, that owns the Manhattan market, will be expanding its service the Washington, DC market in Q2. Fueled by a $189 million cash infusion from J.P. Morgan, the Long Island City, NY company expanded to Philadelphia several years ago and has launched FoodKick, an on-demand mobile delivery app and service…brave dude award of the month goes to Robert Beck III of Conewago Township, PA, who after seeing a deer crash through the window at a Giant/Carlisle store in Manchester Township, PA, wrestled the ruminant doe to the ground and prevented it from barreling into the supermarket’s glass-enclosed bakery case. “When I seen it, it was game on,” said Beck (apparently in his best Pennsyl-tucky English). Beck grabbed the deer by the neck, and with the help of two other patrons, was able to lead it outside the store…very sad to report the death of Robert Osborne, the primary host of Turner Classic Movies, who passed away earlier this month at the age of 84. If you are a life-long movie aficionado, as I am, you couldn’t help but appreciate Osborne’s encyclopedic knowledge and passion for film. Despite some health issues over the past several years, the former failed actor never lost his dedication and enthusiasm for all things cinematic…also leaving us were two unsung musical prodigies. Jazz singer Al Jarreau passed away last month at the age of 76. Blessed with a tremendous vocal range, the Milwaukee native didn’t release his first album until he was 35. Over the next 40 years he would release 19 more albums and was rewarded with seven Grammys in the jazz, pop and R&B categories – the only vocalist to be honored in all three genres. Entering guitar heaven is Larry Coryell, whose fusion style made him a pioneer of jazz-rock. Coryell’s career took many twists (by his own design). On the jazz side he collaborated with such greats as Miles Davis, Ron Carter and Chet Baker. And in the late sixties, he delved into psychedelic rock with his band The Free Spirits, in which he composed, sang and played the guitar and sitar. A great technician who also possessed creative jamming skills, Coryell, 73, released more than 60 solo albums in a career that spanned more than 50 years. He died in his sleep after performing the last of two shows on February 18 at the Iridium Jazz Club in New York City…passing away too early was actor Bill Paxton, who among his 93 movie and TV roles included such blockbusters as “Apollo 13” (1995); “Twister” (1996); and “Titanic” (1997). We all have those “never forget” moments and Paxton’s came as an eight year old when the Fort Worth, TX native was taken to Dallas by his father to see President John F. Kennedy on the fateful morning of November 22, 1963. Paxton was only 61 when he died…the progenitor of all reality courtroom TV shows has now received his final verdict. Yes, sadly, Judge Wapner is dead. Former Los Angeles Superior Court Judge Joseph Wapner died in his sleep late last month at age of 97. From 1981 to 1993, “The People’s Court” was where you could find the good judge on hundreds of local TV stations where he would adjudicate small claims cases, sometimes involving ridiculous confrontations such as when a women bought a birthday cake for her daughter for $9.00. She said the cake was moldy and the baker offered her a refund of $4.50. She then picketed the bakery for six hours and then filed her claim. “I told her that persistence pays off and awarded her $9.00.” Actually, as a real jurist, Wapner was considered an innovator. He was credited with developing a system aimed at saving time for trial participants and his courtroom (which was part of the largest court in the U.S.) was among the first venues to test videotaping of trials in 1971.
