Giant Food Inc.'s announcement last week of plans to build six new supermarkets next year and expand four others is a refreshing burst of optimism from an otherwise pessimistic private sector in metropolitan Washington.
Interestingly, that announcement by the area's leading supermarket chain coincided with its release of third-quarter results that showed that sales for the period rose only 3 percent. Giant's net income, on the other hand, registered a solid 19 percent gain, compared with the same quarter in the previous fiscal year.
The significant element of that earnings report, however, is Giant's commitment to go forward with major expansion plans in the fiscal year that begins in February, even though management concedes a "general slowdown in the regional economy" has affected sales growth.
"We're committing a lot of money to continuing growth," said David B. Sykes, Giant's senior vice president for finance and its secretary and treasurer. "What we're going to do next year is very strong," added Sykes, who says he's an eternal optimist.
What really counts is Giant's optimistic corporate financial statement. And that's as unequivocal as one can be about the company's confidence in the relative strength of the region's economy.
"We believe this is a good investment that's going to pay off," Sykes said. "We could delay construction because we own the sites but we're not taking that position because we believe there will be a turnaround shortly."
That optimism may eventually carry over to other businesses in the area and, more important to retailers at least, to consumers. Anxiety, fueled by a perception that the region and the country are falling into a recession, is apparently hurting retail sales at general merchandise stores as well as supermarkets. Consumers are "skittish about the economy, and they're adjusting their buying habits," observed Jeff Metzger, editor of Food World, a Columbia, Md-based publication that tracks the retail and wholesale food industries. The drop in spending at supermarkets, he added, is consistent throughout the industry.
Indeed, it's not just Giant that's ringing up lower sales. "We saw some consumer concern about the economy as early as January 1990," said an official at the Food Marketing Institute, a trade association for the supermarket industry. "It's not that people are buying less -- they're buying differently," the official explained. "They may buy more private-label brands than gourmet foods now. They may have bought non-food items at the supermarket because of the convenience. Maybe they can get it somewhere else at a lower cost now."
"I think people certainly are more cautious in their spending today," said Lawrence Johnson, regional spokesman for Safeway Stores Inc., the No. 2 chain in the Washington area. "We're seeing more controlled spending in buying the basics and not being extravagant."
From Sykes's perspective, this consumer anxiety is "devastating to retailers."
Some retailers, that is.
Giant has good reason to be optimistic about opportunities for growth and a relative quick turnaround in the local economy. Consumer spending is down and Giant recorded a scant 0.2 percent increase in same-store sales during the third quarter, but Metzger said, "Things aren't that bad."
Other retailers should have it so bad. "Despite the fact that those same-store sales are flat, we're profitable," Sykes said. "We've learned how to make money."
The numbers continue to demonstrate that, even when there's a slowdown in the economy. Net income in the third quarter was $25 million, up from $21 million. Earnings per share rose 7 cents to 42 cents. Net income as a percent of sales -- the key industry measurement of profitability -- actually increased to 3.29 percent from 2.84 percent. In other words, Giant registered a net profit of more than 3 cents on every dollar spent in its stores, maintaining the leading position among the country's regional chains. Industry figures show that Albertson's Inc., an Idaho-based company, has the highest earnings ratio (2.65 percent) among national chains. The industry average is just over a penny.
The base of Giant's earning power is much broader than grocery sales. It is one of the more vertically integrated supermarket chains in the country. It has been able to maintain an edge -- a sizable one, at that -- on the competition not only with its 100 combination food stores/pharmacies (among a total of 151 supermarkets), but also through its own food processing facilities and support systems that include the industry's first computerized checkout and inventory system, a commercial and advertising production unit and a real estate division that develops land and builds its stores.
But can Giant maintain those high earnings ratios in the face of so much consumer pessimism? "We think so," Sykes replied confidently. "We have no reason to believe otherwise. We're looking at cost containment but we're not looking to lay off people."
Nor is Safeway, for that matter -- another indication of confidence in the face of a slowdown in the region's economy.
But whether Safeway and smaller chains in the area can maintain current earnings ratios as consumer concern heightens is uncertain. Unlike Giant, Safeway and smaller competitors are privately owned and aren't required to make sales and earnings figures public. Johnson's comment on the economy and competition in the market, however, is instructive if not intriguing. "We're all on the same level field for the first time in a long time," he asserted.
It's never a level field. Already Giant is expanding its "super deals" program, a merchandising strategy aimed at countering competition from membership discount warehouse stores. "It says to our customers, 'You don't have to go elsewhere for the same value,' " Sykes said.
It also says to the competition that the field won't be level much longer. That point has been made painfully clear before through aggressive merchandising programs initiated by Giant.
A lot more will be known about competition, confidence and the economy after the holiday season, traditionally the biggest sales period of the year for all retailers.