Grocery chains ratchet up fight for customers
In a tough economic environment, food companies are sharpening competitive strategies. Here's how 3 biggies have fared recently.
By Karen Riccio
Investor Steve Cohen boosted his stake in The Fresh Market (TFM), a hedge fund cut its ownership in Safeway (SWY), and Kroger (KR) reported disappointing third-quarter earnings -- and all this action happened in just the past couple of days.
It's just another frenzied week in the grocery industry, as huge chain stores fight for consumers' dollars and loyalty on a daily basis.
In a fiercely competitive environment with low margins and high stakes, the chains must cater to all types of grocery shoppers, their wants and needs, tend to the little idiosyncrasies and keep customers coming back. That’s no easy task. One bad experience can easily send a shopper packing for another store.
Welcome to the world of grocers, where repeat business is king and the key to success.
Individualized deals, pinpoint marketing boost sales
So, what do the big grocery companies have in store for shoppers in 2014? Some are taking a page from Amazon's (AMZN) book and working toward a targeted individual approach. Safeway has already had success with its Just for U program, which sifts through a shopper’s buying tendencies and offers special offers based on personal habits.
For example, families who shop at Safeway for gluten free-foods frequently and sign up for the Just for U program will receive discounts and deals for gluten-free products via Safeway's app.
According to Todd Morris, an executive at Catalina Marketing, every $1 given away in grocery promotions generates $8 in extra sales. The special offer model has done wonders for Safeway, where about 45% of sales -- up from nearly zero in 2011 -- are derived from shoppers who get personalized coupons online or via mobile apps. The program, with some 6 million registered users, has boosted Safeway’s revenue by 1%.
“It’s not enough to turn the company around, but it’s definitely enough to move them in the right direction,” said Andrew Wolf, an analyst at BB&T Capital Markets.
The concept of personalizing coupons based on past purchases isn’t new, but offering the weekly or even daily deals online or through an app is in the grocery store business. For example, Kroger (KR) customers began receiving 150 personally relevant coupons a week this summer. The goal, of course, is to retain customers and grow sales, possibly even make prices less relevant and the frequent personal touch more so.
So, with that competitive landscape in mind, let’s take a look at how some of the major food chains are faring as they head into a new year.
Safeway has had its share of publicity lately -- but not the good kind. Since hedge fund Jana Partners bought a 6.2% stake in Safeway back in September, SWY has risen 20%. However, The Wall Street Journal reported on Wednesday that the firm announced a decrease in holdings to 4.1%; the stock slid 2% as a result.
After Jana Partners’ initial stock purchase, it suggested to Safeway that it cut some stores and return capital to investors -- which the grocer is doing. The company has since exited Canada and just sold the 72 Dominick’s stores in Chicago to Roundy's (RNDY) for $36 million, which will be rebranded as Mariano’s.
Safeway reported disappointing earnings on Oct. 10 for the third quarter, and has also recently been under fire for voluntarily recalling many products. The latest were supplied by Reser’s Fine Foods or Taylor Foods found in the deli department. In September, it took Angel Food Cake products off the shelves for labeling irregularities. Neither instance caused illness or affected shares negatively, but Safeway cannot afford to have any more dings to its brand.
Unfortunately, Kroger’s just-released third-quarter earnings report didn’t help matters at Safeway. SWY stock fell another 3.3% midday Wednesday when Kroger's earnings didn’t meet Wall Street expectations.
While Kroger, the largest U.S. supermarket operator and owner of Ralphs, Smith’s and Food 4 Less chains, reported lower-than-expected quarterly sales Wednesday, investors didn’t take kindly to the weak number. Shares dropped 2.2% mid-day on trading volume of 6.2 million, nearly double its average.
Like all grocers, Kroger is facing a shorter holiday season and slow economic recovery exacerbated by the $5 billion cut in food stamps on Nov. 1, which affects one out of seven Americans.
Still, Kroger, the top-performing mainstream U.S. grocer, maintained its forecast for full-year identical supermarket sales growth, excluding fuel, in the range of 3% to 3.5% and annual profit of $2.73 to $2.80 per share.
The Fresh Market
While many grocers were negatively affected by Kroger’s earnings report yesterday, The Fresh Market came alive after reports that Steven Cohen and SAC Capital increased ownership in TFM stock to 2.4 million shares or 5.1%.
The stock rose 3.3% Thursday on the news, giving a much-needed lift to the struggling specialty grocery retailer. After The Fresh Market reported disappointing third-quarter earnings on Nov. 22, investors punished the stock by nearly 19%.
Like many in the grocery market, The Fresh Market is stuck in a world with low profit margins and stiff competition. Headquartered in Greensboro, N.C., it operates 149 stores in 26 states. However, The Fresh Market will be opening 22 new stores by year's end. Each store will cost $3 million to $5 million and is expected to generate $8 million to $10 million each for 2014.
While this raises TFM’s debt, time will tell if the additional stores can add enough income to beef up earnings. At least Cohen seems confident they will.
More from Traders Reserve
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.