Retail Memo: What's Next For U.S. Retailers if the Economy Picks Up in 2010?

Retailing in trying economic times

The Kiplinger Business Resource Center, which has been forecasting business, economic and consumer behaviors and trends in the fields of agriculture, retailing, finance and other sectors for many decades in the U.S., and writing about these forecasts and trends in its popular Kiplinger Letter newsletters, is out today with a retail forecast for the U.S. for 2010. The premise of Kiplinger's forecast is what retailers in the U.S. can expect if and when (as optimists we say when) the economy picks up in 2010.

Among the trends Kiplinger suggests could stick after the current severe economic recession include consumers sticking to value and continuing to trade down to discount retailers like Wal-Mart Stores, Inc., a current phenomenon we wrote about earlier today in this piece: "Consumer Behavior Memo USA: 'Life, Liberty and the Pursuit of Frugality' - America's New Consumer Frugality."

Additionally, Kiplinger sees quality making a comeback -- but it must come with value. Again this is something we've been saying in regards to upscale, specialty and natural foods stores in terms of the need to offer a value proposition even on organic, higher-end and premium food and grocery products. For example, Whole Foods Market, Inc. has learned that lesson and is trying to do just that -- create and communicate a value proposition for its stores.

The Kiplinger 2010 forecast also suggests consumers will do much less frivolous buying than they did before the current recession (American consumers have been buying frivolously from about the mid-1980's to 2007 in fact, with the exception of a couple years during the recession of the early 1990's), even if the U.S. economy comes roaring back strong in 2010.

This consumer behavior change (less frivolous buying, trading down, searching for value) which is happening right now is something we've suggested could last after the recession is over. We see a deep recession all through 2009. Consumers will trade down even more because they have to all of next year, we believe, and once the economy improves (hopefully by 2010) will have developed some learned behavior in this regard, which we think will prevent them from going right back to the old shopping patterns.

However, we also think there is going to be some pent-up buying desire among consumers once the recession is over. We think that will be good for upscale-oriented food retailers because it's our analysis the first things consumers will start buying again in significant volume are affordable luxuries like organic, specialty and premium food products. They won't be able to buy a new car perhaps, and certainly not a new house, but can afford to spend a little extra at the grocery store, and receive the gratification doing so brings, once the recession ends and things look more optimistic.

Additionally, as we've suggested previously, if the recession lasts all of next year, which we believe it will, consumers will have had nearly two years worth of trading-down and penny-pinching retail shopping behavior. They likely are going to expect value even when the economy improves. After all, the loss in home values and retirement savings, for example, will still be there in 2010. Much of the meager wealth, which was mostly in housing equity, of the middle and upper-middle classes in the U.S. has been wiped out already.

Other 2010 forecasts from Kiplinger include a continuation of retailers building smaller stores -- what we call the "small-format food and grocery retailing revolution" in the U.S -- a beefing up of customer service by retailers of all formats, and retailers developing a whole new set of coping strategies in order to deal with the challenges ahead.

On the small-format store front, Kiplinger agrees with Natural~Specialty Foods Memo that retailers like Wal-Mart who build and operate huge stores won't stop doing so. Rather, as we often write, they will continue what's already been started, which is building smaller-format, sibling formats and stores to go with the mega-stores like Supercenters and Sam's Club formats. We think other chains will join the small-format sibling store club as well in 2009-2010, despite the recession.

Read the latest retailing forecast, written by Laura Kennedy, from Kiplinger: "What’s Next for Retailers? What can retailers expect when the economy finally picks up in 2010? here.

The Kiplinger forecast in our analysis is a good snapshot of some likely consumer and retailer behavioral trends come 2010, assuming the U.S. economy improves by then. If it doesn't improve though, all bets are off, as a recession still strong in 2010 is going to result in some serious changes not only in consumer and retailer behavior, but in the entire structure of the U.S. economy, we believe.

And the government, corporate and individual debt load by 2010, even if the economy comes roaring back by then, still is going to alter retailing as usual for some time, in our analysis.

Just look at what's happening across the board already in terms of consumer debt and lack of credit. Now unemployment and job insecurity has been added to those negatives. In just two months many middle class consumers have gone from cutting back to not knowing if they can even afford the basics in food and groceries each week or month.

For these reasons we believe all food and grocery retailers, regardless of format, must develop and communicate their own unique value proposition now. We strongly believe doing so is a matter of survival as things continue to first get worse then shake out in 2009 and beyond.

We even believe high-end specialty-gourmet food retailers like Dean & DeLuca, which tend to cater to upper middle-class and wealthy consumers, need their own unique value propositions. As an example, in the quarter just ended Wal-Mart Stores, Inc. reported the average income of the shoppers in its stores has increased considerably in the last six months. That's because higher income consumers are trading down to the retailer.

Retailers must remember the upper middle-class and even many of the wealthy are hit hard by dramatic losses in the value of their homes and retirement savings. Housing values are down by 25-50% in many parts of the U.S. And down by at least 10-15% even in the best regions. Retirement accounts are down for many people by as much as 40-50% because of the poor performance of the stock market.

As a result, the upper middle class and even many of the wealthy (or we should say the recently former wealthy) are in growing numbers looking for value, even at Dean & DeLuca and other upscale and specialty food and grocery retailers.

Retail Memo: [Heard on the Street]: Will SuperValu, Inc. Be Supermarket Industry Investor Ron Burkle's Next Play

Ron Burkle, billionaire supermarket industry investor and former bagboy for Southern California's Stater Bros. supermarket chain, is taking a long, serious look at making a major investment in fledgling grocery retailing and wholesaling giant SuperValu, Inc. we've learned.

Burkle, who founded and runs investment firm Yucaipa Companies, LLC and is a close personal friend of former President Bill Clinton (Bill's also an investor in Yucaipa and stands to make about $8 -to- $9 million when he cashes out of one of its funds soon) and a major financial supporter of Hillary Clinton's Presidential campaign, likes what he sees in SuperValu.

What is it he likes? In SuperValu, Inc., Burkle sees a major, multi-banner, multi-format grocery retailer and wholesaler that's stock share price is lower than it should be, has tons of valuable assets, has what looks like a viable turnaround plan, and could benefit from an infusion of cash to help with that restructuring and a large-scale store remodeling program it's in the middle of. SuperValu, Inc. currently has about $44 billion in annual sales.

These are similar attributes, assets and liabilities Burkle has spotted, and liked, in numerous supermarket chains in the past, leading him to invest, acquire, merge, restructure and then sell, making billions as a result.

Burkle's biggest deal with Yucaipa Companies (founded in 1986), which netted him a couple billion dollars of personal profit, began about 20 years ago and involved mutiple acquisitions over an eight year period (1987-1995).

Beginning in 1987, Yucaipa Companies bought Falley's Food-4-Less of Kansas City, Mo. for $35 million. Two years later in 1989 the company acquired long-time Southern California grocery chain Boy's Markets for $375 million. In 1991 Burkle added Alpha Beta, a leading California supermarket chain, to his fast-growing food retailing empire, paying $271 million for the grocery chain.

Then in 1994, the company acquired Phoenix, Arizona-based Smitty's for $138 million. That same year (1994) also saw Burkle making his biggest acquisition to date, the $1.5 billion purchase of Southern California grocery chain Ralph's Grocery Co. He wasn't finished yet though. The following year (1995) Yucaipa Companies acquired Chicago-based supermarket chain Dominick's for $750 million.

Over this eight year period, Burkle and a senior management team operated these various supermarket chains (acquisition-by-acquisition) as an integrated company of sorts, but yet each kept it's own identity, format and positioning in its respective markets. From 1995-1997, Burkle and his team integrated the desperate operations, slashed costs, closed poorly-performing stores, built some new stores, remodeled a number of others, and improved sales and profits as a result.

In 1997, Burkle merged Ralph's/Food-4-Less with Oregon-based Fred Meyer, Inc., creating the number two food retailing company in the Western U.S. after Safeway Stores, Inc. The combined company was named Fred Meyer, Inc.

Then the selling began. In 1998 Burkle broke the Dominick's chain off from Fred Meyer, Inc. and sold it to Safeway Stores, Inc. for $1.85 billion. Yucaipa paid just $750 million for the chain less than three years earlier. Then the BIG DEAL came: Kroger Co. agreed to buy Fred Meyer, Inc. for $8 billion. You can do the math; add up what Burkle paid for all the chains above, then subtract that from $9.85 billion, the combined sale price he fetched for Fred Meyer and Dominicks, and as you can see, he made a tidy profit.

After selling Fred Meyer, Inc. to Kroger Co.--the purchase which made Kroger the number one supermarket chain in the U.S.--Burkle focused primarily on making major investments with Yucaipa, both in and outside of the supermarket industry, rather than acquisitions.

He also nurtured his close friendship with Bill Clinton. In fact, when President Clinton left office after serving his last term, he joined Yucaipa Companies' board of directors at Burkle's invitation. He also became an investor in Burkle's various investment funds--hence the $8 -to $9 million payday the former President is due when he cashes out soon, according to experts who are aware that he plans on doing so.

Burkle's most recent payday came from the acquisition of Wild Oats Markets by Whole Foods Market, Inc., a merger Burkle helped to engineer as the largest private investor in Wild Oats, as well as being its most influencial member of its corporate board of directors.

Burkle netted a couple hundred million dollars from the sale of Wild Oats in September, 2007. That money has been burning a figurative hole in the pockets of the former bagboy, who later became an executive at Stater Bros. in Southern California.

From what we hear, Burkle is close to making a major investment in SuperValu. The grocery chain and wholesaler has been having rough times since the fourth quarter of last year. Sales have been down, although profits have actually been up slightly. The company also has been struggling for well over two years to integrate its huge acqusition of Albertsons, Inc. into its culture and operations. SuperValu's stock share price has been hovering near its all-time lows, which is perhaps its biggest problem, at least in the eyes and investment portfolios of Wall Street.

Just this week however, SuperValu, Inc. CEO Jeff Noodle announced a major restructuring and store remodeling plan that Wall Street analysts might like. Burkle loves to invest large sums of cash and then become a partner with company CEO's and senior executives in restructuring and streamlining operations as a way to increase a company's value. Noddle told investors on January 24 the company is on track to remodel 165 more stores under its "Premium, Fresh and Healthy" format model between now and next year.

At the January 24 investors meeting Noodle also announced additional new initiatives for the company's Sav-a-Lot small-format discount stores and for other parts of its retail operations. He also announced the closing of Supervalu, Inc.'s Sunflower Market stores, a three year-old experimental five-store chain of small-format natural foods stores with an emphasis on low prices.

Such initiatives are music to Burkle's highly-tuned investment ears. We aren't saying the billionaire will make a sizeable investment in SuperValu, Inc. for sure. What we are saying is he's looking very closely and seriously at doing so. Further, if he does make a major investment in the company, look for him to participate in an advisory capacity to Noodle.

SuperValu, Inc. is a huge grocery industry corporation with $44 million in annual sales. As such, Burkle isn't going to gain five or six percent ownership in the company like he did with Wild Oats, which was bought by Whole Foods Market, Inc. for less than $1 billion dollars. However, a cash investment of say $1 billion by Burkle would go a long way right about now in helping SuperValu with it's massive store remodeling program.

Even more important, a Burkle investment would be a positive signal to Wall Street and the company's institutional and private investors and stockholders. In fact, such an investment, especially with Burkle attached to it in some way, would likely give SuperValu, Inc.'s stock a nice per-share boost in the short term. Stay tuned.