FOOL PLATE SPECIAL: An Investment Opinion
Albertson's warned investors of lower earnings as higher costs, lower same-store sales, and competition from Wal-Mart's fast-growing Supercenters hurt the second quarter. Albertson's is, by many accounts, a very well-run franchise, though it has had trouble integrating American Stores. Unfortunately, it's unclear to one Fool -- following an interview with a company spokesperson -- how the company really differentiates itself.
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Shares of the Boise, Idaho chain fell about 14% yesterday on the news. Rival Kroger (NYSE: KR), the biggest grocer in the U.S., fell about 2% and Safeway (NYSE: SWY) dropped 1% in sympathy.
Wal-Mart bounces
Unsurprisingly, Wal-Mart (NYSE: WMT) moved up nearly 2% yesterday as the success of the company's Supercenter concept was part of what impacted Albertson's second quarter. Supercenters combine traditional Wal-Mart discount stores with full-service grocery stores. The concept helped increase Wal-Mart's earnings 29% last quarter and sales 20%.
Albertson's management said on a conference call that Wal-Mart is in the process of opening about 40 of its Supercenters throughout the South as well as markets such as Wyoming, Montana, and Utah. At the end of July, Wal-Mart had about 800 Supercenters and some industry observers have said the company can double or perhaps triple that number without saturating the U.S. market. Certainly Wal-Mart's Supercenters have run roughshod over mom-and-pop grocery stores that haven't done enough to differentiate their offerings.
Should grocery store investors run for the hills?
Of course, there's not a blanket answer to this question. Clearly Wal-Mart's success is having an impact on profits at big retailers like Albertson's. But that doesn't mean the company can't fight back or that grocery stores aren't well-positioned to grow sales, albeit at the slower pace of a mature industry.
Companies can compete with Wal-Mart by catering to local tastes, providing value-added services in departments such as delis and bakeries, and improving distribution systems to increase efficiency. In addition, a recent Merrill Lynch research report argues that Wal-Mart will have a much harder time penetrating major metropolitan markets with Supercenters because of the lack of available real estate and the strength of established chains. This is important since the major supermarket companies generate the bulk of their profits from these markets.
Officials at Albertson's outlined strategies to increase sales -- particularly in the center of the store (the aisles, as opposed to specialty departments) -- cut costs by fine-tuning the labor management system, and resume growth. Investors should track the company's progress over the coming quarters, and understand what it's doing to compete against Wal-Mart.
Unfortunately, from an interview today with a representative of Albertson's public relations department, it's hard to gauge how it really meets the Wal-Mart challenge. The answer I received was that Albertson's aims to be your local grocery store, not a Supercenter, and that it competes with Wal-Mart by offering better service -- such as carrying groceries to cars for patrons -- better convenience, and better quality. That's it?
The company came up pretty short on details, and I considered this a point of concern. Every company in Wal-Mart's path, in my opinion, should have a very clear and specific answer to this question, one they should be able to provide to investors and the media even if it avoids going into competitive specifics. Albertson's didn't seem to have one.
My guess is that the company's management knows exactly what it takes to compete against the fast growing Supercenters. It would be nice if they would tell us.
Your Turn:
How much of a threat is Wal-Mart to Albertson's? Post your thoughts on the Albertson's discussion board.
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