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“I’m all lost in the supermarket/I can no longer shop happily.” So sang The Clash in 1979. In the US today, it appears that it is the supermarkets that are a bit lost.
Supervalu, one of the largest US supermarket operators, reported terrible first-quarter results on Wednesday night. Sales were down 5 per cent and operating profits a quarter less than a year ago. To ensure the company stays profitable and can keep paying down its $6bn debt burden, management plans to cut everything in sight: $250m in costs (4 per cent of overheads), $200m from this year’s capital expenditure budget (nearly a third of the total), and the entire dividend (worth $75m a year). Much of the savings will be used to fund price cuts to attract customers.
Investors don’t think much of the plan, or the announcement that undefined “strategic options” are on the table. The shares lost half their value on Thursday. Peers Safeway and Kroger lost 13 per cent and 4 per cent in sympathy.
The meltdown at Supervalu could be seen as an inevitable result of changes in the way that Americans buy food. All sorts of retailers – big-box discounters, drug stores, dollar stores, convenience stores – sell groceries now. Hence Safeway’s need to cut prices. But Safeway and Kroger, struggling themselves, have still managed to boost sales in the past few years while Supervalu has shrunk. Supervalu’s problems may stem from its $12bn acquisition of Albertson’s in 2006. The deal was meant to create economies of scale, but the debt it came with appears to have constrained investment (capital expenditures as a proportion of sales have been low, relative to peers). In any case, management admits that the merged company did not move fast enough to cope with the changes in food retail. Lesson: cost-saving mergers in industries under pressure should not be funded with debt.
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