US SUPERMARKETS ON THE MEND

Fitch Ratings has published a new report on the US supermarkets, indicating that the industry is beginning to stabilize after two difficult years due to a more rational pricing environment together with higher food inflation.

The report concludes, however, that the long-term challenges facing the industry - which include ongoing increases in healthcare costs, built-in increases in union labor rates, and the encroachment of new competitors and discount formats - will make it difficult for traditional supermarkets, with the exception of Kroger, to produce a sustained turnaround that enables them to restore margins to their pre-2009 levels.

Anticipated price inflation - and a determination to pass higher costs along - should lead to faster sales growth and better expense leverage over the next 12 to 24 months, slowing the cycle of declining margins resulting from reduced customer counts and price investment during the previous two years.
The report includes credit analysis reports on each of the Big 3 supermarkets: Kroger Co., Safeway Inc. and SUPERVALU Inc., that address key rating drivers, liquidity, debt and organizational structures, and covenant summaries. Kroger Co., Cincinnati, which has the best same-store sales growth of the “Big 3” U.S. supermarket retailers, should continue to outpace rivals Safeway and Supervalu, Fitch said.

Safeway, Pleasanton, Calif., has the potential to regain some of the margin lost through price investments if it can accelerate sales, the report said. Minneapolis-based Supervalu will continue to see margin pressure while sales are negative, Fitch added, although cost reductions are softening the blow.

The report, 'US Supermarkets on the Mend,' is available at www.fitchratings.com