Concentrating on Consumers, Efficiency, and Tech Lifts Industry Profits: FMI Study

ARLINGTON, Va. -- Despite sharp rises in energy, health care and other costs, food retailers managed to achieve an average after-tax net profit of 1.91 percent in fiscal year 2006-2007, up from 1.46 percent the before year, according to the Food Marketing Institute's "Annual Financial Review 2006-2007," which came out yesterday.

"Satisfying consumers each and every day is the key to improving financial performance," noted FMI president and c.e.o. Tim Hammonds in a statement. "Retailers are serving consumers with the right mix of products, keeping items in stock, and controlling inventories.

Additionally, "retailers are driving down costs with the speed and efficiency of e-commerce," continued Hammonds. "They can focus on providing optimum service to the American consumer, saving time and money through faster, more accurate inventory management and fewer errors on electronic invoices and orders."

Also of note, according to Hammonds, was that the industry saw these increases before food inflation began to rise in the middle of this year, and that most of the retailers surveyed absorbed energy cost hikes over the past two years.

The report found that 56 percent of participating grocers didn't pass along these higher energy cost to consumers in 2006, and 57 percent didn't do so in 2005.

According to FMI, the smallest and largest companies posted strong bottom-line results. Retailers with annual sales under $100 million had an average net profit of 1.83 percent, while those with sales of $1 billion or more reported an average 1.93 percent net profit. Meanwhile midsize retailers with sales in between had average profits of 1.10 percent.

The report's review of the top 25 percent net profit performers discovered that retailers with sales below $100 million posted the best results across key measures. For instance, they achieved net income averaging 2.78 percent, vs. 2.69 percent for retailers with higher sales; exercised tighter inventory controls, with their inventory valued at 11.51 percent of assets, vs. 14.41 percent for larger retailers; kept down interest expenses to 0.45 percent of sales, vs. 0.66 percent.

Among the key indicators of strong financial performance by all retailers spotlighted by the report were:

--Return on assets (ROA) grew for the fifth consecutive year, to 5.85 percent, up from 4.62 percent in 2005-2006.

--Return on equity (ROE) hit a four-year high at 16.79 percent, from 14.55 percent.
Inventory as a percentage of assets fell to 18.32 percent, from 19.62 percent, a seven-year low.

Energy cost increases especially affected the industry in the areas of transportation, warehousing and operations. Retailers spent an average of 1.7 percent of sales on energy in 2006, and almost nine in 10 respondents, or 87.3 percent, reported cost increases, the same as the previous year. All three areas reported double-digit energy cost increases.

The measures taken by companies to reduce exorbitant energy costs include minimizing leaks in refrigeration systems (96.0 percent), adjusting store temperature to lower heating and cooling costs (82.6 percent), lowering store lighting costs by using LED fixtures or reducing light levels (81.6 percent), creating a more energy-efficient store when remodeling or building a new one (70.2 percent), and re-engineering store delivery frequency (56.3 percent).

Despite the challenges of operating in a high-cost, hypercompetitive landscape, almost nine in 10 retailers (86 percent) are optimistic about their profit outlook for fiscal year 2007-2008. The report found, however, that the number of executives who are "very optimistic" fell to 30 percent, compared with 39 percent the previous year, and those who are "somewhat optimistic" grew to 56 percent, from 50 percent.

The "Annual Financial Review 2006-2007" is culled from data from 109 companies operating 12,852 stores totaling $246 billion in sales. To buy the report, download a copy from ($95 for FMI retailer/wholesaler members, $145 for associate members and $195 for nonmembers). To purchase a hard copy, visit or call (202) 220-0723.

In other FMI news, the organization called for entries in the 2008 FMI Store Manager Awards, which honor store managers for achievements in customer and community service. The awards will be presented at The FMI Show plus MARKETECHNICS in Las Vegas in May. Only store managers from an FMI member company who have been at the same place of business for a minimum of one year are eligible.

Entries demonstrating how a manager generated positive growth and customer satisfaction over the past 12 to 18 months will be evaluated on originality, creativity, impact on store growth, customer satisfaction and community relations. Judges will choose three finalists and one grand prize winner from three separate categories based on company size.

Three grand prize winners will win a $1,000 cash prize. Nine finalists, including the three grand prize winners, will receive two tickets to The FMI Show plus MARKETECHNICS and three nights of hotel accommodations in Las Vegas.

For more information contact Bonnie Cobbs at (202) 220-0802 or [email protected].
FMI conducts programs in research, education, industry relations, and public affairs on behalf of its 1,500 member companies, both food retailers and wholesalers. Its international membership consists 200 companies from over 50 countries.
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