FINANCE

Family Dollar Profit Falls

BY CSA STAFF

Matthews, N.C. Family Dollar Stores Inc. said on Tuesday quarterly profit fell as sales at older stores declined and customers cut their discretionary spending.

Net income for the quarter ended Dec. 1 fell 4% to $51.9 million from a profit of $54.1 million in the year ago quarter.

Revenue rose 5% to $1.68 billion, from $1.6 billion a year ago. Same-store sales fell 1%.

The company said sales of consumables and seasonal and electronics products were the strongest.

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Unions gain strengtrh in Calif., but retailers ready for action

BY CSA STAFF

SAN FRANCISCO —With Fresh & Easy Neighborhood Markets preparing to roll into Northern California, a challenge could again be union activity in opposition to the launch of its operations. Almost certainly, the United Food and Commercial Workers Union will repeat the tactics it has used against Tesco and its non-union Fresh & Easy markets, in part because it has enjoyed some success.

Beyond the particulars, all non-union retailers operating in California are likely to experience more aggressive opposition from unions and their allies. Not only have they had success in challenges to Tesco—including a court judgment that ordered the company to conduct a potentially troublesome environmental assessment of its Riverside, Calif., DC— but unions and their backers also have a peculiar set of allies in their opposition to Tesco, Wal-Mart, Target, The Home Depot and any other non-union retailer they set their sights on: California’s major supermarket chains.

Unions seem to have been emboldened by the recent wage agreement they signed with Safeway, Kroger and Super-valu earlier this year covering Southern California. The contract returned give-backs the supermarket operators got after the major strike three years earlier. The supermarket operators got some concessions they wanted as well, including a new health care structure that management regarded as more flexible and a contract period expanded to four years from three. And they may have accrued one more important benefit: an aura as the socially responsible retailers in a state that is experiencing a major influx of outside, non-union competitors.

In July, when he learned that the agreement was ratified by UFCW rank and file,Steve Burd,Safeway’s chairman and ceo, touted how well the company and its individual banners, including Vons in Southern California, was taking care of its workers.“This new agreement provides employees with the best wages, benefitsandworkingconditions in the Southern California retail market, while making certain Vons has the tools to thrive in a highly competitive environment,” he said at the time.

In the meantime, Tesco was being sued. Temeculah, Calif., environmental attorney Raymond Johnson sued Tesco twice about the environmental impact of its distribution center, sparking rumors early this year that litigation was impacting Tesco’s construction schedule. Rumor also tied Johnson to the UFCW. Analysts noted that the UFCW has challenged some Fresh & Easy liquor licenses, too, which made observers suspect a link with Health First, the group backing Johnson.

In early December, Tesco found itself dealing with a ruling by California Judge Thomas Cahraman, stating that the company has to comply with the California Environmental Quality Act as regards its 820,000-square-foot Riverside, Calif., DC.

Technically, the ruling could lead to the closure of Tesco’s DC, but Johnson conceded that, at an earlier phase of litigation, the court refused to grant a temporary injunction shutting down construction, which suggested that it probably will be disinclined to end operations there at this late date. The court could shutter it, Johnson said, if any environmental impact was sufficiently negative, but some form of mitigation is more likely. “Every case is different, so it’s hard to say what will happen,” Johnson told Retailing Today. “Normally, it’s not an issue. People don’t go ahead and build once someone has sued them on it.”

Well, Tesco didn’t exactly ignore the environmental quality question. It was advised that it didn’t need the environmental impact study to build the DC by a California governmental entity, the March Joint Powers Authority, Johnson acknowledged. Such entities are associations of local municipalities who join to oversee a particular jurisdiction, in this case the former March Air Force Base.

Judge Cahraman had a different opinion.

Many observers see the hand of the UFCW behind Health First, but parties involved deny this, carefully. Johnson said he isn’t aware of union involvement in Health First, which he works with as a group of concerned local citizens, but he wouldn’t say categorically that they were not a part of it. Johnson did say, though, that retailers and their backers often see unions behind obstacles to their expansion in California. “My experience has been when anyone winds up suing Wal-Mart, say, there is always tendency for the other side in the case to make that claim.”

In the meantime, Tesco conducted its San Francisco store ground breaking on Dec. 13, with the city’s mayor Gavin Newsom and supervisor Sophie Maxwell, lending a hand. The San Francisco unit should be open in about a year and a half. Published reports about a new DC in Northern California are premature, Wonacott stated, but he didn’t rule out a new facility as the Bay Area and other adjacent markets mature. For the time being, the San Francisco and other Northern California Fresh & Easy stores will be supplied from Riverside.

And so far, Northern California has proven a friendly respite for the company. “We’re just really starting up here. We just had the ground breaking for the store. That neighborhood has been underserved for too long. They weren’t protesting today or anything [of the] like,” said Wonacott.

The respite probably won’t last, said Richard Berman, president of strategic communications, advertising and government affairs firm Berman and Co., who regularly deals with union issues. “The M.O. of the unions for the targeted businesses is to put pressure on them through zoning, licensing environmental impact and any other regulatory process they can trigger that can slow down the opportunity to invest and expand.”

In other words, Tesco can expect a replay of the union tactics it experienced in Southern California in the northern part of the state, and maybe even some new wrinkles, given the relatively friendly environment for their evolution.

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What’s in store for ’08: Top trends to watch

BY CSA STAFF

NATIONWIDE RT REPORT—Uncertainty is the retail industry’s constant companion, thanks to shifting market conditions and fickle consumers that require operators to continually modify strategies if they are to remain relevant, grow and improve profits.

Achieving those objectives is challenging enough when healthy economic conditions, stable operating costs and confident consumers provide a clear view of future business trends. When such clarity does exist, financial executives and investment analysts are able to forecast sales and profits with a remarkable degree of precision.

Now is not one of those times. The New Year begins with a glut of housing inventory, declining prices and little evidence to suggest when balance will be restored. Meanwhile, consumers are experiencing food price inflation and energy prices are expected to remain volatile, thanks to a war in the heart of the world’s major oil producing region and resulting geopolitical instability. These macroeconomic headwinds, to borrow from the jargon glossary of the financial community, are compounded by the specter of uncertainty raised by presidential candidates as they debate how they plan to fix what ails the nation.

With so many factors clouding the outlook for the economy, the business climate and the consumer spending environment for retailers, it is little wonder investors shunned retail stocks last year.The S&P Retail Index, a subset of the 34 largest publicly traded retail companies contained in the S&P 500 Index, spent the first half of the year above the 500 mark, but headed south in the second half of the year and by late December was slightly above the 400 mark.

Forced to operate in an environment full of forces beyond their control, the editors at Retailing Today determined that success in 2008 will be achieved by those companies focused on the following:

Financial flexibility: A solid credit rating and healthy balance sheet will serve retailer industry leaders well during 2008 as they again demonstrate why cash is king. With expectation high that consumer spending will be constrained by economic weakness and tight credit, especially during the first half of the year, the industry’s marginal players are in for a tough time. Those companies who struggle to grow sales, even when economic growth is robust, will increase borrowings under their credit lines, if they haven’t already done so, to fund operations. Meanwhile, prudent operators with proven business models will be able to repurchase shares at attractive levels because investors have shied away from the retail sector, reward patient shareholders with increased dividends or make opportunistic acquisitions of distressed companies forced to explore strategic alternatives.

Perceived value: Retail in affluent economies is an emotion-filled business where purchases are driven by consumers’ desires to satisfy wants, rather than simply meet needs. As such, the depressing psychological impact of the housing situation has been understated by Wall Street experts out of touch with residents of Main Street, who are experiencing and witnessing firsthand the situation with foreclosures and un-sold inventory. In an environment where consumers have a lot of reasons to feel unsettled about the economy, retailers best able to demonstrate value by offering compelling prices on quality merchandise are the ones that will emerge as winners.

Sustainability: Even if Al Gore arrived at the Academy Awards in a Hummer, returned the Oscar he won for “An Inconvenient Truth” and denounced global warming as an elaborate hoax, it wouldn’t derail the seismic shift that has taken place regarding sustainability and the retail industry. Retailers have gotten a taste of the supply chain efficiency benefits that come from viewing their operations through the lens of sustainability, and now that a business case has been established for saving the planet, look for industry leaders to push the envelope on sustainability initiatives at an even more aggressive pace.

Health care: As a hot button issue for the presidential election, this subject will be debated extensively and there are sure to be proposals put forth with serious implications for the profitability of the retail industry. If retailers speak with a common voice on this issue, they can be part of the solution and avoid being saddled with a system that increases their costs, but does little to address the inefficient processes and outdated systems that are key contributors to rising costs and a source of frustration for providers, payors and patients.

Private brand growth: The increased penetration of private brands is not a new phenomenon, but it is certainly one that shows no signs of slowing thanks to their margin-enhancing benefits. In fact, with retailers eyeing tough market conditions for 2008, the allure of direct sourcing will result in an acceleration of the trend. The capabilities of retailers’ internal product development teams have improved, but building a brand from scratch is never easy, so a more preferable strategy involves acquiring an existing brand or entering into an exclusive distribution agreement.

Authenticity: The Internet has created an environment where anyone with a digital video recorder is a potential investigative journalist capable of instantaneously communicating with the world. The implications for retail are such that dubious business practices are quickly revealed in cyberspace so the only option for retailers in an increasingly transparent world is to redouble efforts around the issue of integrity and assume that any information shared with employees or suppliers has the potential to be immediately shared with others who might interpret it differently than the sender intended.

Each of these issues, along with the obvious operational concern of expense control, promises to impact the retail industry in a big way this year. Companies with a strategy in place to address all, or even some, of them will improve their odds of achieving success given what is currently a fairly bleak outlook for overall economic growth.

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