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    Latest VNU Retail Index: Retailers' Optimism Dips as Uncertainty Rises

    NEW YORK -- May turned out not to be the merriest of months as the VNU Retail Index fell to 81.6, with fewer than one-half of multichannel retailers reporting a positive evaluation of current business conditions.

    NEW YORK -- May turned out not to be the merriest of months as the VNU Retail Index fell to 81.6, with fewer than one-half of multichannel retailers reporting a positive evaluation of current business conditions.

    This marks the lowest point for the Index since October 2005. While that dip was directly tied to the aftermath of hurricanes Katrina and Rita, this time out it seems linked more to a general uncertainty about the economy and more specific worries about gasoline prices.

    It appears, however, that supermarket operators have become progressively more positive in their evaluations over the past few months, while convenience retailers have become more negative. In May 59 percent of supermarket respondents gave a positive evaluation of current conditions, compared with 42 percent of convenience respondents. The difference could be because of the greater impact of motor fuel issues on c-store operators.

    Looking ahead, the Index of Future Business Conditions dropped to 82.6 in May, also its lowest point since October 2005. All retail segments appear more positive about their business six months from now than they are currently. Supermarkets are leading the pack, with 62.5 percent reporting positive expectations, followed by 47.2 percent from c-store operators.

    Economic conditions remains at second place in the ranking of biggest challenges to earnings growth, but concern about the economy is clearly growing, as ratings for these top challenges are separated by only five percentage points.

    Contributing to competitive woes for at least some retailers is the announcement that leading U.K. food retailer Tesco will enter the U.S. convenience market in 2007 with locations in Los Angeles and Phoenix. When asked how this will affect the U.S. retail landscape, about one-third of respondents said that they expected to see little or no impact. Among those who expect to be affected, naturally, are operators in those selected regions, who expressed concern about a new presence in a market that's already saturated.

    One c-store retailer is taking a wait-and-see attitude. "It depends on their locations, store format, marketing strategy, operating philosophy, and ability to operate on lower margins than they're used to in the U.K.," the retailer said. "A few other U.K. companies have tried and they went home," he noted, referring to Marks & Spencer and Sainsbury.

    While the convenience channel will feel the immediate impact, supermarket operators are on alert as well. "Tesco's entry will add a formidable competitor that won't be content with just operating convenience stores," predicted one grocery retailer. "After their successful launch on the West Coast, they'll roll this format out to the East Coast and eventually buy a supermarket chain and expand from there."

    Another supermarket operator believed that Tesco "will change the c-store merchandising focus to more of a fresh food concept, which could add pressure to deli departments in traditional supermarkets."

    No matter what type of store you operate, one retailer thought, "Competition is good for business as long as your business is offering its customers what they expect and want."

    The VNU Retail Index is based on survey results received on a monthly basis from a panel of more than 500 convenience, drug, grocery, mass, and specialty retailers across the country. The survey contains six questions calling for an appraisal of current business conditions and operational challenges, as well as expectations regarding business conditions, hiring, and store count in the next six months.

    If you are a retailer interested in joining the VNU Retail Index panel, please contact Debra Chanil, Director of Market Research, at [email protected].

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