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NEW YORK - Labor strikes and competition could spell disaster to supermarket chains not willing to innovate in 2005, according to Fitch Ratings, a global rating agency committed to providing credit markets with accurate, timely, and prospective credit opinions.
Next year is key for the industry, Fitch reported, as the effects of several protracted union strikes that took place during 2003-2004 will be “anniversaried.” The results in 2005 should paint a picture as to how the supermarket companies are able to maintain and/or grow their core customer base.
In a statement released yesterday, Fitch said it expects the supermarket industry will continue to rationalize its store base and lower the costs it can control such as labor, distribution, and overhead while maintaining financial flexibility.
Competition from other channels won’t make supermarket growth easy; supercenters, warehouse clubs, dollar stores, and pharmacy chains are taking business by offering convenience or drastically lower prices. The supermarkets remain at a cost disadvantage to the discounters and other non-traditional retailers, given their higher cost structures associated with operating a primarily union workforce, Fitch said.
The larger, geographically diversified supermarket companies are expected to continue to lower debt levels and improve balance sheet leverage in order to offset declines in operating margins and stabilize their ratings. Innovative retailers will survive, underscoring the importance of developing a niche, the rating agency predicted.
Several elements do remain in the supermarket industry's favor, however -- location, convenience, service, and opportunities to sell consumers different products, such as fancy foods and lunches. How these factors are leveraged is what will make the difference.