Is Shift Away from Supermarkets, Restaurants Permanent?

BJ’s Wholesale Club Q308 conference call gives a good sense of some of the important retailing trends today:

People are eating out less, but they’re still willing to pay for organic foods, laptops and GPSs:

Q: Your traffic trends have been some of the best in retail… how much do you think is trade down out of the supermarkets and how much could be lower gas prices?

A: In order of magnitude the first would be a shift in channels from supermarkets to us… Casual dining fall out has driven people to prepare food at home and buy foods for eating at home… The benefit from gasoline… is powerful and meaningful… Deflation affects demand, [but] it certainly hasn’t affected our gasoline demand and I think it has been a contributor to our value image.

There is definitely a shift to wholesale club business.

Our sales of organic and natural foods continued to grow, increasing by approximately 46% versus last years third quarter.

Our higher than expected increase in sales of food more than made up for the decrease in sales of general merchandise. The biggest hit to general merchandise in the quarter was the decrease in television sales. Other than TVs the largest declines in general merchandise sales were in jewelry, DVDs and electronics. While we are not planning for positive general merchandise comps during the fourth quarter I should mention that there are a few bright spots including notebook computers, small appliances, house wares, GPS and video games.

Gas:

The impact of gasoline on our margin in Q3 was 21 basis points favorable to last year as compared to our guidance of 40 to 50 basis points unfavorable… As gasoline prices steadily plummeted throughout Q3 it allowed us to offer a tremendous value on gasoline to our members relative to our competition, while at the same time achieving unprecedented gasoline margins [and] significant increases in gallons sold. I should mention that since we started selling gasoline in 1998 we have never seen such market conditions…

Although we came down [our competitors] didn’t seem to come down very rapidly.

Are businesses still spending on IT?

Q: Road map expenses for 2009?

A: The big things that we’re working on right now is we’re going to be changing our payroll system, adding in new software HR system, we’re starting to work to replace all our registers in the clubs, and we’re doing fairly significant amount of work to change mainframe data provider.

Real estate:

Next year we plan to open six to eight new clubs and six to eight gas stations. I should mention that with so much uncertainty in the credit markets our construction and development partners may experience restricted access to financing. We may be more cautious with our share repurchase activity next year in order to ensure that we have the capital we need to fund future chain expansion as needed.

Comments

[billddrummer:]

Hi Judy,

I appreciate your commentary, no matter what industry you're covering. It's a pleasure to read your column.

As far as the shift from restaurants to dining in, I've seen that phenomenon in my own circle of friends. A year ago, it wasn't uncommon for several of us to dine out at least once or twice a week, spending around $20/per person per meal (food, drinks, etc.).

When gas prices shot up, that was one of the first things to go. But even since fuel costs are down, we're still eating in more than out. Now, it's a special treat to eat out--birthday celebrations and the like. I'd guess that my contemporaries now eat out only once or twice a month on average--a far cry from 8 times/month.

Now, grocery shopping is more important than the newest restaurant. And Whole Foods in Reno, along with Costco and Sam's Club, are getting the dollars that used to go to restaurants.

We're still reluctant to go grocery shopping at Wal-mart.

But the demand destruction caused by higher fuel prices has translated into a seemingly permanent behavioral change. Which may be the new reality for discretionary spending in America.

ATB,

Bill

2008 Nov 25 11:24 AM

[SA Editor J...:]

Hi Bill,

So I'm curious, how come you're reluctant to shop for groceries at Wal-Mart? Is there some industry thing about Wal-Mart and groceries? Thanks for your illustrative comments!
ATB,
Judy

2008 Nov 26 01:14 AM

[old guy:]

I am buying more and more groceries at Wal-Mart....I am not a fan of their meat and bakery departments...unless it is a brand name product in those two departments. (A personal thing with me for no reason) The last figure I heard there is an annual savings of $700.00 for average family. I have also increased my investment in Wal-Mart and Costco.

2008 Nov 27 04:03 AM

[CalNative:]

The type and quality of shopper at Wal-Mart is generally repulsive. I choose to shop at Target for the type of products that I would buy from Wal-Mart, shampoo, soap, cleaning supplies, lunch snacks, etc. Costco is another favorite. At both Costco and Target I am pleased with the level of cleanliness, competitive pricing and overall value. At Wal-mart I feel as if I am shopping with people who are 2 steps away from eviction, down and out on their luck. No thanks. I pride myself in being frugal, but the Wal-Mart crowd are cheap and desperate, at least that is my perception. Their is a difference in taking pride in frugality and scratching to survive. Wal-Mart makes me depressed and I'm a very positive person. That's the scoop. Not that you cared, but know you know. =)


On Nov 26 01:14 AM Judy Weil, SA Editor wrote:

> Hi Bill,
>
> So I'm curious, how come you're reluctant to shop for groceries at
> Wal-Mart? Is there some industry thing about Wal-Mart and groceries?
> Thanks for your illustrative comments!
> ATB,
> Judy

2008 Nov 29 01:31 AM

[billddrummer:]

Hi Judy,

As far as my reluctance to buy groceries at Wal-Mart:

The local stores seem to have a lower level of cleanliness compared to other grocery stores, and the meat and produce appear to be inferior quality compared to some of the other local chains. I do the bulk of my shopping at an employee-owned bag-it-yourself store, and have found comparable pricing to Wal-mart on packaged food with better quality produce and meat. Wal-Mart remains, however, the largest grocery retailer in the US.

I don't feel that Wal-mart customers as a whole are two steps from desperation. What we've seen here in Northern NV is that new Wal-mart stores have been built in middle- to upper-middle class neighborhoods, where you're more likely to see Mercedes and BMW vehicles in the lots than Chevys. Some older stores that were placed in lower income neighborhoods have the desperation stigma, though. But as a whole, I think the company has done an excellent job at upgrading its image. And it shows in its financial performance.

ATB,

Bill

2008 Dec 23 12:20 PM

[ing_rivera:]

Hi Judy, people would eat out in restaurants forever just like they have always do, so is not permanent.

People needs to go to restaurants for birthdays, to take out girlfriend, family on friday night,etc.

The demand setback is temporary and normal, it will happen every now and then. The problem is the supply there's too many and there will always be too many since is so easy to enter to the industry. So many PFCB,DRI,CAKE,LNY,CBRL... and pop restaurants, and hundreds others. Still DRI is the largest and have the infrastructure and market power to have above market returns.

Jan 10 09:56 PM