Analysts Can't Agree on Grocery Sector Outlook

"Tug of War Antics Persist Among Grocery Analysts"

Citigroup does not like the grocery sector. Barclay's Global Capital does. I guess it takes varying opinions to make a market. I am a bit puzzled by the degree of impact Citigroup's down grade had on both SWY and KR, as they both took a substantial beating, and the rest of the sector was not spared from Citi's wrath as it succumbed to sympathy selling.

Citi analyst Deborah Weinswig's rhetoric focused on the possibility of price wars developing within the sector . The venom she spewed focused on KR and SWY, as she downgraded each. She seems to be concerned that WMT will aggressively move into lower cost private label merchandise, furthering pressuring prices. Weinswig's a little late to the game. Pundits have been speculating on WMT's impact to the grocery sector for some time now, and this certainly qualifies as old news. I think her analysis should be taken with a grain of salt, especially after considering the firm who employs her. Citibank has very little credibility, and should probably get its own house in order before criticizing others.

Opposite opinion presented by Barclay's

Barclay's Meredith Adler is bullish on the group. Her logic seems to portray the entire group as entering an "attractive period". Adler's contention, recently presented in research note, states:

A pushback in price increases, popularity of store brands and moderating food inflation rates are shifting power away from food manufacturers and toward retailers right now. Grocery stores are also benefiting from improved prepared food offerings that make them an attractive alternative to restaurants.

Adler argued consolidation in the industry and the abundance of consumer data that helps grocers track their customers more closely make irrational price wars less likely than in the past. "In our 20-plus years of following supermarkets, we have seen a significant reduction in the number and ferocity of price wars in the industry," she said. She also noted that many grocers are working on their value pricing or image to consumers, but price wars - like the one seen last summer in Florida - do not meaningfully change the competitive landscape. Adler's favorite picks are KR and Supervalu (SVU).

Customers are looking for deals

Grocery stores are taking advantage of their own private label products, as consumers hover to this segment in their quest to squeeze their food dollar. Although private label brands have a negative impact on sales (they are cheaper) they have a net positive contribution to the retailer, since they carry a higher profit margin. Grocery chains are thriving in this economy, as everyone must eat, and consumers are eating out less, and eating at home more often, in order to save money. Since consumers are less apt to go on vacation, buy cars, furniture or electronics, and so they need something to "treat" themselves with—and it's likely to be food and beverage, especially comfort foods, as they seem to have a relaxing effect in times of anxiety.

I expect Barclay's study has the weight and muscle to defeat Citi's bearish analysis in their tug of war battle. The good news is: the grocery sector is headed for a healthy bottom line, the bad news is: our waistlines might be headed in the same direction.

Disclosure: long WMT, GAP, WINN, SVU, KR, SWY

Comments

[notsosmart:]

you cant believe anybody.all have their own agenda.even your own homework is in trouble since its all a ponzi & the figures you rely on cant be trusted.the whole system is full of liars & cheats.until ethics & trust come back (if ever) you better be careful with your money.

Feb 16 10:13 AM

[David Livin...:]

I agree that the analyst all have their own agenda and many are regularly wrong.

Unfortunately for the analysts, the grocers that are doing the best are privately held. The smartest people in the industry typically work for the best run privately held grocers.

The stock market, individual grocery stocks, and how well a grocery is actually doing operations wise, are much of the time mutually exclusive events. A grocer can be doing quite well, but if the stock is selling off, the price dives. A grocer can be doing poorly but if some analyst can find a reason to promote the stock, they will, and the price will rise for a day or two.

Many analyst only make their assessments on public documents, conference calls, and executive interviews. Those are probably the three worst sources of information.

Feb 16 10:44 AM

[Walt17:]

In general I believe that the analyst's agenda is to make judgments about a stock that will result in their clients making money. They may frequently be wrong. And as the author pointed out, analysts often disagree. Some see "the glass half full" while others see "the glass half empty." But I do not believe there is anything sinister or intentionally misleading about their judgments.

Feb 16 01:10 PM

[NotaHexe:]

So times are tuff even for an Analyst who clearly needs to lay off the helium and resume breathing "NORMAL" air. A company like Safeway who clearly kills in the technological age, knows the Customer and the markets. To think back in the early 80's, 90's and now, consumers will be at the Grocery stores and history does repeat folks. It's a shame people listen to Analyst's so often because clearly the research Citigroup has or mabe has'nt done, would have lessoned the rhetoric they are suffering. To assume there will be a price war is inevitable "BUT" it will be in local markets as these markets dictate not some analyst's theory that it will be Nation wide. Give me a break, my money is on history and the Companies who have proven they deliver what the customer wants and has all the tools to do it.

Feb 17 04:03 PM