Can These Grocers Cope With a Changing Clientele?

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A study shows that the United States' increasing population of millennials -- people born between the early 1980s and late 1990s will change the grocery industry. In the coming years, this age group will represent about 20% of the country's population. The shifting of purchasing power from baby boomers (born between the mid-1940s to mid-1960s) to millennials means less preference to brand loyalty, and more inclination towards value-for-money. Additionally, unlike boomers, millennials don't hesitate to buy online, and they have a soft spot for discounts, coupons, and convenience.

This shift is forcing the grocery industry to change. In this article, I have discussed three grocery stocks which are also changing to keep pace  with the market's expectations. Let's see how they are keeping up with the change, and whether they provide an investing opportunity:

Safeway (NYSE: SWY)

Safeway's stock has seen an upward trend since the declaration of results of the fourth-quarter of 2012. The company reported EPS of $0.94 as compared to the consensus estimate of $0.76.

The star of the fourth-quarter was “Just for U”, an innovative online initiative by the company that gives personalized discount deals to customers; after looking at their past purchases.The average pace of customer acquisition in the program is around 50,000 per week. This program is currently responsible for approximately 45% of the company's revenue. By the end of 2013, it is expected to reach around 55%

Additionally, the success of the program will cross national boundaries with its rollout in Canada by mid-2013. With the Canadian region not performing as well as the US, I think this initiative should help in stabilizing returns from the Great White North.

Safeway has also entered into a deal with ExxonMobil to start a loyalty program. The fuel partnership is operational in the Mid-Atlantic and Chicago regions. By the end of the second quarter, about 93% of Safeway's stores should be covered under the program, thereby increasing its overall revenue.

Taking a long-term perspective, I think the Just for U initiative and the fuel partnership should increase future revenue. I'll recommend Safeway.

Harris Teeter Supermarkets (NYSE: HTSI)

The first quarter of 2013 was not a good one for Harris Teeter, reflecting management's cautious approach towards its Carolinas market and fragile consumer confidence. Results for the quarter were below expectations. It posted EPS of $0.46, which lagged behind the consensus estimate of $0.59. The main factors that affected the results were overly aggressive reaction of Harris towards its rival Food Lion's promotional strategy and costs associated with the acquisition of Lowes Foods.

Food Lion's aggressive pricing in the Carolinas and northern Virginia has made a greater-than-expected impact on Harris Teeter. Food Lion reduced its prices by approximately 5%, forcing Harris Teeter to offer more competitive prices to consumers. Competitive prices did help increase volume, but the gain was offset by the impact on margins. Additionally, the company's profit saw pressure because of the acquisition of Lowes Foods. Although the transaction was completed in the third-quarter of 2012, the start-up costs negatively impacted the operating margins by $3.1 million.

This stock recently saw some momentum, as the news of Harris Teeter considering a takeover offer came out. (Two equity firms have shown their interest in buying the company.) Additionally, Koninklijke Ahold NV and Publix Super Markets are said to be interested in the company. Their expected bid is around $55 per share.

This is good news for investors despite a weaker-than-expected first-quarter. If the deal materializes, it should provide a definite upside to the current market-price of the company. I'll hold the stock until any further information regarding the takeover is obtained.

Casey's General Stores (NASDAQ: CASY)

This company delivered better-than-expected same-store sales in January. Prime drivers of growth were remodeled stores and an increased number of 24-hour stores. Some additional tailwinds came from improving volume and expanded margins in Casey's fuel segment.

The prepared food & fountain segment's same-store sales rose by around 9% because of major remodels, 24-hour stores and the pizza delivery facility. Although the January comps for the segment lag sequentially, the performance drivers for the month should steer this vehicle for the rest of the year as well.

In fiscal 2013, Casey's has plans to open 35 new locations to increase its reach throughout the country. Also, by the end of April 2013, it is expected that the company will renovate about 75 more stores. This is in accordance with its goal of having 800 renovated stores to upgrade the ambiance and improve the customer experience.

Furthermore, there is a plan to open 125 new 24-hour stores this fiscal year; by the end of the year, around 25% of the total stores will be open 24 hours. Currently, the company operates about 500 stores on a 24-hour basis, and around 225 stores that provide pizza delivery. It is expected that some additional stores may be converted to work round the clock and to deliver pizza in fiscal 2014.

The increase in the number of renovated stores, 24-hour stores, and pizza delivery facilities should improve the company's presence.

What's in it for investors?

Adapting to the changing environment shouldn't be a bad thing for the investors -- right?

For two of these companies, the change provides a good opportunity to grow in the future. Safeway's innovative Just for U initiative and new fuel partnerships increase the company's overall reach. And, Casey's incline towards renovations, 24-hour stores, and pizza delivery facilities boosts the reach and experience of the company. The shift should be beneficial for both of them, which makes me bullish on these stocks.

As for Harris Teeter, this scenario is somewhat different. The company came up with an aggressive pricing to compete with Food Lion, but only wound up with lower profits. But the market sentiments attached with the stock with respect to the takeover opportunity give it strength. I'll rate the stock a hold until the takeover deal materializes.   


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