There was good news, like a 1.5 percent increase in same-store sales in fiscal year 2014.
But average net profit before taxes came in at less than 1 percent for independent grocers, down from the previous year’s 1.51 percent.
It was “not a year of record profits by any stretch,” said Peter Larkin, president and CEO of the National Grocers Association (NGA).
Each year with its partner FMS (Financial Management Services), NGA releases the results of a financial benchmark survey. FMS is well known in the industry as it provides back-office accounting for thousands of independent grocers. Larkin presented some of the findings from the 2015 Independent Grocers Financial Survey at the ROFDA Fall Conference.
“Margins were down in 2014 and, unfortunately, expenses increased again with labor and utilities being key drivers there. So it was incredibly difficult to do profitable business and a number (of grocery operators) were not able to make a profit,” he said. “We could spend a lot of time talking about all the various reasons for that, but the numbers don’t lie; 2014 was a very difficult year.”
The survey measures more than profits and margins. It also queries independent grocers about operational costs, merchandising strategies, store development and issues of concern. Not surprisingly, as competition has intensified, its ranking rose among the many concerns independent grocers say they have.
“Staffing, hiring, retention and health care costs, technology investments, data security, consumer obesity, health and welfare and consumer adversity were all on the rise. Those are the things that increased from last year to this year,” Larkin said. “But for the independent sector, competition still is the top concern, the thing that most people are really thinking about.”
In response to evolving consumer preferences, independent grocers increased the number of organic and local products in their assortments. Larkin said 72.4 percent of respondents to the financial benchmark survey reported that they had more SKUs of organics vs. the year before. Sixty percent said they expanded locally grown options, and 58 percent said they boosted the number of prepared food selections. They also reported increases in the number of private brand, gourmet and sustainable products.
“If you look at sales for some of those categories, 67.2 percent said their organic sales were up, prepared foods sales were up for 65 (percent) and private brands, 60 (percent),” Larkin said.
Change in leadership and topics of concern in D.C.
Larkin’s presentation also featured a rundown of recent events in Washington, D.C.
“There’s a lot to talk about there, as there always is, and it’s a very interesting time as those of you who’ve not been living in a cave are well aware of,” he said. He went over the change in leadership in Congress as Sen. John Boehner (R-Ohio) stepped down as speaker of the U.S. House of Representatives and Rep. Paul Ryan from Wisconsin stepped up to take on the role “that nobody wanted.
“I can’t imagine why he would really want to be Speaker of the House in today’s environment,” Larkin said. “To think that just because Paul Ryan is now the speaker that it’s going to be any easier sailing for him than it was for John Boehner, I think remains to be seen.”
He said if there’s still going to be partisanship and a “tug” from “those 40 or 50 conservative members of the House that are going to cause some continuing problems,” little will change.
Ryan may already have a victory under his belt. Both the U.S. House and Senate have agreed on a transportation bill. It is an important piece of legislation for the grocery industry, which relies so heavily on strong supply chain operations, Larkin said.
“It’s a six-year bill. It is funded for the first three years, so we have some stability. We have a path forward. We have a direction for what we’re going to do with our highway/transportation program in the United States,” he said. “This is the legislation that will fund projects to start. I don’t think it’s going to completely repair the crumbling infrastructure in this country, but it will at least start to address that.”
One of the bills has a provision that states there will be no change to the “hours of service” rules until the Federal Motor Carrier Administration is able to produce a statistically valid study regarding its impact on road safety. Current hours of service rules state that property-carrying drivers may drive a maximum of 11 hours after 10 consecutive hours off duty. Larkin said the provision is an important protection for the industry.
He also listed the top political concerns shared by independent grocers in the survey: the Affordable Care Act; potential minimum wage increases; the elections and changes in power at the state and federal level; taxes (“Nothing new there,” he said); government expansion, including more regulations on local, state and federal levels; union activity and organized labor; preservation of LIFO; changes to the SNAP program; swipe fee and interchange issues; state-level issues; sales of beer and wine; and inflation due to fiscal policy.
“These are the things that keep people up at night,” Larkin said.
An issue more particular to independent grocers than large chains is a proposed USDA rule on raw ground beef grinding logs. Larkin described the rule as containing “onerous regulations” about recordkeeping.
It would require all makers of ground beef products, including retail supermarkets, to keep records of information, including supplier information (names, point of contact, phone numbers and establishment numbers for materials used to prepare each lot of raw ground beef), supplier lot numbers and product dates, names of supplied materials (including beef components and any materials carried over from one production lot to the next), amount of beef component used in each lot (in pounds), date and time each lot of raw ground beef product is produced and date and time when grinding equipment and related food contact surfaces are cleaned/sanitized.
Larkin said that if something is not done, the new rule could put some NGA members out of the in-store processing and meat grinding business.
“We submitted comments,” Larkin said. “We expect to see the final regulation by the end of the year and we’re hoping that USDA will have taken some of our comments into consideration.”
Other political issues Larkin shared with ROFDA attendees included:
• Tax extenders. The Section 179 Deduction (on equipment), expensing, bonus depreciation, new market tax credits and employer opportunity tax credits are all “political footballs” left to expire at the end of the year unless Congress decides to allow companies to continue to use them. Last year there was no agreement, so businesses have been operating without them this year. Larkin said now that Ryan has moved on and left as chairman of the Ways and Means Committee, Kevin Brady of Texas will take his place. Brady already has said that he wants to deal with the tax extenders and hopefully even go further and make some of them permanent, which NGA will advocate for on behalf of its members.
• GMO labeling. The house has passed a bill that would establish more federal oversight and set standards for voluntary guidelines and product labeling as GMO or GMO-free. “We will continue, along with the manufacturers, to see if we can get traction on that,” Larkin said. “As you may know, Vermont has a statewide labeling legislation that will go into effect mid-July 2016, so hopefully we can get something done on labeling this year.”
• Menu labeling. The provision that requires posting of nutritional information was part of the Affordable Care Act. It requires restaurants and “similar retail food establishments” that are part of a chain of 20 or more locations doing business under the same name to provide calorie and other nutritional information for standard menu items. The Food & Drug Administration has promulgated regulations that Larkin said “are not exactly the clearest on how this would apply in the supermarket setting.” The effective date for menu labeling legislation has been delayed to Dec. 1, 2016. NGA had a companion bill introduced in the Senate that would not exempt supermarkets but would provide clarity as to how the requirements apply to them.
• Disclosure of retailer SNAP sales data. Larkin said there is a move afoot that would allow the USDA to publish gross SNAP sales by retailer. “So that would be available for all the world to see, and there are a number of members saying that is private, proprietary information that you don’t want released broadly.”
• Joint employer. The National Labor Relations Board (NLRB) has proposed regulations that would identify both independently operated businesses and the corporation behind the affiliate or franchise as joint employers. This is the NLRB ruling stemming from a McDonald’s case, where it found that if the corporate office sets certain rules for franchise operators, then it is a joint employer and liable in cases of labor and wage violations.
• U.S. Department of Labor overtime rule. This rule would more than double the $23,000 ($455 per week) minimum annual salary for exempt employees to more than $52,000 ($970 per week). Those making less than $52,000 would be classified as non-exempt and therefore entitled to overtime pay. Larkin said the rule “is likely to cause a lot of conflict in our industry.”
• EMV/chip cards. NGA’s Greg Ferrara provided a written statement to the U.S. House small business committee in October about the difficulties faced due to the liability shift for fraud from banks to merchants who are not EMV compliant, even those who were non-compliant through no fault of their own. Some independent grocers invested tens and in some cases hundreds of thousands of dollars to upgrade hardware and software, but then were unable to get required certifications prior to Oct. 1. Larkin said it could be another six months or more beyond that date before there is widespread adoption among independents. Meanwhile, large retailers like Walmart and Target upgraded and already have been certified to do these transactions.
“Here’s the rub,” Larkin said. “I think there are a lot of consumers who may walk into a Target and feel that when they’re using their chip card, that transaction is more secure. When they walk into an independent supermarket and use the same card and don’t have the ability to use that chip card (they think) that somehow their transaction is not as secure. I think that that is a message that should not have been communicated to the public, and we have a lot of education ourselves to do. Hopefully we will get off and running with this sooner than later.”
*Editor’s note: Find more ROFDA 2015 Fall Conference coverage online and in the January print editions of The Shelby Report.