SpartanNash CFO: Decline of independents “overblown”

Food distribution customers show resilience in changing market

Russell Redman 1 | Jun 21, 2018

While players have come and gone amid the disruption in the retail grocery sector, SpartanNash Co. Chief Financial Officer Mark Shamber sees independent supermarkets holding their own.

“I think the expected death of the independents has been way overblown,” Shamber said Thursday at the Jefferies Global Consumer Conference in Nantucket, Mass.

Through its core food distribution business, Grand Rapids, Mich.-based SpartanNash serves about 2,100 independent retailers, primarily in the Midwest and southeastern United States. The grocery wholesaler also supplies 142 corporate-owned supermarkets under multiple banners.

“When you look at our [independent grocery] customers from a geographical perspective, they’re not necessarily competing in many of those markets with regional players or international players. They may be competing with a deep discounter like Aldi, they may be competing with Walmart or — certainly in the Midwest — with Meijer, who we compete with on a regular basis,” Shamber (left) explained. “But in many of those areas, they’ve been competing with those folks for years, and there’s not enough demographic demand to allow for an entry of another competitor into the space.”

In the question-and-answer session with Jefferies food retail and distribution analyst Chris Mandeville, Shamber dismissed a recent report projecting that 25% of retailers will close in the next five years.

“There may be some additional competitive openings, but I don’t see a wholesale dynamic shift to where they’re going to be forced out of the market,” he said. “I don’t see anywhere near that level for our customer base in the markets they serve.”

Amid news headlines about regional retailer bankruptcies, independent grocers have demonstrated an ability to operate with financial flexibility in a changing business climate, according to Shamber.

“They operate within a very reasonable level of leverage because they’re positioning themselves to be able to survive downturns or higher interest-rate environments that we’re now seeing for the first time in a decade,” he said.

And though competitive pressures or generational ownership turnover may lead some independents to exit the market, others are looking to branch out.

“Within our customer base, we’ve got independents who are looking to grow and expand,” said Shamber, who joined SpartanNash last September. “And so, in many of those instances, they may acquire one of their competitors — who are also one of our customers in the market — and look to grow their base.”

For its fiscal 2018 first quarter ended April 21, SpartanNash reported total sales of $2.39 billion, a year-over-year gain of 1.3%. Food distribution sales rose 3.7% to nearly $1.13 billion. Revenue for corporate-owned stores fell 5% to $566.2 million, primarily due to the closure and sale of retail stores and to a 2.2% decrease in same-store sales (excluding fuel).

During the quarter, SpartanNash closed three retail stores and ended the period with 142 owned retail stores, down 153 stores a year earlier. Its primary banners include Family Fare Supermarkets, D&W Fresh Market, VG’s Grocery, Dan’s Supermarket and Family Fresh Market.

Since the merger with Nash Finch in 2013, SpartanNash has continued to rationalize its base of retail stores, which totaled 177 at the deal’s completion.

“We’re getting sort of towards the end of that stretch where we brought the store base in line with the [number of] stores that we want to operate,” Shamber said.

“There will be, on occasion, stores that are underperforming or — based on what we’re being asked for market rent increases — where we may choose to exit. But I would say that the pace will slow dramatically,” he added. “I think last year it probably was in the high single digits and maybe even got close to 10% of the store base closed. This year, we’ve had three stores [close] so far, and I would be surprised if it got above the mid-single digits.”

In a research note released Wednesday, Mandeville noted that SpartanNash’s retail store segment brings advantages to its food distribution business.

“Management continues to see strong value with owning and operating its own stores, as it provides proof-of-concept for initiatives also offered to distribution customers,” he said in his report.

Last week, for example, SpartanNash launched a private label line of heat-and-eat meal items called Good to Go!. The products are now available at its Family Fare, D&W, VG’s and Forest Hills Foods stores in Michigan, and plans call for the brand to roll out to the distributor’s more than 300 Michigan independent retailers in the coming months.

SpartanNash, too, has continued to expand its online grocery presence, including curbside pickup and home delivery via its Fast Lane service and Instacart.

Regarding Fast Lane, Shamber said, “We see some significant increases in the consumers who adopt that — whether they’re existing customers or new customers, their basket size increases. And surprisingly, we see a little bit of a scenario where it doesn’t necessarily eliminate their trips to the store. They may use Fast Lane for their primary shop of the week. But through card data, you may see that there are individuals who still come into the store once or twice for fill-ins.”