GROCERSGROCERS ByBy TimoTimotthyhy DenmanDenman

Organic-crazed shoppers flock to a new breed of

The grocery segment is in a period of transition. As mergers and acquisitions continue to shrink the number of publically-traded chains across the country, the healthy and organic trend is re- defining the supermarket experience. Five of the 10 retailers in this ranking are committed to selling organic food, a result that would have been impossible just a decade ago. These new- age grocers have rock-star like followings and are consistently growing both their customer base and revenue. Despite the rising popularity of the organic movement and the obvious long- term potential for continued growth, the stock performance of these retailers has struggled over the past few years — half of the companies in the Top 10 posted negative stock returns year-over-year. Although the organic segment’s stocks have struggled recently, revenue and profits are up, proving that there is more to a company’s performance than its Wall Street evalu- ation. Congratulations to all of the members of the Top 10 Grocery ranking.

12.Top10_ris0814_v4.indd 1 10/7/14 4:41 PM STOCK PRICE REVENUE PROFIT GLASSDOOR CHANGE CHANGE CHANGE SOCIAL GLASSDOOR RANK GROCER W SCORE EMPLOYEE TOTAL SCORE YEAR-OVER- YEAR-OVER- YEAR-OVER- STRENGTH CEO RATING RATING YEAR YEAR YEAR

1 0.1% 6.1% 7.3% 59.8 75.9% 92% 3.8 32

2 -31.1% 10.4% 11.4% 61.3 76.5% 83% 3.6 34

3 -23.9% 35.8% 36.8% 79.6 75.4% 54% 2.7 42

4 24.7% 1.8% 1.7% 60.9 75.6% 62% 3.0 44

5 Empire Company Ltd. -7.8% 19.2% 20.5% 51.2 57.2% 52% 3.3 49

6 -43.3% 13.7% 14.1% 72.0 76.7% 34% 2.5 50

7 Loblaw 9.4% 0.6% 3.8% 46.7 68.3% 72% 3.2 52

8 SuperValu 14.5% 0.1% 8.4% 61.8 75.3% 50% 2.8 53

9 -13.8% 0.5% 0.9% 61.3 75.4% 55% 2.9 57

10 SpartanNash 6.6% -1.0% -1.9% 74.0 75.9% 54% 2.4 61

Costco the past 12 months. The dip in share price is attributed to lower than ex- Although Costco is not a grocer in the traditional sense, pected long-term projections and uncertainty among the investing com- more than 56% of its revenue comes from the sale of sun- munity about how far the relatively new concept can expand. Although dries and food. The king of the warehouse shopping experi- investors are weary of Whole Foods, its customers remain emotionally ence claimed the top spot thanks to a first-place finish in connected and feverishly loyal to the brand, as evidenced by the chain’s CEO ranking and a second-place nod in employee satisfac- second place finish in the social ranking metric. The chain recently an- tion. CEO Craig Jelinek received a 93% approval rating from his employ- nounced plans to introduce one-hour home delivery in select markets, a ees due in no small part from Costco’s employee health benefits plan move that will only greater solidify shoppers’ connection with the retailer. which more than 85% of workers participate, and an average hourly pay rate of nearly $21 an hour. In addition to its commitment to providing employees with a high standard of living, the $100-billion company gives Sprouts Farmers Market back to the community at large through substantial charitable contribu- tions including this year’s $10-million dollar donation to the Children’s Sprouts Farmers Market finished in first place in revenue Hospital Los Angeles. and profit with more than 35% growth in both metrics year- over-year — far and away the greatest increase in either category among all grocers examined. The grocer has grown Whole Foods Market top-line sales and bottom-line profitability for the last three years, beating projections each year. Sprouts built its repu- The trendy natural and organic food supermarket chain tation by offering high-quality produce at competitive prices — approxi- would likely have taken the top spot in the ranking had it mately 25% of its revenue comes from the sale of fruits and vegetables. not been for disappointing stock performance year-over- Its commitment to always having fresh produce in-stock has helped cap- year. Despite double-digit increases in revenue and profit, ture the growing contingent of health-conscious shoppers — contribut- Whole Foods endured a 31.3% drop in stock price over ing to a second place finish in the W-Score ranking, signifying its ability

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12.Top10_ris0814_v4.indd 2 10/7/14 4:08 PM to consistently meet customer expectations. The chain went public last in revenue and profit — lower-than-expected, earnings-per-share projec- year, and despite its impressive revenue and profit growth, stock perfor- tions put investors in sell mode. Share performance aside, The Fresh mance has struggled, dropping 23.9% year-over-year. Market is a fast-rising contender in the healthy grocer space. The re- tailer opened 13 new stores this year, raising its total to more than 100 locations in 20 states across the U.S. The retailer has positioned itself Kroger not just as a seller of food, but the purveyor of an experience. Stores are designed with old-school, open-market touches and shoppers are treated Kroger had the second best stock performance off all the to classical music and an up-scale atmosphere. It is not just the sur- companies examined, and the best return among the top roundings that are a cut-above the norm but the merchandise — as its 10 finishers. The grocer posted nearly a 25% share in- name implies The Fresh Market is dedicated to providing the freshest crease year-over-year, and has doubled its value over the and best local options available. past 24 months. Kroger got onboard the natural and or- ganic trend sooner than much of the competition and has been reaping the benefits — half of its customers buy at least one natural product Loblaw per visit. The grocer has routinely been one of the most innovative and continues to introduce cutting-edge technologies, thanks to Kroger Last year Loblaw, Canada’s biggest food retailer, purchased Technology, an internal team charged with innovation. One area the the country’s largest chain of pharmacy stores, Shoppers team is actively exploring is the Internet of Things. The team is cur- Drug Mart, greatly increasing its reach and product ar- rently developing technology that will monitor the temperature of ray. Industry experts estimate that nearly half of Loblaw’s stores and equipment to ensure optimum operational temperature revenue now comes from non-food items — pharmacy, — a task currently performed manually by associates. health, accessories, etc. Investors are in full support of the acquisition driving shares up more than 9% year-over-year. Employees are also on board with the company’s current direction — the retailer finished in Empire Company Limited fourth place in both the employee satisfaction and CEO ranking. The grocer recently announced plans to pilot a buy-online, pickup in-store Empire Company Limited owns or operates 1,500 retail program branded “click-and-collect.” The program, which is a relative stores, as well as more than 350 retail fuel locations across rarity in Canada, allows shoppers to have their online order loaded into Canada. Last year Empire purchased Safeway’s Canadian their vehicle in a brightly painted section of the parking lot. operations to add to its other grocery locations, including the well-known Sobeys brand. The purchase expanded the company’s reach into Western Canada with the addition of SuperValu 213 stores. Empire finished in second place for both rev- enue and profit, fueled in no small part by the Safeway Unlike many of the others in the Top 10, SuperValu acquisition. The grocer also finished in third place for is not focused on the healthy and organic craze. In- the employee satisfaction metric thanks to career path stead the grocer concentrates its efforts on providing assistance, educational support, paid vacations, health customers with competitive pricing on high-demand insurance and a pension plan. The more than 125,000 items — private brands account for approximately 60% workers the retailer employs across its 14 brands are of sales. SuperValu oversees a network of 3,400 owned, charged with helping Canadians “eat better, feel better, licensed, franchised and independent owned stores and do better.” across the U.S., with plans to open 65 new stores in fiscal 2015. The retailer owns and operates 1,170 Save-A-Lot hard-discount gro- cery locations, offering shoppers savings of up to 40% compared to The Fresh Market conventional grocery stores. SuperValu was just one of five grocers examined for this ranking that posted positive gains in all three finan- The Fresh Market could well have challenged for cial metrics. The grocer had a modest .1% increase in revenue, but spot in the top three had its stock performance not impressive 8.4% growth in profit compared to last year. The retailer struggled mightily since late last fall. Stock price also enjoyed a 14.5% bump in stock price year-over-year, propelling it tumbled 43.3% year-over-year, despite increases to a top three finish in that category.

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Attention All Grocers: Be Unique Ingles By Gary A. Williams Shopping for groceries is pretty straight-forward, right? You go up one aisle The Southeastern supermarket chain is focusing its capi- and down the next in search of the items on your list. When you’re done, you tal expenditures on store and supply chain upgrades. Ingles cash out. We repeat the process in the next week or two. self distributes its merchandise and all 203 stores are with- When it comes to investing in grocers, the traditional supermarket is in 250 miles of its headquarters and upgraded warehouse and distribu- not the place to shop. Our top three grocers are Costco, Whole Foods and tion center. Ingles performed in the middle of the pack in most of the Sprouts Farmer Market. They are all unique in their own way, and quite dif- categories examined, with slightly above par finishes in W-Score, social ferent from the bottom three grocers of Safeway, Weis and Roundy’s Super- strength and CEO ranking. The company’s stock performance however markets. struggled year-over-year with a 13.8% drop in value attributed to high In six of the nine moat barriers that we track, the top three out-perform debt totals and low operating income. Like most grocers, Ingles offers a the bottom three by at least 7% or more in their rankings. Moat barriers are store loyalty card to keep tabs on its customer base and provide promo- how companies capture customers and hold on to them by finding ways to tions and discounts to its shoppers. What makes the Ingles Advantage keep them vested in their future together. Costco, Whole Foods and Sprouts Card unique is it philanthropic angle — a portion of every purchase all have superior trust with consumers, resulting in a huge competitive ad- made by a cardholder is donated to a local school vantage in their brand perception moat. district to purchase computers and supplies. The top three grocers also possess advantages in how they structure their businesses to provide unique access to certain food or beverage prod- ucts, sometimes at a significant discount to their peers. They have built a SpartanNash network effect moat, where strong partnerships with suppliers drive pref- erential treatment with customers. These unique relationships also allow The SpartanNash name is less than one year old. the top three to appear more responsive to the specific needs of their loyal The company was created when Spartan Stores and customers. This creates a switching lock-in moat where customers are un- merged last fall. The newly- willing to even consider an alternate grocer. formed SpartanNash owns or operates 166 retail stores under a diverse Over the long-term, these advantages all translate into better return on collection of 16 different banners across the central U.S. In addition invested capital (4.6% more than the bottom three in the past year) and su- to its retail holdings, the company distributes food to military commis- perior competitive strength (27% more). Over the past year, investors have saries and corporate-owned retail stores in 44 states as well overseas been primarily chasing the large supermarket military locations. The company’s tight association with the U.S. military chains, rather than focusing on what matters most powered it to top five finishes in both the social strength and W-Score for grocers: be unique. categories — customers have a strong affiliation with the brand and their expectations are routinely met. Further powering the brand’s reputation Gary A. Williams is founder & CEO of wRatings. are its charitable donations to the communities it operates in and a com- For more information go to www.wratings.com. mitment to environmental consciousness. RIS

Methodology

To compile the Top 10 Grocers list RIS News examined the top publically-traded retailers in the segment. Seven key metrics were used to compare the companies: stock price change year-over-year, revenue change year-over-year, profit change year-over-year, W-Score, social strength, Glassdoor CEO rating, and Glassdoor em- ployee satisfaction rating. For stock price change, share price on July 31, 2013 and July 31, 2014 were compared. For revenue and profit change the last two full years of reported financials were examined. W-Score and social strength were compiled by our research partner wRatings. Social strength is a company’s ability to create long-term and emotional relationships with customers while a company’s W-Score refers to its ability to meet customer expectations. Glassdoor.com’s survey results were utilized for the CEO and employee satisfaction ratings. For each category, retailers were ranked from best to worst. The retailer with the best score in a category received one point. A perfect overall score would be seven. After ranking all seven metrics the chain with the lowest combined score, Costco, was declared the winner.

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