wrote ‘Taste ofSustainabllly » Blog Archive » How do supermarkets make money? Taste of Sustainability Sharing a taste of sustainability, one thought at a time How do supermarkets make money? Posted April 11th 2012 at 11:02 pm by Ben ‘As I walked home from Whole Foods this week I wondered just how different John Mackey’s stores are from the rest of the food retailing industry, On the surface they seem very different - Whole Foods is richly appointed relative to the other supermarkets T frequent. How can they afford to do this? To answer this question, I decided to take a look at a few financial operating metrics for Whole Foods and a set of publicly traded ‘competitors, Since I’m interested in operating difference, I chose to start by examining each firm’s return on assets (ROA)! Data is readily available for: + CosiCa ~Membership retailer focused on low costs. Groceries area significant portion of volume. + The Fresh Market ~ Supermarket with similar appearance to Whole Foods. Footprint primarily on the east coast. + Delhaize ~ Global supermarket operator with several grocery brands in the castern US. Brands include Food Lion, Hannaford and Sweetbay. + Publix ~ Employee owned supermarket chain inthe southeastern US + Safeway ~ National operator of large supermarkets + Kroger — National operator of large supermarkets under multiple brands Unfortunately, itis difficult to disaggregate Wal-Mart's grocery performance from the rest of their business. Given that Wal-Mart is the top food retailer in the US by sales volume, excluding it will admittedly leave out one of the most important players. On we must go... Returnon Assets (ROA) 20% 155 ea —pathaize oe att —steusy on ithe Fre Marit —toser sm hte Foods SELL LES LESS Source: Company flings hiipihwww tasteosustalnabliy.com/2012104%how-do-supermarkets-make-money! 16sw016 “Taso Sustaabilty» Blog Achive » How do supermarkets make money? ‘As you can see, Whole Foods (in green) is among the best performers inthis set of supermarket competitors. Performance slipped during 2006-2008 as Whole Foods struggled to raise the performance of over 100 recently acquired Wild Oats stores. While this begins to tell the story, we can dig a bit deeper to gain a better understanding of what has driven the difference in performance ‘between these companies. Specifically, the net income margin and asset turnover can shed light on how profitable each supermarket is, and how well each utilizes its assets? Net Income / Sales es « ve ms —Pehae a Publix ox er . ees see os t= oe 3 55 SESELLIFI SSE SS Source: Company ings Asset Turnover “ 35 30 ve 2s —Pehae se rie Se sitiy 1 se The Fresh Market zai ees see os oo SHEE EES EL SS Source: Company filings Competition among supermarkets is fierce - most mass-market players have net income margins between I and 2% of sales, Only Whole Foods and Publix have consistently achieved greater margins. Its interesting to note that the Wild Oats acquisition more than halved Whole Foods net income margin from 3.5% to 1.5%, ‘Whole Foods performs near the bottom of its peers in asset turnover, however. CostCo achieves relatively high turnover with its concrete floors, metal shelving and huge pack-sizes. Kroger has improved significantly over this time frame, although on the surface the drivers of this improvement are unclear. Bither Kroger has become much more efficient, or they have allowed theit assets to depreciate with low reinvestment or maintenance expenditure, Margin performance can be further disaggregated? into hiipihwww tasteosustalnabliy.com/2012104%how-do-supermarkets-make-money! 26wrote ‘Taste of Sustainabllly » Blog Archive » How do supermarkets make money? COGS / Sales 20% — 85% eon conco —bathsne sae tl —siteney 70% The Fresh Markae —woeer 6 le Fos oo SEES IESE IPSS Source: Company filings SG&A / Sales 8% ee 23% costco —pathaize 20% _— 158% —sifewsy the roch Markt — 10% es a wrote Foods "SP PPPSSP ESS Here we start to see the true differences between Whole Foods and other supermarkets. Whole Foods has the lowest cost of goods sold (COGS) among its competitors, which is synonymous with a greater markup above what Whole Foods pays for its products. In addition, Whole Foods has the greatest selling, general and administrative (SG&A) costs as a percentage of sales. This money is likely spent on additional staf in each store to provide & high level of service. Alternatively, CostCo has by far the greatest COGS and therefore the lowest markups. In addition, CostCo spends very little on SG&A. These financial metrics align perfectly with «each company’s strategy. Whole Foods provides high quality products at a higher price point delivered with a high level of service, hile CostCo focuses solely on delivering products atthe lowest possible price. In fact, CostCo derives most if not all of its profit from membership fees. Products are priced to simply cover operating expenses. Asset tumover can similarly be disaggregated: hiipihwww tasteosustalnabliy.com/2012104%how-do-supermarkets-make-money! 36