Times change in food wars

Donald Saltz

August 16, 1991|By Donald Saltz

Giant Food, based in Landover, is the dominant food retailer in the Baltimore-Washington area, and is one of the top dozen food chains nationwide. It has about 46 percent of the food business in and around Washington, and about 29 percent in the much more fragmented Baltimore area, well ahead of all competitors in both cities.

Those percentages have not been constant; they're much higher for Giant in recent years. A few years back, for example, Giant trailed Safeway Stores in the Washington area. Today, Safeway trails Giant there by about 16 percentage points.

But times have changed. New competitors are moving into the area, and existing general merchandise stores are broadening their food lines.

The sluggish economy has led a growing number of shoppers to favor discounters such as Shoppers Food Warehouse, which now account for more than 10 percent of food sales in the Washington area. The recession has also caused a decline in sales of higher-priced food items.

Giant's sales, in its latest reported period -- 12 weeks ended May 18 -- were up only 1.9 percent, with profits ahead just 2.8 percent, well under usual gains.

Recently, Giant and Safeway announced on the same day that they would pay double on most coupons, a coincidence explained by Giant's Barry Scher, vice president for public affairs, as probably the result of there being "few secrets in this industry."

Double couponing did not touch off the price war, though. Earlier, Giant said it would reduce prices on many of its health, beauty aid and general merchandise items, certain to intensify competition in that area of its business, which garners an estimated 16 to 18 percent of the firm's more than $3 billion in annual sales. Giant is a major participant in this business with pharmacies in more than two-thirds of its 153 stores.

David Sykes, financial vice president of Giant, notes the importance of retaining customers in the face of new and intensifying competition. This could lead to a lower-profits quarter for the company, the first since a price war five years ago, a possibility that upsets investors. In that year, 1986, Giant's earnings fell to 77 cents a share from 95 cents the prior year, but the temporary price-cut plan worked and earnings shot up to $1.26 a share in 1987, and they've been climbing since. Last year, Giant earned $2.01 per share and the stock sold for about 15 times those earnings.

In its latest 12-week period, Giant earned as net profit a phenomenal 3.73 percent on sales, with 1 of those percentage points resulting from the firm's manufacturing businesses, which include dairy, bakery and beverage products. Sykes acknowledges that many shareholders dislike even a single down quarter even if there are long-term benefits, such as a greater market share, which occurred in '86.

Despite the competitive clouds on the horizon of a sluggish economy, longer-term investors in Giant shares can hardly be unhappy. Anyone who bought the stock in October 1969 or earlier would have more than 40 times as many shares today through a handful of stock splits, the most recent a 2-for-1 split in April '88. An original share, bought for $15.20 in 1959, has grown to a value of well over $1,000.

However, Giant's share price reached its high of 36 1/4 in 1989. In recent months the share price dropped from 31 to 24, most of that decline coming in the past several weeks when the company began to talk about price cuts and double coupons.

Sykes, a veteran of many competitive campaigns, doesn't seem worried. He notes a program coming up next month that is expected to win substantial added business for Giant.

He said the company is enhancing its computers-for-schools program by providing double tapes for about 2,000 items. The program has also been expanded to include items other than computers. Safeway, which had a similar program, has dropped the concept.

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