Tag Archives: Deflation

Albertson’s Reveal Supermarket Meltdown as Global Deep-Discounters Promise Price Wars in US Markets

Aldi’s $5 billion bet at a brutal time.

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Aldi Market on Biscayne Boulevard In Miami Florida.

Today, Albertson’s explained in an amended S-4 filing for a debt exchange offering just how tough things have gotten for traditional supermarket chains.

As is so often the case, there is a private equity angle to it. Albertson’s was acquired in a 2005 LBO by a group of PE firms led by Cerberus. In January 2015, it acquired Safeway to eliminate some competition. It then wanted to sell its shares to the public. But in October 2015, as brick-and-mortar retail began to melt down, it scrapped its IPO.

The filing’s most revealing data are same-store sales on a quarterly basis through Q4, 2016, comparing year-over-year sales growth at stores that have been open in the current and prior year. I added the red line to show the trend since Q3 2015:

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The S-4 supplied some reasons for the decline:

Our identical store sales decrease in fiscal 2016 was driven by a decrease of 1.9% in customer traffic partially offset by an increase of 1.5% in average ticket size. During fiscal 2016 our identical store sales were negatively impacted by food price deflation in certain categories, including meat, eggs and dairy, together with pressure to maintain competitive pricing in response.

The two key factors boil down to competition, precisely what the Safeway acquisition was supposed to have eliminated:

  • A “1.9% decline in customer traffic.”
  • “Pressure to maintain competitive pricing in response.”

In other words, starting in Q1 2016, competition pushed previously strong same-store sales growth off the cliff.

Given a series of acquisitions by Albertson’s over the years, total sales rose. The following are sales for the 12-month periods:

  • Through Feb. 2015: $27.2 billion
  • Through Feb. 2016: $58.7 billion (includes Safeway)
  • Through Feb. 2017:  $59.7 billion (includes 29 Haggen Stores and 76 A&P stores)

At the end of 2013, the company had 1,075 stores. It then acquired, divested, opened, and closed numerous stores. By the end of 2015, it had 2,271 stores. And by the end of 2016, it had 2,324 stores.

So in 2016, the net store count increased 2.3% but revenues inched up only 1.7%. Hence the decline in same store sales.

During those three 12-month periods respectively, the company had losses before income taxes of: $1.38 billion, $541 million, and $463.6 billion.

And it had total debt of a breath-taking $12.3 billion as of February 25, 2017, up from $3.7 billion in 2013 before the acquisition of Safeway and the other chains.

It’s not going to get better anytime soon.

On Sunday, Aldi announced it would invest $3.4 billion to expand its base in the US to 2,500 stores by 2022. The privately held discount-grocery chain headquartered in Germany already has over 1,600 stores in the US. It also owns Trader Joe’s, which has an additional 464 grocery stores. In February, Aldi had announced that it would add 400 stores by the end of 2018 and spend $1.6 billion to “remodel and expand” 1,300 of its stores by 2020.

This would bring its newly announced investment in the US to $5 billion. The expansion will make Aldi the third-largest grocery chain operator in the US behind Wal-Mart and Kroger, the company said. And it’s going to compete on price.

“As we continue to expand and grow, our purchasing power continues to increase and allows us to bring products at better prices for consumers,” Scott Patton, Aldi’s head of corporate buying, told Reuters.

Another German grocery store chain, deep-discounter Lidl with 10,000 stores in 27 European countries has plans to open as many as 600 stores in the US, it revealed in May. Its first store will open on June 15. It expects to have 100 stores along the East Coast a year from now. It said it would undercut competitors by up to 50%.

This threat by arch-competitor Lidl stimulated Aldi’s thinking; CEO Jason Hart Hart said in a statement that Aldi’s prices also would be about 50% below those of traditional grocery stores.

Aldi has always focused on in-house brands to obtain the deepest price cuts. The company’s shares aren’t publicly traded, and quarterly earnings reports don’t cause any kind of ruckus.

Kroger, the largest supermarket chain in the US, booked a sales increase of 5% in 2016, but its net income fell 4.5%, and its shares, after a series of earnings disappointments, are down over 25% from the end of 2015, even as the rest of the stock market was booming.

Then there’s Wal-Mart Stores, the second largest grocery seller in the US. It’s experimenting with lower prices in 11 states and is hounding its vendors to undercut their competitors by 15%. According to analysts cited by Reuters, it’s willing to spend $6 billion on these efforts.

Target too has been plowing more aggressively into the grocery market. Online grocery sales are taking sales away from brick-and-mortar locations. Amazon is now more than just dabbling in it. Everybody wants into this $630-billion-a-year market.

Alas, over the past six years, sales at grocery stores are up a total of 14%, not adjusted for inflation, according to the retail trade report by the Commerce Department. Over the same period, the Consumer Price Index for food rose 14%, according to the Bureau of Labor Statistics. So in inflation-adjusted terms, over the past six years, “real” sales have been flat.

The price war will be a godsend for consumers, at least for a while. But what gives?

Shares of Whole Foods Market have fallen 42% since late 2013 as it grapples with the new environment. And there have been 18 bankruptcies among US grocery store chains since 2014, according to Reuters, including Marsh Supermarkets and Central Grocers in May and Fairway Group Holdings, parent of the “iconic” New York chain Fairway Market, a year ago.

This is the environment that over-indebted Albertson’s and its private-equity backers hadn’t planned on finding themselves in. Beyond PE firm Cerberus, the backers include real-estate investors Klaff Realty and Lubert-Adler, REIT Kimco Realty, and shopping center owner Schottenstein Stores.

To unload the company in an IPO on the unsuspecting public and conniving institutional investors managing the unsuspecting public’s money, the backers must have a buoyant and blind stock market because for equity investors, this must be one of the most toxic combinations: a brick-and-mortar supermarket chain in the age of online sales that was bought by a PE firm, loaded up with debt as it became a supermarket roll-up, in a stagnant market that is attracting the biggest deep-discounters from around the world.

By Wolf Richter | Wolf Street

End of the Bubble Finance Era Has Begun

We are nearing a crucial inflection point in the worldwide bubble finance cycle that has been underway for more than two decades. To wit, the world’s central banks have finally run out of dry powder. They will be unable to stop the credit implosion which must inexorably follow the false boom.

We will get to the Fed’s upcoming once in a lifetime shift to raising rates below, but first it is crucial to sketch the global macroeconomic context.

In a word, we are now entering an epic deflation. Its leading edge is manifested in the renewed carnage in the commodity pits.

This week the Bloomberg commodity index, which encompasses everything from crude oil to soybeans, copper, nickel, cotton and livestock, plunged below 80 for the first time since 1999. It is now down nearly 70% from its all-time high on the eve of the financial crisis, and 55% from its 2011 recovery high.

BloombergCommodityIndex

Wall Street bulls and Keynesian apologists for the Fed want you to believe that there isn’t much to see here. They claim it’s just a temporary oil glut and some CapEx over-exuberance in the metals and mining industry.

But their assurances that in a year or so current excess supplies of copper, crude, iron ore and other commodities will be absorbed by an expanding global economy couldn’t be farther from the truth. In fact, this error is at the heart of my investment viewpoint.

We believe the global economy is vastly bloated with debt-based spending that can’t be sustained. And that this distortion is compounded on the supply side by an incredible surplus of excess production capacity. As well as wasteful malinvestments that were enabled by dirt cheap central bank credit.

Consequently, the world economy is actually going to shrink for the first time since the 1930s. That’s because the plunging price of commodities is only a prelude to what will amount to a worldwide CapEx depression — the kind of thing that has not happened since the 1930s.

There has been so much over-investment in energy, mining, materials processing, manufacturing and warehousing that nothing new will be built for years to come. The boom of the last two decades essentially stole output from many years into the future.

So there will be a severe curtailment in the production of mining and construction equipment, oilfield drilling rigs, heavy trucks and rail cars, bulk carriers and containerships, materials handling machinery and warehouse rigging, machine tools and chemical processing equipment and much, much more.

The crucial point, however, is that sharp curtailment of the capital goods industries has far more destructive implications for the macro-economy than a reduction in consumer appliance sales or restaurant and bar tabs.

Service operations have virtually no working inventories and the supply chains for durable consumer goods such as dishwashers and cars typically have perhaps 50 to 100 days of stocks on hand. So when excessive inventory investments accumulate, the destocking and resulting supply chain curtailments are relatively short-lived.

But when it comes to capital goods the relevant inventory measure is capacity in place. That’s where the bubble finance policies of the Fed and other central banks have done so much damage.

Prolonged periods of below market capital costs induce business customers to drastically over-estimate investment returns. And therefore to eventually accumulate years and years worth of excess capacity.

This is very different than your grandfather’s consumer goods recessions of the 1950s and 1960s. Those typically involved moderate production cutbacks and several quarters of inventory destocking. But this time the capital goods adjustment will take years, perhaps more than a decade.

Here’s Why

When iron ore mines are drastically overbuilt, for example, new orders for Caterpillars’ (CAT) big yellow mining machines can drop to nearly zero. That’s why CAT is already in the longest string of dealer sales declines — 35 straight months and running — in its 100 year history.

Caterpillar

That’s also why the coming global recession will be so prolonged and stubborn. When cheap credit generates a boom in long-lived and expensive capital goods, it gives rise to a pipeline of new capacity.

This pipeline is not easy to shut-off and often makes sense to complete — say container ships, steel plants or new field mines — even if pricing and profitability have already headed south. That’s known as the sunk cost problem.

Mining equipment orders are likely to remain deeply depressed for the rest of the decade. And this syndrome will be repeated in most other sectors such as heavy trucks, shipyards, oil drilling equipment etc.

This depression in the capital goods industries, in turn, means the disappearance of thousands of typically high pay, high skill jobs at companies like Caterpillar. The same will happen among their extensive chains of outsourced components, materials and service suppliers. And the cascade of those contractions down the economy’s food chain will further intensify and extend the deflationary dynamic.

The graph below give some hint of the massive downturn which lies ahead on a worldwide basis.

During the last 25 years CapEx spending by the publicly listed companies of the world grew by an incredible 500%. Much of this happened in China and the Emerging Market (EM) economies, and in the transportation and distribution infrastructure that connects them.

GlobalCapex

Yet this massive explosion of investment spending didn’t happen because several billion Asian peasants suddenly decided to save-up a storm of new capital.

Instead, this unprecedented construction and CapEx campaign was financed almost entirely by a massive issuance of printing press credit at virtually zero real interest rates.

That means capital was drastically underpriced and that waste, excess and inefficiency abounded.

At length, the global economy became dangerously unbalanced. And these adverse consequences of the false central bank credit boom, in fact, highlight the investment opportunity ahead.

Healthy capitalist investment based on market prices and savings set aside from current income can go on indefinitely, fueling rising efficiency, output and wealth.

But CapEx based on printing press credit only temporarily enabled the world economy to have its cake and eat it, too. Now it’s payback time.

Needless to say, during the expansion phase of central bank enabled bubble finance, optimism reigns and bulls and speculators insist that “this time is different.”

Yet the laws of sound finance and market economics never change. It often just takes an extended time for all the excesses to work their way through the system and finally reach the blow-off stage.

The graph below summarizes this great deformation.

Over the last two decades, global credit market debt outstanding has soared from $40 trillion to $225 trillion. This represents an incredible $185 trillion debt expansion. That eruption would be simply unimaginable without the help of money printing central banks.

By contrast, global GDP only expanded by $50 billion during the same period, and even that’s an overstatement. Much of that reported gain merely represented the one-time pass-through of fiat credit, not real savings put to work in efficient production.

Consequently, it is likely that the global economy accumulated more than $4 of new debt for every $1 of incremental GDP.

Not only is that self-evidently an unsustainable financial equation, it also means that when credit growth stops, the bottom will drop out of reported GDP. It wasn’t new wealth in the first place, just production stolen from the future.

GlobalDebt

And this gets us to the Fed’s upcoming move to raise interest rates for the first time in 10 years. It will amount to a sea-change that in due course will shatter the entire regime of bubble finance that gave rise to the false credit and CapEx boom depicted above.

As I have often said, the Fed has become addicted to the “Easy Button.” During more than 80% of the 300+ months during the last quarter century it has either cut rates or left them unchanged.

EasyButton

Accordingly, the professional gamblers in today’s Wall Street casino have no real experience of a time when the “Fed is your friend” adage failed to work. They have experienced essentially false one-way markets, knowing that the Greenspan/Bernanke/Yellen “put” under stocks and other risks assets would come to the rescue.

But here’s the thing. After 84 months of zero interest rates — and folks that’s pure lunacy by all historic standards — the Fed has run out of time and excuses.

If it doesn’t begin to normalize rates at last, and as repeatedly promised, its credibility will be shattered. And what it long has been deathly afraid of will happen. That is, the market will plunge into a hissy fit that will shatter confidence in what is essentially a giant credit-based Ponzi.

And the other major central banks of the world are in the same boat. Just last week we saw the ECB stopped short by its powerful Germany contingent that essentially said to Draghi that $1.3 trillion of money printing is enough.

Likewise, the People’s Bank of China (PBOC) has run out of dry powder, too. And that’s of monumental importance.

The epicenter of the global commodity, industrial and CapEx boom was in China. Thanks to the greatest money printing spree by the PBOC in recorded history, outstanding public and private debt there has exploded from $500 billion in 1994 to $30 trillion at present.

That’s a 60-fold gain. Is it any wonder that the commodity and CapEx charts shown above went nearly vertical during the peak of the global boom?

But now China is facing the collapse of its credit Ponzi, and capital is fleeing the country at a prodigious pace.

In the last 15 months alone, nearly $1 trillion has high tailed it for London, New York, Australia, Vancouver and other resting places for flight capital.

So the PBOC is being forced to stop its printing presses in order to prevent the Yuan exchange rate from collapsing and the capital outflow from getting totally out of hand.

Even in Japan, the Bank of Japan’s printing press is no longer accelerating. That because notwithstanding trillions of new money conjured from thin air during recent years, Japan is on the verge of its 5th recession in seven years. Even in Japan, bubble finance is losing its credibility.

Regards,

David Stockman for The Daily Reckoning

The $100 Trillion Reason the Fed is Terrified of Deflation

by Phoenix Capital Research

Falling Prices Ahead

Over the last few months, Janet Yellen, head of the Federal Reserve Bank repeatedly stated that lower oil prices were “positive” for the US economy. This is simply astounding because the Fed has repeatedly told us time and again that it was IN-flation NOT DE-flation that was great for the economy.

And yet, repeatedly, the head of the Fed admitted, in public, that deflation can in fact be positive.

How can deflation be both positive for the economy at the same time that the economy needs MORE inflation?

The answer is easy… Yellen doesn’t care about the economy. She cares about the US’s massive debt load AKA the BOND BUBBLE.

Yellen knows deflation is actually very good for consumers. Who doesn’t want cheaper housing or cheaper goods and services? In fact, deflation is actually the general order of things for the world: human innovation and creativity naturally works to increase productivity, which makes goods and services cheaper.

However, DEBT DEFLATION is a nightmare for the Fed because it would almost immediately bankrupt both the US and the Too Big To Fail Wall Street Banks. With the US sporting a Debt to GDP ratio of over 100%… and the Wall Street banks sitting on over $191 TRILLION worth of derivatives trades based on interest rates (bonds), the very last thing the Fed wants is even a WHIFF of debt deflation to hit the bond markets.

This is why the Fed is so obsessed with creating inflation: because it renders these gargantuan debt loads more serviceable. In simplest terms, the Fed must “inflate or die.” It will willingly sacrifice the economy, and Americans’ quality of life in order to stop the bond bubble from popping.

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This is also why the Fed happily talks about stocks all the time; it’s a great distraction from the real story: the fact that the bond bubble is the single largest bubble in history and that when it bursts entire countries will go bust.

This is why the Fed NEEDS interest rates to be as low as possible… any slight jump in rates means that the US will rapidly spiral towards bankruptcy. Indeed, every 1% increase in interest rates means between $150-$175 billion more in interest payments on US debt per year.

If you’ve ever wondered how the Fed can claim inflation is a good thing… now you know. Inflation is bad for all of us… but it allows the US Government to spend money it doesn’t have without going bankrupt… YET.

However, this won’t last. All bubbles end. And when the global bond bubble bursts (currently standing at $100 trillion and counting) the entire system will implode.