Discount Retailers Use Food to Drive Store Traffic

Negative ratings activity for retailers has slowed in 2009 according to a Fitch Ratings special report, The Retail Register. The report showed no ratings changes during the second quarter among the retailers whose debt is rated by Fitch.

Despite the challenging sales environment, many companies across Fitch’s U.S. retail coverage have been managing inventory positions well, according to the report. Gross margins have rebounded for those companies in the discretionary categories--nonessential goods like bedding, sports equipment, and toys--that were hit particularly hard during the 2008 holiday period.
Food continues to be a major driver of store traffic for discount retailers such as Wal-Mart, Costco, and Target, the report notes. Fitch expects these retailers to continue to focus on capturing market share through broader food offerings, an attractive value message, and further store base expansion, albeit at a slower rate than historically. Adding to their financial flexibility, the discounters have a high percentage of real estate ownership.

Supermarkets will continue to be pressured by a number of factors, according to the report, including the trade down to discount formats and reduced discretionary purchases, as they find themselves competing with many nontraditional grocery retailers, such as discounters, warehouse clubs, drugstores, and dollar stores that have increased their food offerings to drive shopping frequency. The drugstore chains, meanwhile, are expected to benefit from their mainly nondiscretionary merchandise offering despite the challenging environment.

Department store sales are expected to be considerably weak through 2009, the report warns. While there already have been a number of bankruptcies among department store operators, the pace could accelerate in a prolonged downturn. And department store square footage is expected to contract as retailers close underperforming stores.