2002 industry overview: sales rise $73 bil. to $1.17 tril - Annual Industry Report Top 150 - retail industry - Industry Overview

DSN Retailing Today, July 7, 2003 by Mike Troy

The willingness of American consumers to spend their hardearned dollars over the course of the past year propelled the retail industry to new heights.

As revealed in DSN Retailing Today's Annual Industry Report, a proprietary scorecard of the nation's leading public and privately held retailers, sales for the top 150 companies increased 6.5% in 2002 to $1.177 trillion from $1.105 trillion in 2001. More noteworthy than the increased sales volume though is the fact that operating profits for the group grew by 15% to $77.8 billion in 2002 from $67.7 billion in 2001.

The retail industry's sales and profit growth last year, a year in which consumers lived under the specter of potential terror attacks, an impending war and frequent reports of a weak economy, demonstrated more than anything the resiliency of the American consumer. It also serves to underscore the seeming disconnect between the way the vast majority of Americans go about living their lives and the politicians and economists who promote the belief that the economy is in shambles and soup lines will be forming soon. Fortunately for retailers, most people didn't see it that way and their actions spoke louder than consumer confidence numbers would have suggested.

Many segments of the retail industry and specific companies within those segments produced solid and profitable growth last year and their prospects for this year and beyond are favorable. Discount retailers, most notably Wal-Mart and Target, produced strong growth, aided in part by the closing of hundreds of Kmart stores. Wal-Mart's broader consumer appeal, greater emphasis on opening price points and lower operating costs allowed it to outperform Target, which also achieved growth but did see some sales weakness due to its more discretionary mix of products.

Wal-Mart's supercenter concept remains the dominant force in retailing and at the current pace of growth the supercenter format is expected to account for annual sales of roughly $100 billion by the end of 2004. Approximately 210 of the enormous stores are scheduled to open this year, putting further pricing pressure on competitors.

Much of that pricing pressure falls on major supermarket chains such as Kroger, Albertsons and Safeway. They were less effective than Wal-Mart in generating sales growth with Kroger experiencing the biggest increase with a 3.3 percent gain. Although Wal-Mart has had a large impact on the nation's food marketplace, the extent to which it is responsible for major food retailers' weak sales growth remains the subject of some dispute, as some camps hold the view that Wal-Mart's market share gains are coming from smaller, regional operators.

Unlike the food market, the home channel is enjoying healthy growth thanks to a robust demand for housing fueled by interest rates so low people will tell their grandkids about them. The low rates made the American dream an affordability reality and pushed home ownership to all-time highs. Retailers such as Lowe's and Home Depot were there to capitalize on the demand and maintained their aggressive store expansion programs and had substantially higher sales volumes to show for it. Saturation began to emerge as more of a concern among home center retailers however as investors grew more concerned about the retailers' ability to generate sales growth when the housing market cools off and the two chains compete head to head in even more markets.

Bed Bath & Beyond and Linens 'n Things also benefited from low interest rates and the strong housing market. Strong new store opening programs combined with positive same-store sales growth allowed both companies to achieve high double-digit sales increases.

Two diverse segments of the retail industry taking different paths to achieve success are the drug and dollar store retailers. Operators in both segments continue to rapidly open new stores and build sales.

Walgreens led the pack in that regard as it increased its store count by 360 units to a year-end total of 3,520 stores. It was followed in terms of new store opening activity by CVS, however a greater number of CVS' openings are relocations of older stores so its net store count total only increased by 58 units to 4,191. JCPenney's Eckerd division and Rite Aid were more modest in their expansion efforts, but both have more aggressive plans for this year and next. However neither will come close to the 450 unit increase in store count Walgreens is expected to realize this year.

Now the dollar stores, that's another story. Family Dollar, Dollar General and Dollar Tree continue to add new stores at breakneck speed while generating the returns necessary to justify the expansion. The three retailers' combined total store count increased by 1,136 to 12,992 stores at the end of last year and by the end of this year their combined store count is projected to reach 14,248.

At the opposite end of the spectrum, warehouse clubs and electronics retailers saw their rate of sales growth slow as consumers tightened up a bit on big-ticket items. Leading companies such as Best Buy and Costco posted solid sales growth, 21% in the case of Best Buy and 11% for Costco, but that performance was considered disappointing as both companies, their shareholders and employees were accustomed to more rapid and profitable growth.