Deflation is likely to continue to impact sales growth through the first half of the year before modest inflation takes over, executives at Smart & Final Stores told investors Wednesday.
Dave Hirz, president and CEO of the Los Angeles-based non-membership warehouse chain, said deflation in the company’s fourth quarter ended Jan. 3 was 150 basis points, “and we’re thinking it will be around 1% in Quarter One.”
Deflationary pressures were felt primarily in proteins, he added, but also affected high-volume categories including dairy, cheese and fresh produce.
Rick Phegley, SVP and CFO, said he anticipates 1% inflation for the full fiscal year.
“We only experienced deflation in four of the 25 product categories we measure,” Phegley explained, “and our belief is that in 2016 we’ll continue to face deflationary pressures in meat, particularly beef, and in dairy and cheese through the second-quarter anniversary of the inception of this trend.
“That will continue to pressure sales in the first half of 2016, but we do not anticipate a deflationary environment in the back half of the year.”
Asked about the move of Aldi into the Southern California marketplace later this month, Hirz said three of the first eight Aldi locations will compete against existing Smart & Final stores. “But we have a competitive grand-opening playbook that our stores execute when a new store comes to town, beginning six months out, then three months out, one month out, one week out.
“There is some pricing taking place that I don’t want to spend a lot of time talking about.”
According to Hirz, when Walmart opened 90 stores that competed with Smart & Final locations, “the average store lost less than $8,000," he said.
“Aldi does a nice job, but we believe their impact will be much less [than Walmart’s] because 30% of our volume is club size, and they carry zero, and 32% of our sales come from businesses and they have zero items the business customer would want to carry.
“We’ll be priced competitively, but on private label, we’ve price-checked Aldi in Chicago and they’re 15% to 20% lower than Walmart, but it’s only private label, and there’s a certain customer they are going after.
“Less than 10% of Smart & Final Extra customers have median household incomes of $40,000 or below, so it’s a limited target that Aldi is looking for. But we’ll be ready when they open against us.”
Regarding the 33 stores Smart & Final acquired from Haggen, Hirz said the company has reopened nine under its own banner, including four this week. Of the five previously converted, “customer reception has been really strong,” he noted.
“These stores did about $350,000 a week when they were run by Albertsons and Vons before Haggen took them over. The reason they failed [under Haggen] is because price was an issue, but our prices are 17% lower than what Haggen had, so we’re getting great customer reception.”
Phegley said the purchase price for the 33 stores averages out to about $3 million per location, compared with an average cost of $3.2 million to develop a new store.