For Subscribers

Get the complete article now!

TWST: How have the stocks of the food and drug retailers performed over the past six to 12 months, and for the most part, have they been able to hold their own over the past difficult month? Have any of the stocks been under pressure?

Mr. Currie: By and large, the last year has been a successful one for supermarkets. They’ve benefited, one, because they had a bad year a couple of years ago when valuations plummeted. So they’ve been recovering from that. But also there has been a drive into more defensive names and supermarkets have popped up as one of those classically defensive sectors that investors need for protection. And of course, demand for food is much more stable than in most other retail categories. However, we believe the supermarket sector is showing signs of increasing competition. My background is that of a UK analyst. I spent 10 years looking at UK retailers, which has been one of the most difficult sectors of the last 10 years in the UK stock market, because while there are some fantastic retailers in the UK, they were going through a competitive phase in their cycle. They had come out of a consolidation phase and entered into a much more aggressive market share-eating phase, and we saw operating margins hit quite drastically. And as a result, the share price performance of that group through the 1990s was extremely poor. We believe that US retailers are also coming out of that quite intense consolidation phase, and we think there are signs that they’re entering a much more competitive phase. And of course, when those things happen it doesn’t really matter what stage of an economic recovery or slowdown you’re in because the fundamentals take over.

TWST: What is the outlook for pricing? Is there any indication that inflation is picking up?

Mr. Currie: Not at the moment. It’s a very tough retail market overall. Inflation for some years now has been negligible. And from what we’re seeing in terms of increased competition, inflation is getting lower.

TWST: Where does Whole Foods Market fit into the overall picture of US food retailing over the next few years?

Mr. Currie: It’s an intriguing company because while a lot of regular supermarkets don’t differentiate from one to the next, Whole Foods (Nasdaq:WFMI) operates truly different stores. Not only is it selling products that are quite unique, but we also think it is an excellent retailer — particularly at fresh food display and execution. I’m not just talking about the organic foods and the health supplements, but they also sell regular fresh food with great flair. However, one of the risks for Whole Foods is that regular supermarkets are introducing more health foods, organic products and more supplements. So they’re looking at Whole Foods as a target for market share. Another risk is customers trading down; when times get tough, Whole Food customers can decide not to go there at all. Rather than pay up for good quality fruit and vegetables and excellent merchandising, they may settle for average, cheaper products.