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WIKI ANALYSIS
Arden Group operates a chain of supermarkets in Southern California through its subsidiary Gelson's Markets. In fiscal year 2007, Arden managed 18 stores, earning $486 million in revenue and $29.2 million in net income.[1] By billing its stores as extremely upscale and catering specifically to wealthy customers in high income areas, Arden Group differentiates itself from lower-priced grocery chains like Wal-Mart Stores (WMT), Kroger Company (KR), and Safeway (SWY), and maintains its customer base. The company builds loyalty through its superior customer service, encouraging employees to know customers by name and go out of their way to minimize waiting time.[2]
Arden Group's profitability is highly dependent on its product margins. In 2007, food-at-home (grocery) price inflation increased by an average of 4.2% while wholesale food price inflation increased at a higher average rate of 6.5%.[3][4] Although the company's cost of goods sold increased in 2007, its gross margin remained flat at approximately 39%.[5] The reason for this is that, unlike discount supermarket chains, Arden has been able to raise its prices without losing customers as a result of their relative affluence.
Company Overview
Arden Group's segments are geared towards supporting its retail outlets. By operating its own supply chain and managing its own real estate, the company hopes to minimize total operating costs.
Supermarket Outlets
Arden Group operates 18 grocery stores under the name Gelson's Market. All stores are located in high income areas in Greater Los Angeles.[6] Additionally, all stores offer a branded Gelson's Market credit card to qualified customers.[7]
Distribution
Arden Group leases a central warehouse and small truck fleet to supply its stores. Approximately 47% of all supermarket products are distributed through the warehouse; the rest are distributed directly by the producer.[8] With a small number of stores in close geographical proximity to each other, Arden Group is able to minimize distribution costs and finds it just as cost efficient to pay some producers to deliver inventory directly to stores rather than to distribute the inventory itself.
Real Estate
Arden Group operates a wholly-owned subsidiary called Mayfair Realty. Mayfair Realty owns two Gelson's Market properties and a shopping center in which a Gelson's Market is located. The remaining properties are leased from third parties for an average period of 20 years.[9]
Financials
Arden Group has $80 million in cash and investments on a $166 million balance sheet, indicating management's reluctance to reinvest retained earnings in expansion.[10] The chart on the left illustrates revenue and operating income from 2003 to 2007. From 2005 to 2007, operating income increased at a higher rate than revenue because Arden Group was able to raise prices and margins without losing customers. The graph on the right illustrates Arden Group's sales growth from 2003 to 2007. The company's sales growth grew dramatically in 2003, due to the fact that the the three major supermarkets in Southern California, Vons, Ralphs and Albertsons, were embroiled in a consumer-supported labor dispute with the United Food and Commercial Workers Union, and Gelson's Markets were some of the only alternative supermarkets.[11] Revenue increased at a smaller pace in 2004 as the strike ended early in the fiscal year, and then fell in 2005 as customers shifted back to the lower priced big three supermarkets. In 2006 and 2007, revenue has increased mainly due to higher product pricing.[12]
Key Trends, Risks, and Forces
Arden Group Grows Revenue Solely Through Raising Prices, A Strategy That May Be Unsustainable in the Future
Arden Group's revenue growth in 2007 was a result of higher product prices. However, this was partially offset by a reduced customer count.[13] As food prices continue to rise - up an annualized rate of 6.1% in 2008 - the company may not be able to continue to raise prices without losing customers and shrinking revenue.[14] Although the wealthiest of Arden Group's customers may still buy at Gelson's Market, middle income customers may leave to lower priced alternatives such as Kroger Company's Ralph's or Safeway's Vons.
Arden Group Has Limited Expansion Opportunity
At the end of fiscal 2007, management did not believe that it was feasible to open any new stores.[15] Gelson's Market has fewer expansion opportunities than other small supermarket chains because of its very specific target audience. The high-end demographic Arden Group targets is only a small percentage of the overall population, and many others can't (or won't) afford its premium prices. Because of this, Arden Group's revenue is limited to growth through current operations and not through store growth.
Competition
With its focus on high end products, Arden Group's primary competition is other premium grocers.
- Whole Foods Market (WFMI), with 26 stores in Southern California, is Arden Group's largest competition in terms of product selection and location.[16]
- Safeway (SWY), operating under the banner Vons in Southern California, competes with Arden Group to a lesser degree. Although it is one of the large Southern California grocers with 325 stores, Vons does not have as large a selection of premium products as Arden Group and targets a lower income customer.[17]
- Kroger Company (KR), operating under the banner Ralph's in Southern California, competes with Arden Group to a lesser degree. Although it is one of the large California grocers, with 386 stores throughout the state, Ralph's does not have as large a selection of premium products as Arden Group and targets a lower income customer.[18]
References
- ↑ ARDNA 2007 10-K, Item 6, Page 11
- ↑ ARDNA 2007 10-K, Item 1, Page 2
- ↑ Weis Markets Announces $80 Million Cap Ex Program at Annual Shareholder Meeting - StreetInsider.com
- ↑ Food CPI, Prices, and Expenditures - US Economic Research Service
- ↑ ARDNA 2007 10-K, Item 7, Page 15
- ↑ ARDNA 2007 10-K, Item 1, Page 1
- ↑ ARDNA 2007 10-K, Item 1, Page 2
- ↑ ARDNA 2007 10-K, Item 1, Page 3
- ↑ ARDNA 2007 10-K, Item 2, Page 8
- ↑ ARDNA 2007 10-K, Item 6, Page 11
- ↑ [http://libcom.org/history/2003-2004-los-angeles-supermarket-strike 2003-2004: Libcom.org "Los Angeles supermarket strike"
- ↑ ARDNA 2007 10-K, Item 7, Page 15
- ↑ [1] ARDNA 2007 10-K, Item 7, Page 15
- ↑ [2] Consumer Price Index Summary
- ↑ ARDNA 2007 10-K, Item 1, Page 2
- ↑ Whole Foods Online
- ↑ Vons.com
- ↑ Grocery Store Banners By State
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