Did Another Retailer Just Collapse?

Another substantial U.S. retailer has effectively sold itself to a larger rival to avoid the death spiral. Two weeks ago it was drugstore operator Rite Aid (NYSE: RAD), which sold itself to Walgreen Boots Alliance (NASDAQ: WBA).

Now Milwaukee-based regional grocer Roundy’s (NYSE: RNDY) has been gobbled up by Kroger (NYSE: KR) in what looks suspiciously like a fire sale to avoid the death spiral. The death spiral occurs when a retailer’s sales are so bad they no longer cover its operating costs, so it has to start closing stores or selling off assets to keep the lights on.

Roundy’s was certainly in a lot of trouble at the time of the sale; The Milwaukee Journal-Sentinel reported that it lost $8.6 million and its same store sales fell by 3.6% in the third quarter of 2015. That gave Roundy’s a profit margin of -.15% and a net income of -$281.53 million.

Why Roundy’s Could Not Compete

What’s truly bothersome here is that Roundy’s was actually in a pretty good position when it suffered those losses. It reported $4.03 billion in revenue on June 30, 2015, and its revenue grew by $540 million between June 2014 and June 2015, rising from $3.49 billion in 2014 to $4.03 billion in 2015.

Roundy’s also has some impressive assets, including:

• Four grocery store brands: Pick N’ Save, Mariano’s, Copps and Metro Market.

 

• A 39% share of the Milwaukee-area grocery market through Pick N’ Save.

 

• 151 supermarkets.

 

• 101 pharmacies.

• A presence in the nation’s third largest city, Chicago, through Mariano’s.

 

• One of the best-respected and fastest-growing new grocery brands in the country, Mariano’s, which has 34 well-loved stores in Chicago.

 

Yet despite all that, Roundy’s was not able to remain competitive. It could not match the deep discounting at competitors like Walmart Stores Inc. (NYSE: WMT), Costco Wholesale (NASDAQ: COST) and the privately-held Meijer, which just entered the Wisconsin market.

In an interview with The Journal-Sentinel, Wisconsin grocery analyst David Livingston predicted that prices at Pick N’ Save would fall by 4% to 5% when Kroger takes over. The reason for that is the sheer volume of Kroger’s buying power; it reported revenues of $108.78 billion on July 31, 2015, which makes the grocer America’s fourth largest retailer after Walmart, CVS Health and Costco.

Like Walmart and Costco, Kroger has the ability to force suppliers to lower prices and pass the discount along to customers. Roundy’s simply cannot, which makes it difficult to do business when chains like Walmart are in the market.

Income Inequality Hurting Retailers

Another problem facing chains like Roundy’s is growing income inequality and the decline of the middle class. Roundy’s business model is based on the existence of a large and growing middle class. Well, now the middle class is shrinking; the Pew Charitable Trust reported that the percentage of middle-class households fell in every state of the Union between 2000 and 2013.

Not coincidentally, one of the states where Pew found that the middle class had declined the most was Wisconsin—Roundy’s home turf. One reason why Roundy’s is struggling is that its customers no longer have the money to shop at it. To make matters worse, some of those customers no longer exist.

Yet another cause of Roundy’s near demise was a rather desperate attempt to create a chain of high-end markets designed to cater to upper-class customers in Chicago—Mariano’s. Mariano’s appeared to be the only part of the chain that was making money. Obviously, part of the reason for the Mariano’s experiment was to try to replace the lost middle-class customers.

The Retail Apocalypse Gets Worse

One has to wonder how retailers can survive in such a market and how the economy can function. If we want a healthy economy, we need a growing middle class that can afford to shop. Without one, income inequality and all the problems that it creates will only grow.

My prediction is that many more retailers will soon either collapse or end up in fire sales to larger competitors capable of deep discounting. Expect to see many more regional grocers among the casualties.

Disturbingly, Roundy’s was the second large grocer to collapse this year. The historic A&P chain in New York and New Jersey was liquidated in July. Therefore other regional grocers such as Supervalue and Winn Dixie could soon collapse or sell themselves to Kroger or Safeway in order to keep the doors open.

It looks like the retail apocalypse is heating up, and it is driven by income inequality. One has to wonder how bad this situation will get before it triggers political upheaval and an economic meltdown on the level of the Great Depression.