1. Grocery Store Industry Food Retailers Food Wholesalers Supercenters

2. About the Industry Food sold by retail grocers in the U.S. is a half-trillion dollar industry that represents 7.2% of total consumer spending. In size, it ranks second only to housing. Modest and lower income families spend 15% or more of their paycheck at the food store.

3. Why Retail Grocers? (and Why Not?) Part of one of the industry sectors that CinMIC has not yet investigated—non-cyclical consumer Grocery purchases continue through market cycles that impact other sectors. Competition with supercenters and restaurants is a major concern, however. Also, as part of a cyclical industry, these stocks start in the hole on a NAIC evaluation, with limited growth potential and low profit margins.

4. About Food Retailers, Wholesalers, and Supercenters Value Line lists 14 traditional food retailers. Wholesalers (Supervalu, Sysco,Nash Finch, Performance) compete for market share. Wal-Mart, Target, and even dollar stores also compete for our food dollars. Other issues include labor costs and potential strikes, and healthcare costs, both of which squeeze profits.

5. Value Line (5/7/04) Industry Timeliness 68 of 98 (Wholesalers 51/98) The sector is in a year of challenges, ranging from labor union strikes to healthcare costs to competition from non-traditional competitors. Depressed profits at Albertson’s, Kroger, and Safeway are partly attributable to strikes in southern California. Other retailers (Wild Oats, Whole Foods, etc.) have gained market share during this period. Positive signs---sales are up slightly (<2.0%). Overall, this is a low margin, high fixed-cost business. Not recommended for the year-ahead, but with “turnaround potential for 2007-2009”.

6. My initial list of retail grocers Included 8 companies, sticking with my interest in ‘local’ opportunities. Included 8 companies, sticking with my interest in ‘local’ opportunities. Publix turned out to be employee owned. Publix turned out to be employee owned. Meijer’s turned out to be privately held. Meijer’s turned out to be privately held. Bigg’s is part of Supervalu (SVU), a wholesaler. Bigg’s is part of Supervalu (SVU), a wholesaler. Albertson’s (ABS), Kroger (KR), Safeway (SWY), Wild Oats (OATS), and Winn-Dixie (WIN) were researched. Albertson’s (ABS), Kroger (KR), Safeway (SWY), Wild Oats (OATS), and Winn-Dixie (WIN) were researched. Based on VL, added 7-Eleven (SE) and Pathmark (PTMK) to complete the initial list. Based on VL, added 7-Eleven (SE) and Pathmark (PTMK) to complete the initial list.

7. Narrowing It Down SVU out, since it is more comparable with Wal-Mart and Target OATS and PTMK out, due to extreme volatility WIN out, with ‘clouded’ future projections SE out, too dependent on oil futures That leaves ABS, KR and SWY to consider

8. Comparative Quick Analysis

9. Albertson’s (ABS) Founded in 1939. 2003 revenue $35.4 billion. In 31 states, with about 2,300 stores, including 1,350 food-drug stores, 700 stand-alone drugstores, and 250 warehouse stores. 200,000 employees. 19 distribution centers. Banners include Albertsons, Jewel-Osco, Acme Markets. Acquired 1,600 American Stores (1999) and 200 Shaw’s (2004), a New England chain. VL---Earnings will fall more in 2004, despite other initiatives like closing stores in New Orleans and improving supply-chain mgt. VL—ABS is the only large supermarket that pays a dividend. VL---Shares offer “solid total-return potential to 2007-2009.”

10. Safeway (SWY) Went public in 1986. 2003 revenue $35.7 billion. In the western and mid-Atlantic states and Canada, with over 1,800 stores. 208,000 employees. 34 processing facilities. Banners include Tom Thumb, Vons, Pak’n Save Foods. Recent acquisitions include Genuardi’s (2001), Randall’s and Carrs (1999), and Dominick’s (1998). VL---More aggressive sales-building strategies have reversed a trend of declining sales. VL---Profits remain under pressure, despite improvements in shrink and marketing efforts. VL—Although market share is likely to continue shrinking, SWY is “a worthwhile turnaround play for patient investors.”

11. Kroger (KR) Founded in 1883. 2003 revenue $53.8 billion. In 32 states, with about 2,500 stores, including 800 convenience stores, 400 jewelry stores, 42 processing plants, 500 fuel centers, and 1,900 pharmacies. 290,000 employees. Banners include Fred Meyer, Fry’s, Turkey Hill, Quik Stop, Mini Mart, Tom Thumb, Littman Jewelers, and Barclay Jewelers. The 1999 merger with Fred Meyer created the nation’s largest retail grocery. VL---Union resolution at Ralph’s (California) should reduce long-term labor costs. VL—Q1 2004 included the biggest sales increase in two years (1.8%), despite the strike. VL---Assuming a partial recovery in PM, “the stock should be a more rewarding holding for investor’s with a 3- to 5-year investment horizon.”

12. Comparison of SSG and VL Data 15.520.818.3Average Days Acc. Pay. 27.128.331.3Average Days Inventory 10.411.116.9Current PE 17.415.117.0Average PE 24.532.813.1 Varying5-year % EOE 5.6 Varying3.7 Varying3.5 Varying5-yr % PTP on Sales SWYKRABS

13. My Evaluation BUY HOLDRecommendation 24.3520.9715.31Current Price, as of 08/20/04, in $ 24.40/15.0023.23/15.0015.20/10.00Buy Range, High Low, in $ 10.411.116.9Current PE 43.20/15.0040.00/25.0025.60/15.605-yr Stock Price, High/Low, in $ 15.013.810.85-yr Return, per year, in % 77.490.767.25-yr Price Appreciation, in % 2.0:13.2:11.9:1Upside/Downside Ratio 21.6/12.416.0/11.716.0/10.45-yr projected PE range 445356Quick Analysis ABSSWYKR

14. Recommendations (1 of 3) Retail grocery stores are not classic growth investment companies. They have multiple competitors, including supercenters and wholesalers. The larger chains also have competition from regional retail stores, which have increased their market share in the last few years.

15. Recommendations (2 of 3) Nevertheless, some of the larger retail stores have potential for long-term market growth. My initial analysis ended up with ABS and SWY in the buy range, and KR in the hold range. I am personally biased toward further consideration of KR and SWY.

16. Recommendations (3 of 3) I would recommend that we continue further investigation of this sector, with these specific thoughts: Monitor marketing strategies at KR and SWY. Review data we have already collected on competitors Wal-Mart and Target. Develop comparisons with selected wholesalers, including Sysco and Supervalu. Revisit a possible buy within one or more of these sectors in the next quarter.