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Supervalu plans to double the number of Save-A-Lot stores

by | February 04, 2010
Supervalu Inc., which is one of the larger supermarket companies in the country, has made it known that it plans to nearly double the number of Save-A-Lot stores that it operates over the next five years. Currently, it operates about 1,200 stores from coast to coast in urban, rural and suburban environments.

Save-A-Lot is a smaller-format, discount chain that claims to offer savings of as much as 40 percent compared to a conventional grocery store. It offers limited SKUs throughout the store, including in the produce department.

Retail consultant Ed Odron of Ed Odron Produce Marketing & Consulting in Stockton, CA, said that the potential for 1,200 new Save-A-Lots over the next five years "is great news for produce suppliers. That's a great operation, and they do a real good job on perishables. They have good people there and especially good produce people. Mike Kemp (vice president of product segments) runs a very good department. In fact, he worked for me as a produce manager many years ago."

Mr. Odron said that with the current economy continuing to show signs of weakness, “it’s the perfect time for expansion of the value-type stores.” He said that the limited SKUs work in this type of store because the discount operation does not try to be all things to all people. “You have to remember that about 20 percent of the SKUs [result in] 80 percent of the sales. Save-A- Lot carries all the basics.”

Dick Spezzano, a longtime produce retailer and consultant who operates Spezzano Consulting Services in Monrovia, CA, said that newer Save-A-Lots have 40-50 produce SKUs, which is double the number of the older stores. He said that almost all the alternative formats, such as dollar stores and even convenience stores, have increased the number of produce SKUs over the last several years to capitalize on the growing popularity of fresh produce and perishables — and Save-A-Lot has done the same.

“I think this is a good strategy for Supervalu as the Save-A-Lot format has been a good growth area for them,” he said.

Supervalu has not said what percentage of its new openings will be franchisees and how many will be owed by the company itself. Currently, about three-quarters of its Save-A-Lot locations are operated by licensee owners, and Supervalu also services many other independently owned grocery stores.

Mr. Spezzano speculated that the corporation would own a greater percentage of the new Save-A-Lots, as that makes sound economic sense. On the other hand, he said that the company would not want to upset current franchise owners and other independent stores that it currently services by putting in corporate-owned Save-A-Lot stores in close proximity to established stores. Expansion will be a tricky enterprise.

Mr. Spezzano said that the discount format has worked very well, especially in these difficult economic times, as it offers very good value to consumers. He noted that the older Save-A-Lot stores tend to be smaller and concentrated in urban areas and appeal to consumers at the lower end of the economic scale. “But the newer stores are bigger and are appealing to many different types of customers.”

As a chain, Supervalu is currently going through what some experts are calling growth pains. Through acquisition, including the purchase of Albertson’s in 2006, the company has become one of the larger grocery store firms in the United States with about 4,300 stores: 1,200 traditional supermarkets, 1,200 Save-A-Lots and 1,900 independent stores that the firm services. Among its store brand names are Supervalu, Albertson’s, ACME, Jewel-Osco, Shaw/Star Markets, Cub and Farm Fresh.

The firm’s stock was trading near $50 per share in 2007, after it completed its purchase of Albertsons Inc. The stock slumped tremendously in 2008 to a low of just about $9. It rose in early 2009 and has been trading around the $15 level ever since.

In May 2009, Supervalu appointed Walmart veteran Craig Herkert as its new chief executive officer. The new CEO has embarked on a number of cost- saving measures, including reducing the number of SKUs in each store by as much as 25 percent and announcing the expansion of Save-A-Lot. Mr. Herkert has said that sales data show that consumers are very cost- conscious and tend to be shopping ads more than ever. This points to consumers who are open to discount formats, and expands the Supervalu sales platform with which the Walmart-trained Mr. Herkert is very familiar.

Mr. Spezzano said that the strategy makes economic sense, as it is much less expensive to open a Save-A-Lot than a traditional store. “You can probably open six or seven Save-A-Lots for the same cost as opening one conventional supermarket.”

Mr. Odron said that opening the smaller format Save-A-Lot is much easier in terms of available locations. A 50,000-square-foot conventional supermarket can be placed only where there is sufficient land. A much smaller-format store can be shoe-horned into almost any strip mall.

Neither Mr. Spezzano nor Mr. Odron was as embracing of an SKU reduction strategy as a cost-saving measure.

“I believe carrying limited SKUs in a discount format works well, but in a conventional supermarket that’s a different thing,” said Mr. Odron. “Customers come into a conventional supermarket looking for variety. I think you can overdo it and bigger isn’t necessarily better, but you just can’t cut SKUs without really considering what you are doing.”

Mr. Spezzano concurred with those comments, saying that an SKU-reduction plan is easy to talk about but difficult to execute. “To do it right, you have to look at the specific demographics and buying patterns in each store,” he said. He explained that a well-designed SKU reduction plan will cut different SKUs in different stores as the company’s sales data identify by store which SKUs are slow sellers. This will result in better utilization of shelf space in the store but won’t result in huge SKU cutbacks and savings at the warehouse level. “You might cut SKUs by 25 percent in each store but only realize a 5 or 10 percent reduction at the warehouse,” said Mr. Spezzano.

Neither retail consultant knew if the companywide SKU reduction strategy at Supervalu would affect the produce department. Both indicated that there might be room for some reduction but reiterated that it has to be carefully planned. Categories such as tomatoes and mushrooms have had huge growth in their respective number of SKUs over the past decade. But those new SKUs have typically been premium products that are good profit centers for the retailers — and might result in larger sales losses than a store can realize in cost savings.