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Supervalu heading in new direction

With the recent announcement that it is selling almost 900 of its stores to an investor group, Supervalu Inc. has articulated a new strategy that has it concentrating its efforts in three distinct business segments.

In late January, its new senior management told investors and lenders that those three sectors are its discount Save-A-Lot brand, its wholesale distribution operation and its five remaining traditional supermarket chains — Cub Foods, Shop ‘n Save, Farm Fresh, Shoppers and Hornbacher’s — that are all regional in nature.

The Wall Street community appears to like this new strategy as the company’s stock price has increased about 25 percent since the sale announcement. While it is still about half of the $7.50 per share that it was a year ago, it has rebounded from its low reached in October of less than $2 to be trading near $4 in early February.

Retail experts in the produce industry also see these latest moves as positive steps.

“I think [selling some of its brands] is an excellent idea,” said Ron Pelger, who is a columnist for The Produce News and a longtime veteran of the retail sector.

Mr. Pelger, a consultant in his own right and chairman of an industry consulting consortium called FreshXperts, added, “At this point in time everything is different and there are a lot of changes happening [in business]. ‘Downsizing’ is ‘old hat.’ The new term I like to use is ‘shift span.’”

He explained that successful companies are learning that big isn’t necessarily better. It is better to stick with core competencies.

“It costs more to wear two hats or three hats than one hat,” said Mr. Pelger. “Supervalu was a very good distributor but not so good as a retailer. They need to get back to doing what they do best.”

In fact, in its latest financial statements the company revealed that about half its revenues and one-third its earnings come from the distribution business, which continues to grow and currently services about 2,500 independent retailers from 19 distribution centers. During that same quarter, same-store sales at its supermarket locations dropped about 4.5 percent, with even Save-A-Lot outlets registering 4.1 percent decreases in same-store sales.

Supervalu Inc. is selling off five of its grocery chains — Albertson’s, Jewel-Osco, Acme, Shaw’s and Star Market — to a management firm called Cerberus Capital Management, which already owns 200 Albertson’s. Supervalu was just not able to successfully assimilate those brands into its operation. The price being paid today is well below what Supervalu paid for those entities over the last decade.

“It’s a very expensive lesson,” said Dick Spezzano of Spezzano Consulting Services, another longtime retail produce executive.

The investor group will pay $100 million in cash for the stores, and the new company will assume $3.2 billion in existing debt. Cerberus will also offer to buy up to 30 percent of the remaining Supervalu stock for $4 per share after the deal closes.

Mr. Spezzano continued: “Over the years I have seen several companies try to go from being a wholesaler to a retailer and they struggle. It is a very difficult transition.”

Still another consultant, Anthony Totta of Grow My Profits LLC, said that the retail business has been very cyclical over the years bouncing between a centralized and de-centralization model. He said it appears that decentralization is currently winning the day.

“We are in an era of buy local, sell local,” he said. “Regional markets seem to be doing much better.”

Both Mr. Totta and Mr. Pelger agreed that Kroger has done a very good job of managing several different banners from its corporate headquarters, but it’s a very difficult road to hoe and most other large retailers have failed.

Mr. Totta said that Kroger appears to go into acquisitions with a clear-cut plan and it makes sure its new retail partners follow it closely.

Mr. Pelger said that if you look around the country, regional supermarkets are doing very well. He mentioned Publix in Florida and H.E.B in Texas as two regional markets that know their territory and are very successful.

He added that Walmart and some of the large discounters such as Costco are also doing well, but that it is a very difficult competitive environment for regional chains being managed nationally, as has been the case with the Supervalu brands.

Using his own house as a metaphor, Mr. Pelger analyzed Supervalu’s problems. He said that he has grass that needs cutting and trees that continue to shed leaves that need raking. “In addition, I had to repair a cupboard in my house today and my garage is a mess. Maybe it makes sense for me to remove the grass and cut down the trees and put in a zero-scape front yard with rocks and cactus. Then I could spend more time on my house and my garage.”

He believes that Supervalu is not done with its “shift span” and should consider selling off more of its supermarket brands to concentrate on the wholesale business. He said the jury is still out on Save-A-Lot. “I don’t know if they can handle that or not.”

The Save-A-Lot stores feature a footprint of about 15,000 square feet, with most of them located outside of urban areas. They offer limited SKUs and concentrate on big discounts.

The discount food chain currently has more than 1,300 stores in 35 states.

Mr. Spezzano expects Cerberus to spin off at least some of the stores it has bought to multiple buyers. He said Albertson’s will probably be operated independently as several hundred of them are now, while some of the other store locations of Albertson’s and the other brands could well be packaged and sold to local retailers.

For example, in Southern California, Mr. Spezzano said that the regional Stater Bros. Family Markets chain may want to acquire a significant number of locations and register some quick growth through acquisition.

Less than a decade ago, Stater Bros. successfully employed that strategy and grew by almost 50 percent when larger chains had to divest themselves of some properties because of a merger.

In discussing its situation with the business community, Supervalu’s management team indicated that there was opportunity for growth in the distribution business as its facilities have excess capacity. In addition, they predicted growth for the Save-A-Lot chain.

Supervalu’s new leadership team, which includes Chief Executive Officer Sam Duncan, who most recently headed OfficeMax, said that it also expects to initiate $250 million in cost savings by implementing several new strategies, including streamlining processes, cutting what it pays for professional fees and services, and trimming costs in maintenance and information technology.

Though Mr. Duncan has been out of the retail food business for most of the past decade, he does have extensive experience in the supermarket industry, most of it with Kroger.

Mr. Pelger expects that he will do a credible job. “The CEO’s job is to make money by controlling the cost of doing business. He has people around him to run the business units. I would guess this gentleman is skilled at making money. That’s what he needs to do.”