CEO Expects Supervalu to Grow-A-Lot
As a former executive with Wal-Mart Stores,
Supervalu CEO Craig Herkert knows what low prices and a tightly-controlled
selection of top movers in food categories can do for a retailer’s sales.
So, there shouldn’t be much surprise that Mr. Herkert’s plans to turn Supervalu
into “America’s neighborhood grocer” include a rapid expansion of the
company’s limited assortment Save-A-Lot format.
Mr. Herkert is looking to
double the number of Save-A-Lot stores over the next five years from its
current count of 1,200. The company is slashing its dividend to help pay
for the expansion and it has plans in place to make it easier for licensees
to open and operate stores.
“This is not an abandonment of traditional
grocery; this is an acceleration of Save-A-Lot,” Mr. Herkert told analysts
during Supervalu’s second-quarter earnings call.
While Save-A-Lot is a big
part of Mr. Herkert’s answer to Supervalu’s recent woes (company earnings
were down 42 percent in the most recent quarter versus the same period in
2008), he also sees the need for the company’s other chains to become more
price competitive especially in everyday retail.
Discussion
Questions: What do you think of Craig Herkert’s plans for growing Supervalu?
Do you see the greatest opportunity for growth with Save-A-Lot or some
other part of Supervalu’s business? What about its role as a wholesaler?
Mr. Herkert has only been at the Supervalu helm for five months, but he has a big turnaround task in front of him:
1. Judging from the last quarter, it looks like wholesale distribution has declined to only 30% of Supervalu’s revenues. At one point this was the company’s core competency, but Target and doubtless other accounts are moving toward self-distribution as a way of controlling their own supply chain costs effectively.
2. Supervalu has made acquisitions in the traditional grocery business (such as Albertsons) at a time of long-term decline for this business. One parallel would be the merger of two lagging regional department stores…there may be short-term benefits of scale but Supervalu is fighting bigger competitors such as Kroger and Safeway, not to mention the inevitable shift of share to supercenters.
3. The Save-A-Lot strategy seems sound, but Aldi already has a national head-start with this concept and Walmart is right around the corner. The question is whether Supervalu can roll out Save-A-Lot quickly enough to move the revenue and profit needle…or whether it might trigger divestiture of some of its lagging businesses to make it happen faster.
Tough questions. Supervalu will probably not be growing, but shrinking. It’s not about growing Supervalu but saving Supervalu. Growing is what has caused all their problems. Supervalu has never been a good retailer. They have been closing Cub stores in nearly all their markets but Minneapolis. Whatever chain they buy, they just end up losing sales and closing stores. Remember Scot’s? They’re gone. Then they bought the distressed Jewel and Albertsons stores. We all know what happens when a below-average retailer buys another below-average retailer. All you get is a just a larger below-average retailer with a lot of debt.
In my opinion, Save-A-Lot can’t quite compete with Aldi and Walmart. So Save-A-Lot will need to go where those two are not, which would be the difficult inner city urban areas. Good luck to Supervalu on that.
Slashing a dividend is a sign of severe financial distress. Again best of luck to Supervalu going forward.
The wholesaling business appears to be under stress as more and more independent retailers either close their doors or switch to other wholesalers.
I hope we don’t have another Fleming.
I also want to add that I find it odd that Supervalu has failed to get a single Save-A-Lot store open in their home base of Minneapolis. I also find it odd that a financially distressed company is talking about expanding. I think that is just bold talk for the press release and hopefully, they have a more realistic plan for survival.
If Supervalu is to play the grocery space on the scale that they are seeking, and protect their “share of stomach,” they have to be in this space. They know how to distribute very effectively. The store operations for a Sav-A-Lot box should work well in the culture and execution of how Supervalu operates–perhaps more effectively than the Albertsons model.
Right move.
Save-A-Lot falls under the ‘right time’ on my list of retail commandments. The question I have is what about location (which is also in my list of commandments)? My analysis of ‘the recession’ is that it is localized and specific to certain areas of North America. Limited assortment only works when people are truly trying to save money. Pinpointing exact locales where a Save-A-Lot will work is critical to the success of this expansion.
And what is their definition of ‘limited assortment’? I hope they still have a localized mix in the merchandise. Reaching out to the community is how you will overcome softening sales.
It’s a strategy. It’s a good strategy. It’s an aggressive strategy. Shouldn’t take long at all to see if it’s working. Finding 240 locations per year may wind up to be quite the challenge.
As Walmart broadens their reach to the middle class, the best opportunity is enhancing and growing their price/value proposition. Herkert’s experience fits well with this approach. His issue will be whether to be all EDLP or a mix of EDLP and seasonal high-low.
Save-A-Lot is a sound strategy for the times. Supervalu execution remains to be seen.
I concur with Doron that people shop limited assortment when they want to save money. But the extension of his argument is that people only seek to save money on food when they are impacted by hard financial times. That assumption was challenged in the general merchandise arena by none other than the estimable Mr. Sam himself. Rather than murder the quote, let me just paraphrase–consumers will always be happy to save money on necessities in order to afford a few more luxuries…
That insight could be the key to the success of Save-A-Lot, Aldi, and others.
In the history of my heart, I shared numerous decades of profitable, sales-increasing halcyon days at Kroger and Supervalu. Today, Kroger is at the top of its well-tailored game and Supervalu and its new CEO must putter along carrying too much debt and too many inherited Albertsons residuals.
Ambitious debt is the trap in which Supervalu set and baited itself in recent years, and now it’s deliberately in it.
Craig Herkert has worked for Wal-Mart and Albertsons and has apparently decided that a low-price strategy is needed at Supervalu. Rolling out 1,200 Sav-A-Lot stores in the next five years is his projected strategy and we trust it will work. Now here’s an alternate thought, Craig. Since the owner of Aldi’s is a SVU shareholder and also owner of Trader Joe’s, I would smile–and happily assist–if another strategy is silently being envisioned in Eden Prairie: the merging SVU, Aldi and Trader Joe’s.
Just look at the numbers. If Save-A-Lot stores is doing more volume with better profitability than the traditional stores, then Supervalu is moving in the right direction. The future of food retailing is going to be more about specialization to contain costs and to attract more customers who are spending more per trip. Value-priced, limited-selection stores, if done right, is the future in food retailing. The danger is to get the selection right. It is not always the cheapest selection that sells but the best quality at the best price.
Yes, it was a similar strategy that Great A&P attempted almost 30 years ago when it rolled out limited SKUs PLUS stores in the Northeast and Chicagoland areas. Soon it learned that because of almost non-existent profit margins, these stores brought down profits and were eventually abandoned after less than 3 years. Remember Great A&P, at the time, operated a mega food processing plant in Horseheads, NY, so it definitely had the capacity to expand the concept.
However with over 1200 stores, Save-A-Lot is operating today in many of those former A&P Centennial and PLUS stores. So with all of the empty boxes sitting around, Supervalu can get these additional stores launched on the cheap.
And what’s wrong with urban areas as growth potential anyway? Several urban states, NY, PA, NJ, are providing incentives for operators to set up shop in urban areas that have become food deserts.
Acme is struggling in the Philly-NJ market. Converting some of them into Save-A-Lots wouldn’t be such a bad idea.
Two questions about this: 1) why does everyone think price is the magic elixir forever? And 2) is taking on Walmart a good idea?
I’m sure SVU has gone to great lengths to get to this strategy vs. just making a top-down call based on recent results. Right?
Personally, I think the real answer is multi-format. An “assortment” of concepts that best fit the demographic of where you’d like to expand. One size (including price) does not fit all…just as price does not cure all.
Same movie with different actors…hmmm…anybody care to revisit the Save-A-Lot/Deal$ acquisition and growth strategy? Unfortunately, Supervalu seems to go through this type of exercise every 5 years or so–always ending up at the same place.
In my opinion, Supervalu at one time had a strategic vision, strong formats and a real emphasis on retail. All that changed in the late ’80s and the focus moved from retail to procurement (i.e. from making money on the “sell,” by growing top line sales, to making money on the “buy”). Couple that with pressures to increase margins, non-competitive pricing, questionable retail operations, inconsistent store conditions and an independent customer base with a tendency to block opportunities for “real” growth and you get what you get.
Let’s revisit things in 5 years and check the results. If Supervalu is able to put the focus back on retail, reverse the negative, like-store sales trends and successfully manage growth and development in markets with diverse formats and multiple operators, it will be a sure sign that they have won the battle. It’s a tall order and I hope they can pull it off!