What’s next for Supervalu?

The industry is split on whether the chain will recover from a financial tumble that pummeled its stock and prompted store closings and executive changes.

by Barrie Dawson

July 12 will go down as one of the most pivotal dates in the history of the Supervalu supermarket chain. For it was on that morning that Supervalu’s stock tumbled 44% to an all-time low, leaving the chain looking at a potentially fractured future.

On the heels of a grim first-quarter financial report, delivered July 11, Supervalu shares closed at $5.29 apiece, according to New York Stock Exchange figures. For the first time in 60 years, Supervalu had suspended its quarterly dividend. It also had announced that capital expenditures for fiscal 2013 would be reduced from $675 million to a range of $450 million to $500 million. The company’s board, with guidance from New York-based financial strategists Goldman Sachs as well as Greenhill & Co., would initiate a strategic review that could culminate in the sale of parts or all of Supervalu’s business.

“If I’m a competitor—if I’m Giant or ShopRite, which are the two biggest like them in this (Philadelphia) area—I’m just salivating because these guys are down,” says Richard George, chairman and professor of food marketing at Saint Joseph’s University in Philadelphia, regarding Supervalu’s plan to cut capital expenditures. “They don’t have any resources really to turn it around.”

July 12 was not your typical 90-degree, sunny summer day in some parts of Eden Prairie, Minn., home of Supervalu Inc. By 10 a.m., the chain’s stocks were in a free-fall, down to $2.97 per share, the result, in part, of after-hours trading. By the end of the day, the price stood at $2.69.

Supervalu was being walloped by a storm that analysts saw coming.

“I don’t think there’s much of a surprise here,” says Dr. Bill Bishop, chairman and founder of Willard Bishop, a retail consulting firm based in Barrington, Ill. “You never really know when something is on the decline how steep or precipitous that is, so when you hit the cliff and go over it, it always gets attention. Up until recently, there was only one strong performing unit—extraordinarily strong—in the whole portfolio of things they did, and that was Sav-A-Lot. More recently, Sav-A-Lot has started to lose ground.”

So where does Supervalu go from here? In five years, will July 12 be remembered as the day Supervalu reinvented itself and began its great comeback? Or will it be remembered as the day one of America’s largest retailers, with banners such as discounter Sav-A-Lot as well as Acme, Albertsons, Jewel-Osco, Cub, Shaw’s and several others, plunged into oblivion?

“I don’t think we’ll be reading an obituary,” says Bob Hermanns, director of food industry programs at the University of Southern California. “Reinventing could be a combination of retaining the wholesale business and selling some or all of the retail banners, or some combination yet undetermined. It could be an entry opportunity for an international firm that’s either not in the U.S. now or minimally present. There’s strength in many parts of the company, but it certainly will be different than it is today.”

ROOTS AS A WHOLESALER
Once upon a time, Supervalu was a leading wholesaler, but then it turned its attention to retail and now boasts of a network of 2,434 stores, according to its website, and ranks third nationally among traditional grocery retailers.

According to George, Supervalu was a “terrific” wholesaler about 15 years ago. “Supervalu was a wholesaler that always wanted to be a retailer, and they went on this whole thing with acquisitions—Albertson’s, Jewel, Acme and all these other markets—and I don’t think they ever had the expertise necessary to run retail centers,” George says. “People say, ‘How would you describe Supervalu as a retailer?’ I say, “Supervalu as a food retailer is an average wholesaler.”

Supervalu spokesman Mike Siemienas says 80% of the chain’s revenues come from the retail side and 20% from its wholesale operations. “Supervalu is financially stable,” he says. “We are a profitable company. We did make $41 million in profits this quarter. We have strong operating cash flows in excess of $1 billion and ample liquidity to meet our obligations,” Siemienas says. “This year, we expect to pay down at least $450 to $500 million in debt, which more than exceeds our current requirement.

“While we obviously did not hit our targets for the quarter, and we’re accelerating our plans to make changes, we are still financially stable, and we are still a profitable company. That’s something that’s really getting missed by a lot of people.”

Siemienas adds that Supervalu will not provide updates as its board and advisers review strategic options, but he says the company will share the final findings—even if it does not result in any transactions or changes in Supervalu’s business model. There is no announced timetable for the review’s completion.

Yet, one change came quickly: By late July, CEO and president Craig R. Herkert was out and board Chairman Wayne Sales was in as the supermarket chain’s new leader and strategist. By late August, it had restructured its management team, and in early September, Supervalu announced it would close nearly 60 supermarkets, including stores in its retail division and 22 Save-A-Lot locations.

“Quite honestly, our performance reflects the fact that we did not move quickly enough to respond to intensifying competitive conditions in our industry,” Siemienas says. “The grocery industry has become extremely competitive because all types of companies are now starting to sell groceries, from your big box stores to your club stores to discount dollar type stores to traditional pharmacies to every convenience store.

“We are accelerating our plan to lower prices. We plan to lower prices in half of our banners by the end of this fiscal year, and the other half by the end of next fiscal year. We began this in Jewel last month, our large banner in the Chicagoland area, and it will be completed by Labor Day.”

The roll-out plan may be accelerating in the Chicago area, but is it happening fast enough nationally?

“[Herkert] said it’s going to take them until 2013 to get all of their pricing initiatives in place. That’s a very long time in this industry, given all the competitive threats, to get their pricing in position. So I found that a little bit perplexing,” Hermanns says.

“I don’t know enough about this specific strategy—but I do know if I was deploying a lower-price strategy, taking a year and a half to roll that out, to me, would be risky.”
Walmart, Target and the Dollar stores, all major discounters, are players in the retail-grocery game these days. By making price reductions one of its major initiatives, it appears Supervalu plans to butt heads with them.

“I think it is approaching suicidal for traditional supermarkets to strive to match the low price grocery sellers,” says Bishop, also the chief architect of the website Brick Meets Click, which analyzes the future of shopping.

“It cannot be done. It can’t be done because the cost structures are different, so you will be out of business before that has an effect.”

Industrywide problem?
When Supervalu’s stock prices fell so fast on July 12, shares of fellow retail giants Kroger and Safeway dropped significantly, too, which prompted a question: Is Supervalu’s problem really an industrywide problem?

“This is an industrywide challenge, and what’s separating the horses on the track is how inspired and effective management is in dealing with this challenge,” Bishop says.

He adds that the challenge is industrywide for three reasons: People can buy groceries now in more stores than ever; the economy has made shoppers more price-conscious than ever; and the Internet has changed how people shop.

“People—particularly younger people—want to communicate with you the way they want to communicate, and if you don’t have those communications channels in place, they’re not going to work that much harder to communicate with you if somebody else does,” Bishop says.

“You put those three things together. And you have a challenge to what would be called the traditional supermarket, and the business model for the traditional supermarket.”

Technology allows today’s supermarket to know more about each shopper’s buying and spending habits than ever. So, connecting with each shopper through loyalty cards and emails is one tactic Bishop believes retailers should use.

He also says that retailers must recognize that today’s shoppers are highly segmented and that different segments are looking are looking for different things.

“If a retailer chooses to drop prices for all products for everyone coming through the door, that means they’re really going to please the people who are interested in prices, and they’re going to be giving away money and margin with those who put less emphasis on that,” Bishop says.

“Not only do you have to connect, but you have to divide your shoppers and then be able to give each group what they’re looking for from you. At the core, getting that kind of one-two step in place is what I believe is the only way out of the current dilemma. It’s the way in which you re-establish a unique relationship with the shoppers, and that’s critical.”

There’s another strategy Bishop believes should be enacted, too.

“On average, a household gives less than 50% of its grocery spending to the store that is its primary store. That means, even among your best shoppers, you’ve got a chance to increase your sales by 100% or more,” he says. Offering flu shots, for example, is a nontraditional way grocers can increase shopper spending.

George believes Supervalu, and its traditional retail brethren, must do more to differentiate themselves from the pack that occupies what he calls “The Big Middle” —stores that are neither discount nor high-end oriented.

“When you’re driving down the street, what’s going to make you turn into an Acme?” George said of the Supervalu banner in the Philadelphia area. “What will it be?

Dinner options, the most common being grilled, fried or rotisserie chicken, are also available to time-starved customers, who also can take advantage of what Siemienas calls each store’s “hyper-local” stocking strategy as well as Supervalu’s three-tiered private branding system that provides value, national-equivalent and restaurant-quality levels for shoppers.

Although some Supervalu strategies are already in place, the operations review by the retailer’s board members and analysts has yet to be delivered.

“They say they’re not going to file for bankruptcy, but they’ve been trying to sell these properties for the last few years,” George says. “I have no confidence at all that they have the ability to turn around.”

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