A few weeks ago, I commented on fourth-quarter sales and earnings for SUPERVALU
The not-so-good news was that earnings before taxes (EBIT), excluding unusual items, was lower as a percentage of sales than prior to the acquisition. In other words, every sales dollar is generating fewer profit dollars than previously. One would expect consolidation synergies to drive this "penny profit" metric higher, not lower.
Last week, the company gave us a glimpse of its strategic thinking for the next few years at a Lehman Brothers retail seminar. Let's look at what SUPERVALU has in mind to drive sales and earnings as we approach the one-year anniversary of the Albertsons acquisition.
Clarity on the business
I had always been a bit leery of SUPERVALU because of its dual focus on retail and distribution. Prior to the acquisition, the company's annual revenues were evenly split between grocery store sales and distributing goods to other grocery chains. I have always believed a single-minded focus on what you do best is a key to long-term success, particularly in the retail world.
The Albertson's acquisition has focused the company squarely on driving retail success, as 75% of its revenue and 82% of its EBIT now come from retail operations. I see this as a very positive outcome for SUPERVALU. The company will now be successful (or not) based on its ability to drive sales and margins and to manage expenses in the grocery stores. Distribution has become a support function, not one of the primary drivers of the business. Clarity is good.
Brand strategy
The accepted retail trend in recent years has been toward fewer (more powerful) brand nameplates, merchandise consolidation, and consistent store operating procedures. The reasons are clear and compelling. Maintaining a brand is expensive and time-consuming, and the easiest way to drive operating synergies is through simplification and standardization of how a retailer goes to market.
A recent example is Federated
SUPERVALU is charting a different course. The company operates grocery stores under more than 10 different nameplates, including Star Market, Shaw's, Jewel-Osco, Cub Foods, Farm Fresh, Savon -- the list goes on and on. This is bucking the general retail consolidation trend but is not without merit. The grocery business has its roots in a local store serving customers within a two- to three-mile trade area. SUPERVALU is continuing this tradition with local brands that are established within their marketplace (Jewel-Osco in Chicago, Cub Foods in Minneapolis, etc). No need to invest in building local brand loyalty.
The company is also allowing its field operators to decide how best to merchandise to their local customers, then taking the most successful regional merchandising strategies and applying them in other parts of the country. It's a fascinating concept, concluding the corporate merchandising group doesn't have all the answers and allowing field operations to call a lot of the merchandising shots.
Driving sales
SUPERVALU is pursuing a variety of sales-building strategies. Customer service initiatives include reducing checkout wait times (for example, by opening a new register when three customers are in line) and more personalized service through "greet, offer, and thank." Increasing the depth of organic food offerings is an attempt to tap into a fast-growing market. The company is also rationalizing its private-label offerings to increase shopping cart penetration from its current levels in the mid-teens to the national average in the mid-30s.
Fresh food is clearly a differentiator in the grocery business. It's hard to find a more creative way to merchandise cereal, so the most noticeable way to stand out from other grocery competitors is to have outstanding fresh offerings. SUPERVALU is embarking on an aggressive program to remodel its stores. The company will spend $1.2 billion in capital next year, largely on remodels targeting the fresh departments, a program it calls "Premium Fresh and Healthy." The goal is to have 80% of stores new or remodeled within the next seven years.
The company is targeting 1%-2% comp-store sales this upcoming year. That doesn't sound to me like they're setting the bar particularly high. Kroger
Distribution
This is a part of the business SUPERVALU knows very well. The company operates 35 distribution centers in the U.S., serving 5,000 retail end points. I would expect significant synergies to be realized from an acquisition that doubles a company's retail presence, but there wasn't much on the call about supply chain initiatives.
SUPERVALU is deploying automated case handling at its Hopkins, Minn., distribution facility, with plans to roll out the technology (called "T Squared") in Pennsylvania later this year. The company expects to realize benefits of aisle-ready pallets, customized pallets, and higher picking accuracy, but did not quantify expected savings from the initiative during the call.
The Foolish bottom line
The grocery business is a fascinating channel to observe these days. For the past 10 years, traditional grocers have been mauled by new business models, such as Wal-Mart Supercenters, which combine food and general merchandise in a one-stop shopping environment, and rapid growth in warehouse clubs, which offer rock-bottom prices. Grocers are fighting back through improved service, premium fresh offerings, and customized local merchandising. Who will win at the end of the day? I see traditional grocers starting to make some headway. SUPERVALU is determined to be a major force and appears to be making some of the right moves.
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Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles. Timothy owns shares of Wal-Mart but none of the other companies mentioned in this article. The Fool has a disclosure policy.
