SUPERVALU (NYSE:SVU) once dominated the discount grocery segment. However, increased competition from discount chains such as Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) has left SUPERVALU fighting for its life. SUPERVALU's stock also took a hit last month when takeover talks broke down between the company and private equity group Cerberus Capital Management. As a result, shares plummeted more than 12% and are down nearly 70% year to date. Let's take a closer look at what is at stake for current shareholders as SUPERVALU struggles to keep its head above water.

A tough 2012
The company's shrinking market share and deteriorating profit margins have made SUPERVALU a hard sell. To be sure, SUPERVALU posted a year-over-year net sales decline of 5% for its second quarter and weak same-store sales. The reality is that more shoppers are choosing to buy grocery items from discount retailers like Wal-Mart and Target.

Last year, Target took a page out of Wal-Mart's playbook and expanded its superstores to include fresh and packaged food items. For these stores, everyday products like snacks and perishables pull more customers through its doors. While groceries render lower margins, the hope is that once in the store, customers will buy other higher-margin products as well.

SUPERVALU, on the other hand, is plagued by a higher cost structure that impairs its ability to compete with discounters and supercenters such as Wal-Mart and Target. And these days, even dollar store chains are offering groceries as a way to drive more customers to their stores. This is a trend that's left SUPERVALU and other traditional grocers bleeding market share.

Dollar General (NYSE:DG), for example, is hoping to become a one-stop shop by increasing the number of "Dollar General Markets" across the United States. This has so far proved to be a winning strategy for the company. By adding food and beverage brands like Coca-Cola and General Mills to its shelves, Dollar General has gone from a $13 million loss in 2008 to positive $1.3 billion in 2011, according to Forbes.

A troubled takeover target
As Dollar General and others remodel locations and add new platforms to their stores, SUPERVALU continues to fall further behind its peers. Moreover, investors who were once in this company for its rich dividend have since fled. SUPERVALU benched its quarterly dividend earlier this year in favor of strict cost-cutting measures. Nevertheless, some investors have stuck around in hopes of a possible sale.

With mass retailers, wholesale clubs, and dollar chains continuing to steal market share away from SUPERVALU, Cerberus Capital could probably get away with paying a lower multiple in a possible bid for the entire company. For this reason, SUPERVALU may be able to generate more value by instead individually selling parts of its business to local competitors who are willing to pay higher premiums.

Morningstar analysts point out: "Although the process of multiple sales will obviously take much longer than a potential single transaction to Cerberus, divesting the assets in a methodical manner should yield the maximum value for the firm and shareholders."

Yet another option would be for Cerberus to buy SUPERVALU's Albertsons locations. Current shareholders may want to stick around as long as talks of a buyout are still ongoing. However, if discussions with Cerberus fall through, then SUPERVALU may attempt a turnaround on its own, at which point I would consider selling.


Fool contributor Tamara Rutter owns shares of Target. The Motley Fool owns shares of SUPERVALU. Motley Fool newsletter services recommend The Coca-Cola Company and SUPERVALU. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.