A basic tenet of investing is that, even in down markets, people need to eat. As a result, supermarkets are often seen as a safe bet, along with certain consumer goods that stock grocery-store shelves. Yet truisms don't always apply evenly, as SUPERVALU (NYSE:SVU) is finding out.
Despite an increase in the number of stores it operates, the grocery chain had flat sales of $10.2 billion in the second quarter. In fact, with same-store sales declining 1.3%, it was fortunate it was able to offset those numbers with greater square footage. While SUPERVALU has cut prices on many products and become more promotional, it hasn't been doing a good job of conveying that to consumers.
Contrast that with Kroger (NYSE:KR), the nation's largest supermarket chain behind Wal-Mart (NYSE:WMT). Kroger was able to label its second quarter a success with a 12% increase in sales by honing its message of being a low-cost leader. Although many supermarkets, including SUPERVALU, are now promoting private-label brands with gusto, Kroger has the most extensive program in the industry.
Another concept that has gained traction in supermarkets is organic, fresh produce, which was popularized and made a staple by Whole Foods Market (NASDAQ:WFMI). Kroger, Safeway (NYSE:SWY), and even Wal-Mart offer such selections, but the pricier produce may not be offering consumers enough value. It's tough to gain traction for produce that can cost twice as much as the regular stuff, and some studies suggest interest in the sector may be waning. It looks like SUPERVALU might have decided to get in on the action at just the wrong time.
Consider also that Kroger chose to pass along to shoppers many of the increased costs it experienced, while SUPERVALU made the decision to eat them. While that led to higher profits for Kroger and a hit to earnings for SUPERVALU, Kroger still saw sales rise.
A partial explanation may be that Kroger is seen as a low-cost supermarket all the time, like Wal-Mart with its “everyday low price” policies. That can’t be the only reason, though, since SUPERVALU’s Save-a-Lot chain ought to be perfectly positioned for these times. Perhaps we'll see that later on in the year. Then again, maybe not. SUPERVALU has pared back guidance for the rest of 2009.
The value proposition still seems to be the key here, and SUPERVALU says that some moves it has taken since the close of the quarter are already coming to fruition, as shown by high foot traffic in its stores. At just six times earnings, the grocery chain would seem to be priced to offer investors a good value, but the inconsistent way SUPERVALU has been moving would suggest investors might want to shop elsewhere.
You'll find great value in these related Foolish articles:
- It's not hard to label Kroger the industry leader.
- Organics looked like a healthy opportunity for SUPERVALU.
- But the economy has taken a healthy bite out of the segment.
