MINNEAPOLIS -- Consolidation in the wholesale industry is by no means over. Nor should it be.
That's the view of Mike Wright, chairman, president and chief executive officer of Supervalu here, who said in an SN interview that his company, the largest U.S. supermarket wholesaler, is poised to take advantage of numerous opportunities as the industry combines.
"My personal feeling is that the industry needs to have more consolidation so that we have wholesalers that are strong and can support the growth of independent retailers," Wright said.
"Consolidation on the wholesale side of the business hasn't stopped. It will continue. I think we're in a unique position to be a leader in this consolidation and take advantage of the opportunities."
While Wright doesn't predict the course of future mergers, he is interested in gearing Supervalu to benefit from increasing size and protecting it from the great pressures faced by wholesalers and independents.
His view is that Supervalu is now pointed on a course that will enable the company to weather the jolts and keep its independents on top. The company is reshaping its operations to adjust for marketplace changes and eyeing a range of options, not only on the wholesale front, but also in corporate retail as well. Among the highlights:
The operator is making progress in building its efficiencies to compensate for the absence of manufacturer promotional dollars. It is rolling out its new regional warehouse concepts, gearing a wide launch of its new customer pricing program and hitting a home run with category-management initiatives.
Supervalu is hoping to expand its role by becoming an outsourcing destination for chains, and is pitching its capabilities -- particularly its regional logistics expertise -- in discussions with retail operators.
The company will attempt to further increase its varied corporate food retail business, which is now one of the largest in the United States at close to $5 billion. That business is also helping the wholesale side of Supervalu by helping to spawn new formats and ideas.
Advantage Moves Ahead
Supervalu, which reported sales of $16.6 billion and net earnings of $176 million for the 1997 fiscal year ended Feb. 22, is in the midst of a massive change in business practices in a move that will deeply affect the estimated 4,900 stores it supplies in 48 states under a variety of banners. Of those, Supervalu operated a total of 322 corporate units at the end of the last fiscal year.
The company is moving ahead on its major re-engineering program called Advantage, which is redirecting its processes while negatively affecting financial results for now. Operating earnings in food distribution last year fell to $310.5 million from $334.7 million. "Earnings continued to be impacted by costs related to the Advantage transformation, such as increased computer and systems development expenses, overlapping staffing and training needs, as well as costs related to implementing the Southeast regional distribution facility," Wright said in a statement accompanying year-end financial results.
But Wright, who has been with Supervalu for 20 years -- all but four of those at the helm -- remains confident that Advantage provides Supervalu with a big advantage. It attempts to channel vendor promotional dollars through the supply chain, provide activity-based pricing, remove unnecessary distribution-operating costs and improve profitability. It's been fueled by the changing ways manufacturers go to market, switching from paying allowances for forward buy to focusing instead on what is sold, Wright noted.
"As the manufacturers take away that opportunity, we've had to make adjustments in logistics, pricing and sales or market-driven dynamics of our retailers," Wright stressed.
While the company has moved with speed, it has prudently slowed the pace of initiatives that could cause customer disruption. As examples, its new pricing initiative, certain to be controversial to some accounts and to challenge computer capabilities, isn't being rushed. Nor is the rollout of Supervalu's giant Midwest regional facility, which will cater to no fewer than 13 distribution centers in four regions.
The company's regional distribution plan is a cornerstone of its logistics program. Facilities will operate in a number of regions when the construction is complete. Regional programs will specialize in slow-moving grocery, and health and beauty care and general merchandise items, while doing some cross docking for faster movers.
"More cross docking, emphasis on continuous replenishment and moving inventory through the system faster and more efficiently is the whole concept behind the logistics," Wright said.
The first regional facility, now up and operating in Anniston, Ala., is serving five Southeastern distribution centers by consolidating slow-moving groceries, and general merchandise and HBC products. The second regional center is the Midwest one, the largest slated for the wholesaler. It is now under construction in Oglesby, Ill., west of Chicago.
"It will be the end of the calendar year before that's completed, and it probably won't be operating for a few months after that," Wright said. "It will open in two stages, first for general merchandise, health and beauty care, and then at a later date we'll add slow-moving grocery. Because it will serve so many facilities, you have a greater complexity of distribution centers and regions. So we want to take that in steps."
The company will also operate an East Coast regional facility using two existing warehouses in Pennsylvania and Maryland, and is mulling a Northwest facility. "We haven't made a decision on that one yet," Wright explained. "The reason is the distances there. The Northwest region is Denver; Tacoma, [Wash.]; Spokane, [Wash.]; and Billings, [Mont.] You start looking at a map, and this is not like being in Boston, where you've got all these cities around. So we'll work on the others first and save the Northwest for last. We want to make sure it's economical to have one out there. It may be more economical to let each facility do its own, as they have been doing."
Another foundation of Supervalu's Advantage program is its pricing concept, Activity Based Sell. It sets a dead-net selling price that reflects the wholesaler's actual cost and a three-part fee structure that reflects the costs for storage and handling, freight and product service.
A big benefit is that the program reflects to retailers the actual cost of purchasing products, including forward-buy dollars and expenses. The result is that retailers have more power to reduce costs by becoming more efficient.
The early results are encouraging from an ongoing test in Denver, Wright said. "We have found that it is a real stimulant to both ourselves and our retailers to get more efficient. We've been able to take quite a bit of cost out of the system with this arrangement.
"We continue to work with our Activity Based Sell in Denver and we will start rolling that out to some other divisions this year."
Wright concedes that the company is purposely taking short strides in this initiative.
"We've been taking this very slowly because we want to make sure our customers fully understand what we are doing and are comfortable with it," he said. "You can describe it all you want, but until they see how it affects them, they will wonder. Plus, the computer work behind the rollout is massive. That has also played a part in why we have taken our time. We're trying to get a lot of this invoicing and reflection of allowances on a real-time basis. That's been a significant computer challenge, and we're now at the [point in the] process where that's almost complete.
"Now we can feel comfortable installing that piece in Denver, and then start testing there and rolling it out to other divisions. So I would expect by sometime this summer we'll have another region starting with the ABS pricing."
Clearly the fastest success in Supervalu's repositioning is its category-management work with retailers, part of the wholesaler's effort to drive sales.
"We now have about 1,000 stores that we service in one stage or another of category management," Wright said. "We are very, very pleased in what we see are the results: reduced inventory in the stores, increased sales and increases in gross-margin dollars in those categories that have been reset. And we continue to aggressively roll that program out."
Financial analysts give Supervalu good marks for effort in its Advantage program, even though they note the jury is still out on the results.
"I think they are doing some innovative things in wholesale and are moving pretty deliberately," said Gary Vineberg, a securities analyst with Merrill Lynch, New York. "It's a tough business. They don't want to lose customers. There aren't signs yet whether or not it's paying off, but the ideas are valid."
"In general, Supervalu has the right strategy," said Charles Cerankosky, a Cleveland-based securities analyst with Tucker Anthony, Boston. "The company wants to increase efficiencies to make its independents as competitive as possible vs. the chains. Supervalu is in a good position to improve the company's structure and provide the right information technology to support independents."
Cerankosky said that the Supervalu distribution model -- a multilayered structure involving divisional and regional warehouses -- is close to the one being used by Cincinnati-based Kroger Co., the nation's largest supermarket retailer. "It's not a strategy for everyone," he said. "You must be multiregional to do it. The regional facility can serve different cities, which can support divisional warehouses."
Mulling Outsourcing Opportunities
As Supervalu maps its efficiency plans, it is focusing on more than just serving its existing base of stores. The operator hopes to lure some chain business on the strength of its advanced logistics capabilities.
Earlier this year, Supervalu picked up the supply business of 24-unit Schwegmann Giant Super Market, New Orleans, following the acquisition of that company by Kohlberg & Co., Mount Kisco, N.Y. Schwegmann's 268,000-square-foot grocery and frozens distribution center was leased to Supervalu. At the time, Mark S. Sellers, Schwegmann's president, CEO and chief financial officer, said Kohlberg decided to lease out the warehouse facilities "because from an economic point of view, the Supervalu deal made it more attractive than operating them ourselves." Wright said that its current search for chain business is largely sparked by a growing momentum to outsourcing by chains and Supervalu's ability to fill the needs. A big draw at Supervalu, said Wright, is the attraction of the regional facilities.
"A lot of people don't realize that the regional distribution center has the potential for being a separate business for Supervalu," he said. "People think of us as a wholesaler supplying all the needs of a particular retailer or retail group. But the regional center, with slow-moving grocery, health and beauty care and general merchandise, can also take care of those needs for national and regional chains. "Most of those items don't carry the velocity that you would like in your distribution center. And therefore, to outsource that would make logical sense. You may take a look at those items and say, 'I'll outsource those and keep the fast movers.' There's all kinds of different opportunities."
Asked if outsourcing is economically viable for chains, Wright said that changing times have altered the economic models. In the old way of doing business, a benefit of self-distribution was that the chains were capturing the forward-buy income and off-invoice allowances, Wright said. However, as such incentives decline, chains need to rethink their position, he added. Supervalu can provide distribution while passing on to chains monies from forward buy, diverting or other activities.
"The question is, do the chains want to put the capital into the distribution side of their business instead of the retail side?" he said. "The only reason I can see for them doing that is if they get a good return on distribution that exceeds the return they get on their retail stores -- and if they can do the distribution cheaper than we can do it. For some large national chains, they probably can do it. But for a lot of regionals, I think it would make very good sense for them to consider not making the investment in the back end of the business, but rather at retail, where their lifeblood will be."
Underscoring his claim that outsourcing is a growing industry trend, Wright said several industry chains have recently moved to outsource parts of their business.
"You go to build a new distribution center nowadays, and you're talking $50 to $100 million. You can build a number of good retail properties for that amount. I see this outsourcing trend continuing."
Wright said he believes some chains will seek Supervalu's services for parts of their distribution, while others will seek full-line services. Despite his excitement over the business potential of outsourcing, Wright said he couldn't yet disclose business prospects for Supervalu. "We probably will be in a better position in the near future to discuss specifics because we're in discussions with some chains about doing that aspect of their businesses," he said, declining to identify which chains. "The discussions are ongoing and we're encouraged by them. We're also talking to a number of drug retailers about supplying some of their needs as well."
Some analysts said the outsourcing option is an intriguing one for Supervalu if the economics are right. Jonathan Ziegler, a San Francisco-based securities analyst with Salomon Bros., New York, said chains including Safeway and Kroger have moved to outsource some parts of their logistics with specialists, which he takes as evidence that outsourcing is an important trend.
"Chains outsource if they need the expertise and technology," he said. "In the case of Supervalu, if the wholesaler can convince a chain that it can deliver lower landed cost than the retailer could on its own, then Supervalu has a strong position. Such a move might particularly interest smaller chains."
Tucker Anthony's Cerankosky said building an outsourcing business is "a possibility" for Supervalu because of the needs of certain chains. "Smaller and larger chains aren't as good at delivering slow movers," he said. "They may find Supervalu a reasonable way to go. Supervalu isn't there yet with the new business, but it's marketing itself."
Vineberg of Merrill Lynch said that though there is some outsourcing potential for wholesalers like Supervalu, that type of business shouldn't be counted on too heavily. "The retail marketplace is consolidating in favor of self-distributing chains," Vineberg said. "Supervalu may have picked up some new business, but it doesn't signify a trend. Chains are doing some outsourcing, but it's not that big of a deal. But it is an interesting concept worth trying for Supervalu."
Building Corporate Retail
In discussing the retail side of Supervalu's business, Wright said he is pleased with financial results as of late. Retail posted good results last year, with sales increasing 7% to $4.7 billion and operating earnings advancing 64% to $93.7 million. The corporate retail segment continued to grow last year. At the end of fiscal 1997, Supervalu operated 322 corporate stores, compared to 287 the year prior. The company said it will add 33 new corporate retail stores in the current fiscal year, including three Cub Foods stores and 30 units of Save-A-Lot, the limited assortment store format. Wright said he is satisfied with Supervalu's portfolio of retailers, which include supercenters bigg's and Laneco; price superstores Cub Food Stores and Shop 'N Save; superstores Scott's Food Stores and Hornbacher's Foods; and Save-A-Lot. In addition to operating stores corporately, Supervalu supplies many independents who also use these banners.
Wright stressed that at close to $5 billion in corporate retail sales, Supervalu is now one of the top retail operators, a fact he says too often gets overlooked in the industry. The result is that retail is boosting the company's overall financial results and leading to synergies with the wholesale side, he said. "It's a benefit to our independent retailers that we have both wholesale and retail," he said. "The efficiencies come from driving volume through distribution centers. Plus it's given us the opportunity to experiment with formats. We now have 115 Cub stores, and over half of those are operated by our independents. An outgrowth of that was the superdiscount format called County Market. The same thing with Save-A-Lot. Many of our independents are also now opening Save-A-Lot stores. So the spinoffs from these formats have been very beneficial to our independent customers."
Supervalu will grow the retail businesses primarily within existing markets, so most of the chains won't be eyeing new territories, Wright said. The company is also on the lookout for further acquisitions. In last year's third quarter, Supervalu acquired Fleming's 21-unit limited assortment chain called Sav-U-Foods, with plans to transfer those units to the Save-A-Lot banner. In addition, Supervalu plans to significantly expand Save-A-Lot's southern California presence in the future.
Save-A-Lot, which currently has over 600 units, most of them franchised, will grow at over 100 stores a year, Wright said. "Save-A-Lot will continue to expand very rapidly because it's a smaller format takes less capital and is easily licensed to other retailers," he said. Asked what 20 years at Supervalu has taught Wright about the food business, Wright paused for a moment and then mused about the quickening pace of change and the response of industry companies. "I've been in the business for 20 years, and most people outside the industry don't realize how much change has occurred," he began. "The outside world enjoys the benefits of the industry's remarkable efforts, but sometimes they don't understand the extent of our effort. The pace of change seems to accelerate. It puts a lot of pressure on all of us. I didn't realize how great this industry was. I'm proud of the position Supervalu has held and continues to hold in our industry."
