ST. LOUIS -- Save-A-Lot here, a wholly owned subsidiary of Supervalu, Minneapolis, is developing a format so simple it's a wonder no one has tried it before: a combination limited-assortment grocery and dollar store.
To pull it off, the company is relying on its own experience with limited-assortment groceries and the expertise of the St. Louis-based dollar store chain it acquired last year, Deal$-Nothing Less Than A Dollar, Bill Moran, Save-A-Lot's chief executive officer, told SN.
Moran explained that bringing low-cost groceries and low-cost general merchandise to the same store requires two very different approaches.
In the case of groceries, Moran said "efficiency in procurement and handling the product" are what enables the company to offer low prices. He noted that Save-A-Lot has a distribution network entirely separate from the one its corporate parent, Supervalu, uses to serve its retail customers. That separate network, with its 14 food warehouses and one general merchandise distribution center (with another one scheduled to open soon in Columbus, Ohio), plays an important role in keeping costs down, he explained.
"It helps that these distribution centers are set up to handle a strictly limited number of stockkeeping units at high velocity," Moran said. "There are efficiencies that can be extracted from that model that simply couldn't be achieved in a distribution center that handled 30,000 SKUs."
Industry observers pointed out several other ways Save-A-Lot is able to rein in costs. Gary Giblen, senior vice president and director of research, C L King Associates, New York, noted that Save-A-Lot tends to favor recycled real estate over more expensive green-field development.
"Typically, they have stores that were originally something else," Giblen said. "It's inexpensive real estate because it's left over."
Moran noted that "most of our stores are the second or third use of the property."
An emphasis on private label is another hallmark of Save-A-Lot's grocery offering, according to Chuck Cerankosky, an analyst at McDonald Investments, Cleveland. "The SKU count is dedicated to controlled labels, labels that only Save-A-Lot develops and sells," he said.
On the general merchandise side, Moran said the company relies on the Deal$ procurement model. The dollar store's buyers "have spent significant time in East Asia dealing directly with the people who manufacture the products and not with brokers or third parties," he explained.
Moran added that the general merchandise, while inexpensive, is not a collection of retail rejects. "General merchandise is primarily not diverted product or closeouts," he declared. "And we don't deal in distressed merchandise, salvage or outdated product at all."
Commented Neil Stern, a senior partner at McMillan Doolittle, a Chicago retail consultancy, "The important thing Supervalu did in acquiring the Deal$ company was getting their access to product and their procurement skills. This is a different kind of buy."
On the grocery side, the result is that Save-A-Lot offers consumers products at prices an average of 40% below those at conventional supermarkets, according to Moran.
However, the CEO was somewhat less forthcoming about his company's gross margins. He declined to comment on grocery margins at all. Analyst Giblen estimated they are probably below those of conventional supermarkets.
Moran also declined to give a figure for general merchandise margins, although he did note they are "quite a bit stronger than grocery margins." He added that these higher margins was one reason his company had acquired Deal$.
Consultant Stern noted that general merchandise margins at publicly traded dollars tend to run to about 35%, which makes them quite strong indeed.
The growing presence of general merchandise, the industry observers said, also gives Save-A-Lot an additional way to differentiate itself from its principal competitor, Batavia, Ill.-based Aldi. Even before it started adding the dollar store items, Giblen said, Save-A-Lot had a better food offering, particularly in perishables, than Aldi.
And while Moran said he is still assessing customer acceptance of the new format, the industry observers told SN they already think the combination stores are likely winners.
Willard Bishop, president, Bishop Consulting, Barrington, Ill., said, "What's good about Deal$ for Save-A-Lot is that it gives people an additional reason to visit the store. It also gives the company some additional higher-profit products to be able to get to the margin structure they need and still offer exceptionally low-priced groceries."
Stern said the format's expansion potential "could be unlimited."
And Giblen enthused, "I think it's probably the best retail format any wholesaler has, maybe the best format in existence."