SUPERVALU'S CROWN JEWEL

Reporting: Martin Schneider

Save-A-Lot's success and rapid growth is partly due to attracting lower-income shoppers seeking value. The price-impact chain is about to get a boost in its assortment with Supervalu's acquisition of Deal$ inked this month.

ST. LOUIS -- Quick quiz: How many food-distribution companies have as many as 1,000 stores under a single banner?

Well, there's a few power retailers who could lay claim to such an achievement, including Wal-Mart Supercenters, Kroger, Albertson's, Safeway and Save-A-Lot.

Save-A-Lot?

It's true. Earlier this month the 1,000th Save-A-Lot store was opened in Waterbury, Conn., allowing that small-footprint, price-impact format to join the rarified number of food retailers with so many outlets.

Save-A-Lot is a store format that's run from here but which for a number of years has been owned by Supervalu, Minneapolis, the nation's largest company that's primarily in the food-wholesaling business.

In recent years, Save-A-Lot -- seemingly little more than a bijou at 12,000 square feet or so -- has become something of a jewel in Supervalu's crown. Today, Save-A-Lot generates more than $4 billion in annual sales, pulling product from 14 Supervalu distribution centers. Supervalu's total sales volume is more than $21 billion.

And, in another development that occurred this month, Supervalu acquired the locally based 45-store extreme value general merchandise chain Deal$. That acquisition is expected to lead to the integration of general merchandise into the Save-A-Lot format, expanding it into something of a low-end mini-supercenter.

How did such an edited assortment format such as Save-A-Lot grow so large and contribute such a significant proportion of Supervalu's total top line?

In interviews with SN, two topside executives responsible for the format -- Jeff Noddle and Bill Moran -- talked about Save-A-Lot. Jeff Noddle is Supervalu's president and chief executive officer; Moran is Save-A-Lot's CEO. (Noddle is to add the title of chairman of Supervalu next month.)

Moran is the executive with the heavy experience at Save-A-Lot. He opened the first Save-A-Lot in 1977 and, in a couple of years, expanded the operation to 29 locations. Save-A-Lot became part of Supervalu when the company acquired Save-A-Lot's former parent, Wetterau, in 1992. (There were other earlier ownership permutations. See Time Line.)

Growth Factors

The acquisition by Supervalu sparked a period of rapid growth for the format. The chain has grown by nearly 600 stores since 1994 alone.

Said Noddle: "Since 1994, our store base has more than doubled. Our eight-year compound annual growth rate, from fiscal 1993 to fiscal 2001, is 12%." Powering that growth is a combination of entrepreneurship layered on corporate ownership: Less than half the current store count is corporately owned; the balance is licensed to individual owners.

In Noddle's view, the ownership mix allows owners of franchised stores some autonomy in running stores, and has the benefit of reducing some of Supervalu's costs, too.

But the real key to Save-A-Lot's growth has been its surgical targeting of a demographic. The store is aimed at households with incomes of less than $35,000, and many families fall in that income segment. "That's more than 40% of the country's population," Noddle said.

During the first decade of Save-A-Lot's development, the store was not considered to be a destination-shopping format, Moran told SN. During that time, the demographic was families with incomes less than $25,000, and the stores did not have full-service meat and produce departments.

Currently, though, Save-A-Lot offers a fuller, although limited, product mix. Stores typically offer some 1,250 stockkeeping units. The assortment is heavy on shelf-stable, private-label goods, up to 80% of distribution; produce and meat are also offered. The fuller mix opens the stores to a larger shopping pool.

"Even though we cater to households under that $35,000 mark, we really meet the need of anybody seeking value," Moran said. "And as long as we continue to stay focused on that target -- value -- we will succeed."

Securities analysts told SN they consider Save-A-Lot to be a format that should be able to grow for some time to come. Jonathan Ziegler, San-Francisco based managing director with Deutsche Banc Alex. Brown, New York, called the Save-A-Lot format the "gem of Supervalu's retail fleet. It's become quite visible in the marketplace; people recognize the banner as a brand now."

Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said, "It's a fine format, a real evolution of price-impact retailing. They have found a market niche and fill the need well."

Steve Chick, analyst with JP Morgan Chase, New York, said he believes Save-A-Lot will be the key driver of Supervalu's revenues in the coming years.

Competitive Challenges

No matter how fast-growing the format may be, Save-A-Lot faces formidable competitive challenges, Noddle said, and that would include every other format that sells food.

Perhaps the closest competitor Save-A-Lot faces is the German retailer Aldi. That company operates more than 600 stores, with a small-box blueprint similar to that of Save-A-Lot. Moreover, Fleming Cos., Dallas, also is rolling out similar price-impact formats flagged Yes!Less and Rainbow.

As of the end of 2001 Fleming operated 116 price-impact stores, including 99 Food4Less and Rainbow stores and 17 Yes!Less limited assortment stores.

"We go head to head with Fleming's similar formats in Dallas [Yes!Less] and in Minneapolis/St. Paul [Rainbow], and the results have been promising [for Save-A-Lot]," Noddle said.

Said Moran: "We don't have more than 3% share in major markets because our stores are so small. And even when we add more stores, we don't expect to gain noticeable amounts of share. But there are some rural areas in which we operate where we control 30% of the market."

Moran also said that the Save-A-Lot format does not overlap with Supervalu's other price-driven banner, Cub.

Save-A-Lot's versatility offers Supervalu a foundation for a national format that could grow to a store base of at least 2,500 stores, Noddle said. Moran said that the chain will open several stores in new or developing areas, including areas such as Baltimore, Colorado, Chicago, the Gulf Coast of Florida, New Orleans and Phoenix.

Moran said he expects the chain to reach 2,500 stores in the next five to 10 years. "As we continue to evolve the format, we realized we don't really know what the limit is for the chain, since our appeal is so broad."

Geographically, Noddle said the chain will expand as far as Supervalu's distribution network can allow. And international expansion is a distinct possibility.

Right Deal

Be that as it may, a new domestic-growth strategy was unveiled when Supervalu acquired Deal$ here. A general merchandise depot was part of the deal. No purchase price was disclosed.

The concept is to integrate some 4,000 SKUs of general merchandise from Deal$ into the Save-A-Lot format, yielding a store of about 18,000 square feet, or about 6,000 square feet larger than many current Save-A-Lots.

"[The acquisition] is the culmination of a yearlong effort to develop a general merchandise strategy to support the next phase of expansion at Save-A-Lot," Noddle said. "By introducing general merchandise product into Save-A-Lot, and following the same disciplined approach that secured Save-A-Lot's leadership position, we can positively influence the growth of our extreme value retail business over the long term. We are pleased to find the right 'deal' to accelerate our Save-A-Lot growth plans."

Moran added, "Deal$ is a young company that has effectively competed in the dollar store marketplace. The experienced retail management at Deal$ will complement our team at Save-A-Lot. Over the next few months, we will finalize a new Save-A-Lot prototype that represents a combination store of grocery and general merchandise. Save-A-Lot is well-positioned for its next phase of growth as this nation's No. 1 extreme value grocery retailer."

The addition of Deal$ means that Save-A-Lot's expansion plans will be accelerated to 150 stores in fiscal 2003 compared to approximately 100 in fiscal 2002, Noddle said.

Save-A-Lot At A Glance

Format

Limited assortment food chain. Offers the highest-quality groceries -- both exclusive label and national brands -- at savings up to 40% over conventional grocery stores. Stocks the most frequently purchased grocery items, generally one size and one brand per item. Offers 1,250 basic grocery, produce and meat items (the majority are store brands ) vs. 30,000 or more products in a typical supermarket.

Number of stores

More than 1,000, with the majority licensed to independent operators.

Locations

In 36 states, ranging from Maine to California, with a heavy concentration of stores east of the Mississippi River.

Size of stores 12,000 to 14,000 square feet.

History

Launched in 1977 by founder Bill Moran, who is the current chief executive officer. Became part of Supervalu with acquisition of its former parent, Wetterau, in 1992 (see Time Line).

Save-A-Lot Through the Years

1977

First Save-A-Lot opened in Cahokia, Ill. Save-A-Lot's edited assortment format was immediately successful, allowing small, licensed retailers to compete with the larger chains.

1978

General Grocer Co. adopted Bill Moran's idea, bought the rights to the edited assortment concept and opened five stores in the St. Louis area.

1979

Save-A-Lot expanded to 29 locations.

1980

Save-A-Lot added 52 locations and opened a warehouse in Jackson, Tenn.

1983

Wetterau, a St. Louis-based food wholesaler and retailer, bought General Grocer Co. Soon after, Moran repurchased Save-A-Lot from Wetterau.

1984

Moran aggressively expanded Save-A-Lot's operations, purchasing 76 Jewel T stores and two additional warehouses -- one in Pennsylvania and one in Florida.

1988

Wetterau exercised a buyback option. Moran agreed to continue as president and chief executive officer of Save-A-Lot.

1992

Minneapolis-based Supervalu acquired Wetterau and, with it, Save-A-Lot. The company continues to operate as a wholly owned subsidiary of Supervalu.

2002

Save-A-Lot is the 13th-largest retail grocery chain in the United States and the sixth-largest under one banner. It opened its 1,000th store earlier this month in Waterbury, Conn. Retail sales chainwide exceed $4 billion.