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Herkert Outlines New Vision for Supervalu

Craig Herkert, the president and chief executive officer of Supervalu here, said last week he envisions the company becoming America's neighborhood grocer one that pursues a customer-centric focus and views itself as a single, integrated entity rather than a series of individual banners. In a conference call to discuss second-quarter financial results in which sales and profits fell sharply

MINNEAPOLIS — Craig Herkert, the president and chief executive officer of Supervalu here, said last week he envisions the company becoming “America's neighborhood grocer” — one that pursues a customer-centric focus and views itself as a single, integrated entity rather than a series of individual banners.

In a conference call to discuss second-quarter financial results — in which sales and profits fell sharply — Herkert outlined his vision for Supervalu for the first time since taking over as CEO in May. It includes the following:

  • Building market-share growth based on geography rather than banner, which could mean expanding Save-A-Lot or some of Supervalu's independent wholesale customers into new marketing areas.

  • Doubling the size of Save-A-Lot, the company's 1,200-unit, limited-assortment banner, within five years.

  • Leveraging purchasing power across all banners and working with vendors to rationalize assortments, with a goal of reducing SKU counts by 10% to 20% over the next year.

  • Continuing to centralize buying and merchandising operations.

  • Making better merchandising decisions to fund investments.

  • Focusing capital in key markets and smaller sub-markets.

  • Divesting non-strategic assets.

Industry analysts contacted by SN last week were guarded or outright skeptical about the vision he laid out.

Karen Short, a New York-based analyst with BMO Capital Markets, Toronto, said Herkert's plan was “detailed in nature [but] short on details.”

“We do see some opportunities to improve profitability of the business through increased operating efficiencies, but several markets face significant challenges, and many of these initiatives will be offset by competitive challenges in a number of the company's key markets.”

Meredith Adler, a New York-based analyst with Barclays Capital, London, said Herkert's strategy “makes sense, but execution will likely be challenging.”

She said Supervalu has some good assets, particularly the Albertsons stores, most of which are in relatively protected markets. “Despite that, most stores were not well positioned to deal with consumers' rapid shift to a value orientation, nor was there enough discipline around store-level execution,” Adler noted.

She applauded Herkert's move to invest more in lower shelf prices, “yet the company will also need to maintain attractive promotions to drive traffic, which could put exceptional pressure on margins for multiple quarters.”

John Heinbockel, an analyst with Goldman Sachs, New York, said Herkert's vision lays out “an interesting approach [that will require] more detail as to how the organizational structure will change to support this and how management will ensure someone takes ownership of the different markets.”

The increased attention to Save-A-Lot, “the most attractive business in [Supervalu's] portfolio,” makes sense, he added.

Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, said he likes the prospects for an expanded Save-A-Lot operation in the current economic environment and the concept of looking at markets by geography rather than banners.

“But the company has to take a hard look at the overall sales performance of its conventional stores, which have weak same-store sales, and turn that segment around” for Herkert's full vision to succeed, he noted.

Herkert stressed his plans to “grow market share by emphasizing geography over banner and ownership, which will enable us to choose the format that best serves a given neighborhood.”

In Chicago, for example, that could mean introducing Save-A-Lot into a market where the company's Jewel-Osco banner has historically been the primary focus.

“For the first time we are looking at all that we offer in a market and how that totals up to market share and gives us leverage,” Herkert said.

He cited the example of a conventional supermarket group Supervalu supplies, which he declined to name, that has been successful putting stores in the same strip malls as Save-A-Lot.

“We think there is an opportunity for us to behave that way,” he said. “This integrated point of view will dramatically change how we grow.”

Save-A-Lot will be more top-of-mind as Supervalu looks for ways to maximize market share, Herkert added. “We will approach Save-A-Lot with a new and heightened sense of urgency,” he said.

To leverage the size of its diverse store network more effectively, Supervalu will seek to achieve “best-in-class product cost by acting as one integrated company,” he said. “We think there is an opportunity to dramatically change the cost structure of this business and to improve the terms we get from our vendor partners.”

For example, he said the company recently realigned a small grocery subcategory within a total store network where 65% of sales were from its own private-label lines, with the balance spread over three national brands. “In that instance, we concluded that we did not need three national brands and, in fact, duplication in this subcategory only made shopping more difficult for customers.” (See “Retailers Increase Focus on SKU Rationalization” in the Oct. 12 issue of SN for more on this effort.)

Toward that end, he said Supervalu has divided Center Store products into five groupings: invest, optimize, support, maintain or exist. Of the first 12 Center Store categories the company looked at, which came from the “support” and “maintain” groupings, Herkert said assortments will soon be reduced by 15% to 20%.

Net income for the 12-week quarter, which ended Sept. 12, fell 42.2% to $74 million, while sales fell 7.5% to $9.5 billion and identical-store sales in the retail division fell 4.8%. For the half, net income was down 35.5% to $187 million, while sales declined 5.9% to $22.2 billion.

Herkert said ID sales in the first five weeks of the third quarter have softened. “Supervalu must transform itself into a business that is customer-focused, dynamic and agile enough to meet the evolving needs of its customers,” he said.