Save-A-Lot's New Outlook

JON SPRINGER

Save-A-Lot is rallying behind the conviction that the lower-income grocery shopper is underserved in more ways than one.

Not only is the opportunity to serve them vast and growing, but there is plenty of room to improve the means by which they're served, Save-A-Lot officials acknowledge. The prospect of simultaneously growing faster and serving better has sparked Save-A-Lot to adopt a new approach to marketing and merchandising that is making over its 1,200 corporate and licensed stores in the U.S.

Officials of Supervalu, the Minneapolis-based parent of Save-A-Lot, describe the new approach as “consumer-centric” — the industry term for approaching the business from the standpoint of the shopper, as opposed to operating primarily to meet company goals of efficient logistics. For Save-A-Lot, which had built a franchise on low-cost, relentless efficiency that sometimes reflected negatively in the stores, it is a fairly radical shift in philosophy.

“We are moving to a customer-centric model, a shift that calibrates our traditional operating standards to become increasingly innovative in our approach to presenting extreme value to our customers, but still maintaining the systemwide efficiency that Save-A-Lot is known for,” Mike Jackson, chief operating officer for Supervalu, said in a presentation earlier this year.

This new positioning, Jackson added, not only will better serve the core Save-A-Lot customer, but also positions the retailer to benefit from a trend toward value shopping as concerns over food inflation and high fuel prices have come to roost in the shopping habits of consumers of all economic stripes.

“From a strategic standpoint, Save-A-Lot is in the right part of the market with the right kind of store,” Neil Stern, senior partner with McMillan Doolittle, Chicago, told SN. “If anything, the market is moving toward them. You're seeing more of these 15,000-square-foot boxes getting looked at by all retailers, and they are already there. So it's a matter now of how they execute it.”

The case for Save-A-Lot's new focus is compelling and compellingly simple: The market for lower-income shoppers is large, underserved and growing.

According to figures cited by Jackson, there are currently 42 million households in the U.S. with income of less than $35,000 per year. This group represents annual grocery spending of $97 billion, or about one-fifth the country's entire grocery spend. Yet, limited assortment, extreme value and dollar stores combined — including Save-A-Lot — capture only 22% of that $97 billion opportunity, Jackson explained. “There are significant growth opportunities there,” he said.

And it's an opportunity that will continue to grow, he added. By 2011, Supervalu expects 44 million households will make less than $40,000 per year and spend around $115 billion annually on groceries.

“Their strategic positioning is right — not just now, but from a long-term standpoint,” said Stern. “There's a big chunk of U.S. consumers who are very value-driven and need to save money on groceries. This is not an economic blip for a lot of people — they need to save money. So Save-A-Lot is positioned, along with Aldi, to truly serve this market.”

Shoppers from higher economic brackets “trading down” to Save-A-Lot also represent a significant opportunity, Jackson noted, saying that changes at Save-A-Lot could help the chain benefit from a trend toward consumers fragmenting their shopping trips among several stores.

“Consumers are showing us they are willing to shop a wider range of stores and formats for low prices,” Jackson said. “In addition, they're willing to trade brand names for a strong per-pound price proposition, even when they're not familiar with the brand name.”

This trend is an obvious opportunity for Save-A-Lot, where retail prices tend to run 40% below conventional competitors' prices, and private-label items comprise around 80% of the selection.

And it is here where some Save-A-Lot licensees said they sense the greatest opportunity.

“I couldn't prove this to you, but I have a gut feeling that people are going to start trading down, and if so, we've got to have a store that people are comfortable trading down to,” Mike Lofino, a Dayton, Ohio-based merchant who operates 12 Save-A-Lot stores, told SN. “I don't mean trading down in a derogatory sense. But as people's income levels shrink, they're going to start looking at a Save-A-Lot today where they wouldn't look at a Save-A-Lot two years ago.”

Lofino said the changes bring Save-A-Lot closer to parity with conventional competitors and are drawing a younger demographic.

“I think the Save-A-Lot customer might have been a little bit older than we would like to have had. A lot of the things we're doing now appeal to a younger customer, bringing the stores up to a profile that's more competitive with what conventional stores are doing,” Lofino said. “Quite frankly, if you look at the history of Save-A-Lot, it was a store in the county seat of a rural area, and it had a niche and serviced it. That's come around full circle now. Today, you're in more urban areas, you're dealing with more ethnic groups. There's been changes in the industry, and you have to change with it.”

Tom Jamieson, an independent Save-A-Lot licensee in Uniontown, Pa., added that he felt the tighter economy was a positive for his Save-A-Lot units.

“Eight out of my nine stores have increased by 5% this year,” he said. “Maybe the economy going sour is keeping people at home more and having them shop at the low-price leader, which, in my markets, is Save-A-Lot.”

Save-A-Lot began a move toward a “customer-centric” positioning under Bill Shaner, who has been running the chain as president and chief executive officer for the past two years. While officials stressed they wouldn't sacrifice the pillars of efficiency upon which the Save-A-Lot model was based, they detailed new philosophical underpinnings of the shift in a presentation at the company's annual investors conference this year.

The change, officials explained, highlighted moves from “tradition” to “innovation.” Where the prior approach emphasized intuition, product attributes and price, the new philosophy values data, brand benefits and emotional connections, respectively. Standard assortments and rigid limits on SKUs are phased out in favor of regional assortments and customized selection. The focus on operations has been replaced with an emphasis on selling and marketing. Where Save-A-Lot once aspired to “serve” customers, it now seeks to “engage” them.

Where other food retailing companies, most notably Kroger, have effectively managed a similar change in perspective, it is not an easy shift, observers said.

“You have to be committed to it, and really mean it, to change your strategy, tactics and culture,” Andrew Wolf, an analyst for BB&T Capital Markets, Richmond, Va., told SN. “And if that resonates with customers, you'll be successful over time. But you have to have conviction.”

The changes have been embraced by Save-A-Lot's licensed retailers, several of whom told SN that they felt the corporate office has become more receptive to their suggestions and more sensitive to their calls for local product selection.

“If you're not reinventing yourself every so many business cycles, you're going to go away,” said Jimmie Gipson, CEO of Houchens Industries, the country's largest Save-A-Lot licensee, operating 220 locations from New York to Texas. “It's not at all like it was in 1990 when we first began with them. They're adding more product lines, more name-brand special buys, being more responsive to local needs for perishables.”

The new philosophies at Save-A-Lot are playing out in a series of marketing and merchandising initiatives launched over the last two years. Primary among these is shifting the company to four regions — Northeast, South, Southwest and North — to customize product assortments and respond more quickly to local changes, Jackson said.

Introducing customers — particularly new shoppers — to the Save-A-Lot fold is one of the goals of a “Produce First” initiative that moved the produce departments to the front of the stores at more than 300 locations, Jackson said.

This arrangement also provides Save-A-Lot with an opportunity to highlight local merchandise, as it did in certain Michigan stores last summer when it partnered with the Michigan Department of Agriculture and its “Select Michigan” program involving more than 100 local produce growers.

Save-A-Lot intends to expand the “Produce First” program to around 60 new stores this year.

When customer research revealed that Save-A-Lot shoppers tended to be particularly brand-loyal to certain soft-drink and snack national brands, the retailer integrated those products in its corporate stores for the first time (some Save-A-Lot licensees already had this option, sources said). The sets of 30 Coca-Cola items and 12 Frito-Lay items provided a sales lift that was entirely incremental and did not cannibalize store brands, Jackson said.

A consumer focus also revealed unique issues and opportunities with regard to health, Jackson said. Incidence of diabetes, for example, is four times higher in the Save-A-Lot demographic than the overall U.S. population. This prompted Save-A-Lot to roll out a 42-item set of “Healthy for You” products that are marked with a logo indicating low-calorie, low-sugar, low-fat or low-sodium products.

Jackson said sales of those items have exceeded expectations and that the sets will be rolled out at all Save-A-Lot stores this year.

Save-A-Lot has also begun to add beer and wine to stores in areas where it is permitted, and has been adding financial services such as check cashing, wire transfers and bill payment to certain stores.

The latter moves have helped a customer base “underserved by the traditional banking system” and have boosted traffic among the 73 stores where it had been rolled out earlier this year, Jackson said. Beer and wine sales, he added, have been “promising,” but he acknowledged that it will take some time to shift buying patterns among shoppers. Save-A-Lot currently offers beer and wine sales in three states.

The new outlook at Save-A-Lot extends to a receptiveness to its independent merchants that didn't exist before.

“As an independent, you could look at a Save-A-Lot and think, ‘I could sell this, or I could sell that,’ but you weren't allowed to,” said Jamieson, the Pennsylvania-based independent licensee. “Now, you can customize your store to the area you're in.”

Save-A-Lot's traditional plan strongly emphasized uniformity among stores, with the feeling that continuity would bring discipline to independent merchants and foster a unified national brand. Jamieson is outspoken about allowing independents to bring local expertise to that package.

“There is no doubt we had consistency — if you went to one store, you'd see the same things in every store. And at one point, 10 years ago, that worked,” Jamieson said. “But if you don't change with the times and change with your trade areas, there are a lot of opportunities that pass you by.”

According to Jamieson, the new leadership at Save-A-Lot has been receptive to creative ideas, such as combining a Save-A-Lot under one roof with a Shop & Save conventional store he also operates under license from Supervalu. Jamieson opened the tandem stores — which share back-room services and even some products — in Lawrenceville, Pa., last year.

Jamieson even forwarded the idea of adding a service deli department at one of his Save-A-Lot stores, although corporate did not approve that particular change. “Their issue was more with the store I wanted to put it in than the idea itself, which is a good sign,” he said.

Implementing some of the same changes in corporate stores — and taking advantage of the new freedom to customize local selections — has improved business for Lofino's 12 stores.

“The approach in the corporate stores is filtering down to the licensees now. We've converted all of our stores to the front-end produce program, with great results,” he said.

“They are a little more open-minded in what they allow you to do,” he added. “In some of our stores that have a heavy Latino concentration, we are taking the center aisles that used to be general merchandise and putting in Latino sections, and that has been doing well. They're giving us a little more latitude, where in the past it was a very McDonald's-like, cookie-cutter approach. There was a program, and you had to follow it.”

“The Save-A-Lot customer is stressed by definition,” Jeff Noddle, Supervalu's chief executive officer, described in a recent conference call. And with rising food and gas prices placing additional strain on that customer, “it makes it more difficult, because a lot of these shoppers only have so much money they can spend, and they have to spread it as far as it can go in the store,” he said. “On the other hand, that [economic stress] attracts more of that kind of shopper to our stores.”

For that reason, Noddle said Supervalu was “very bullish” on the prospects for Save-A-Lot, with plans to add between 55 and 60 stores in the current fiscal year. The chain entered the Pacific Northwest and border towns in Texas for the first time last year and currently operates in 40 states.

According to Stern, a bigger concern for Save-A-Lot would be increased competition for that consumer, with conventional stores making aggressive price-focused marketing efforts, and limited-assortment competitors like Aldi and dollar stores going after the same customer.

“The concern for Save-A-Lot is that they are operating in a segment they used to have mainly for themselves,” Stern said. “At one time Aldi was their only competition. Now there's more people paying attention to this segment. So they have to raise the level of their game.”

Aldi, the Batavia, Ill.-based U.S. division of the international discounter, is getting especially active, sources said. Aldi operates more than 900 stores in 28 states and recently announced expansions to Florida, Texas and New England.

Save-A-Lot by the Numbers

• 1,190 stores in 40 U.S. states

• $4 billion-plus systemwide sales

• 4 million shoppers visit Save-A-Lot each week

• 1,250 SKUs in a Save-A-Lot store

• 15,000 square feet for an average Save-A-Lot store

• 400-plus trademarks and exclusive brands in a Save-A-Lot store

• 15 distribution centers

Source: Save-A-Lot