Supervalu Plucks Sunflower to Focus on Core Business

ELLIOT ZWIEBACH

MINNEAPOLIS — Supervalu will shutter its five Sunflower Markets natural and organic stores after a two-year test, a move observers said will allow the company to focus more attention on its ongoing integration of Albertsons.

Other factors in Supervalu's decision may have been a lack of significant market penetration and the increasing ability of conventional supermarkets to serve the natural and organic niche, they indicated.

Supervalu opened the first Sunflower Market in Indianapolis in January 2006, followed by three stores in Columbus, Ohio, and one in Chicago. At one time the company indicated it hoped to have 50 Sunflower Markets in operation by 2011.

The format, which is slated to close in about two weeks, offered natural and organic foods in a no-frills presentation, in stores averaging 10,000 to 12,000 square feet, with prices said to be 10% to 15% below mainstream supermarket prices. All five locations were leased, and stores whose leases have not expired will be sublet, a Supervalu spokeswoman told SN.

“The Sunflower stores were a great laboratory for learning about natural and organic merchandising,” she said, “and we will certainly use that knowledge in the further development of our premium fresh and healthy format.”

Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN he believes the Sunflower Markets are closing “because Supervalu just has a lot of other things on its plate. Its primary focus has to be the integration of the Albertsons properties it acquired in mid-2006, and Sunflower is just a distraction.”

But one of the lasting benefits for Supervalu from the Sunflower experience will be the Nature's Best line it developed for those stores, Stern said, “because that can be deployed through other retail and wholesale accounts.”

“Sunflower was a development project for Supervalu,” said Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, “but with just five locations, management's attention needs to be more focused on the Albertsons properties, since that's where the greatest opportunities lie.”

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., also said he believes Supervalu's decision to close Sunflower is related to the integration of the Albertsons stores. “I'm not sure how Sunflower was doing, but unless it was really lighting things on fire, this is the right move. It has less to do with any failure of Sunflower and more to do with Supervalu focusing all its energies on its core business.”

Scott Van Winkle, a Boston-based analyst for Canaccord Adams, Vancouver, British Columbia, said Sunflower was trying to cater to a niche that doesn't need that kind of store.

“I'm not sure the average consumer is ready for a dedicated natural and organics store, and that's the consumer Sunflower was going after, rather than the more educated and more affluent shopper who is more of a natural match for that kind of store,” he said. “The customer Supervalu went after is comfortable shopping for natural and organics foods at a conventional supermarket, and because Sunflower was not offering anything different for that customer, it was difficult to see how it would succeed.

“I'm not sure what Supervalu's experience was — whether its expectations were high and it didn't get the returns or its expectations were low and the stores did poorly,” he added.

Industry observers declined to estimate sales volumes at the Sunflower banner.

Jim Hertel, managing partner of Willard Bishop, Barrington, Ill., said the decision to close Sunflower was primarily a matter of meeting performance goals. “I've got to believe that ultimately, Supervalu was not seeing the trends in transaction counts and sales dollars that it was looking for.”

He said Supervalu might have miscalculated in developing the Sunflower concept as a low-price format.

“It went into Sunflower on the premise that one of the barriers to selling more natural and organic products was price,” Hertel said. “But what it probably found out was that price is only a piece of it. What Whole Foods is selling is the food experience first, and the natural and organic offerings are only one reason people shop there.”

On the plus side, Hertel said Supervalu's experience with the smaller-footprint Sunflower will give the company insights into express-store formats like the ones Tesco, Giant Eagle and Whole Foods are operating, with similar formats from Safeway and Wal-Mart on the horizon.

Natalie Berg, an analyst with Planet Retail, London, said the market for a dedicated natural and organic store like Sunflower may be limited.

“Organics have truly gone mainstream,” she told SN, “and Supervalu can be much more successful by expanding the organic ranges in its other stores rather than operating a handful of organic food stores that tend to cater to a much smaller consumer base.

“It's also important to realize Supervalu already operates an up-market format that's heavy on organics — Bristol Farms. Although Bristol Farms and Sunflower are quite different, it's not too much of a surprise they would axe one of the two organic formats.”

She also said the concept may have lacked sufficient penetration. “Operating just one store in all of Illinois isn't enough to achieve sufficient scale, create brand equity and build a large enough customer base.”