Thinking Outside the [Small] Box

MARK HAMSTRA

For a little store, Save-A-Lot has an awfully big footprint to fill.

The limited-assortment retailer, a division of Minneapolis-based Supervalu, has set a goal of doubling its store count to some 2,400 locations by 2015.

Bill Shaner, president and chief executive officer of Save-A-Lot

Some see tremendous upside potential for the hard-discount format in the United States, where no-frills grocery stores specializing in store-brand product and rock-bottom prices are much less prevalent than they are in places like Germany.

“The economy certainly has consumers looking for value, and certainly we are well positioned to deliver on that value, and that is a big reason Supervalu is looking at Save-A-Lot as a growth vehicle,” said Bill Shaner, president and chief executive officer, Save-A-Lot, in an interview with SN. “Right now the hard-discount format is kind of underdeveloped in the U.S. — there's Save-A-Lot and Aldi and a handful of other smaller chains, and then the dollar stores — but compared to Europe, and South America, hard discount is underpenetrated. Now is the opportunity to build market share, get a brand established, and be the first mover.”

The company has been experimenting with several new opportunities to drive accelerated expansion, including co-branded stores with a Hispanic-oriented operator in Texas and a test with drug store operator Rite Aid at 10 stores in South Carolina. In addition, some licensees are experimenting with new offerings to drive better returns, such as deli departments.

Save-A-Lot, which runs its business from a headquarters in St. Louis and is operated mainly by independent licensees, has long been a growth banner for Supervalu. The chain has enjoyed a renewed focus on expansion, however, since Craig Herkert joined the parent company as CEO in 2009.

Herkert, a Wal-Mart Stores veteran who had experience with that company's small-format stores in Latin America, immediately singled out the Save-A-Lot banner as one of Supervalu's best assets. Soon after joining Supervalu, he issued the expansion target of doubling the banner's store count in five years, a pace some observers — including some Save-A-Lot operators — told SN may be out of reach.

Despite the far-off growth target, Shaner said he has been encouraged by Herkert's enthusiasm for the Save-A-Lot banner.

“He has been very bullish about Save-A-Lot, and he has worked hard to free up the capital that we need to grow — not only for the store growth, but also the infrastructure growth, because we are going to have to think differently and act differently,” Shaner explained. “We have to look at our organizational structure, and we have had to look at our processes, and the things that we need to do to get to that next level of growth and ultimately double the size of the company.”

Support has come in the form of funding — all licenses who open Save-A-Lot stores are eligible to receive at least $200,000 in incentive financing per store — and in the form of resources. Supervalu has made available its real estate and development teams throughout the country for Save-A-Lot to utilize as it pursues its expansion plans.

Previously Save-A-Lot had a smaller internal growth team entirely based in St. Louis, Shaner explained. Now Save-A-Lot's team reports to Andy Herring, an executive vice president responsible for all growth at the parent company. The new structure gives Save-A-Lot more “in-market expertise,” he said.

“That has given us access to the real estate and development talent across all of Supervalu — a whole dedicated team, a much broader team, and it has really made a tremendous difference to have so many people waking up every morning thinking about, ‘How do I grow the Save-a-Lot business in my marketplace?’

“For example, right now we benefit from having an individual in Chicago who lives there, who knows the Chicago market, who is responsible for growing Save-A-Lot in Chicago. The previous person responsible for Chicago lived in St. Louis, and was also responsible for other markets.”

These in-market experts reflect Supervalu's holistic development strategy, in which the company examines development on a market-by-market basis, evaluating opportunities for traditional retail banners, Save-A-Lot stores and independent customers of the wholesale business.

Shaner said that new structure should be particularly beneficial to Save-A-Lot as it seeks to expand on the West Coast, where Supervalu has a strong presence in traditional retail but relatively few Save-A-Lot stores. While Save-A-Lot does not have aggressive growth plans for that region in the coming year, Shaner said the company does plan to ramp up growth there in the next two to three years.

A map detailing growth opportunities for potential licensees on Save-A-Lot's website cites the opportunity for 100-plus new locations in California, and 50 to 100 each in Oregon and Washington. Other states shown to have 100-plus opportunities for Save-A-Lot locations include Texas and Florida.

In 2011, the company has an even more aggressive growth goal than in 2010, Shaner said, although much of the growth is expected to come in existing markets like the Southeast, where the support infrastructure is already built out. Several stores are planned in the Carolinas, where Save-A-Lot in December broke ground on what will be its 16th distribution center in Lexington, N.C. That facility is slated for a December 2011 opening.

Save-A-Lot is also expanding outside the Continental U.S. in the Caribbean, with stores in Aruba, the Bahamas and Dominica, and additional locations planned.

Last year, the first benefiting from Save-A-Lot's ramped-up growth initiatives, the company opened a record number of new locations with 142 stores. Net of closings, the total of added new stores fell just short of 100.

While the mix of new stores was about evenly split between corporate and licensed locations in 2010, Shaner said the company plans to return to its more traditional mix that is reliant on licensed independents opening locations going forward, particularly in smaller markets, while corporate-store openings will be weighted more heavily to larger urban markets.

“There is something special about the entrepreneur in that smaller town or smaller city,” Shaner said. “Often they are known in the town, and maybe they have had other businesses there, and other community ties. There's something about that entrepreneurial spirit — it's the American dream, and we think Save-A-Lot is a big part of that.”

INCENTIVES OFFERED

To help drive accelerated licensee development — licensees currently operate about 890 of the company's 1,200-plus Save-A-Lots — the company has taken several steps to make it more profitable for independent operators.

In addition to the incentive program, which helps reimburse some of the average $822,500 it costs to open a new store, Save-A-Lot also has sought to bring down the costs of new-store openings by becoming more flexible in its building requirements. The chain describes the program as “letting the building be the building,” rather than imposing a proscribed Save-A-Lot design on an existing space.

“In the past we were a lot less flexible in terms of the lighting, the flooring, the walls — basically the construction standards, so we decided to be a lot more flexible,” Shaner explained. “The customers don't care if the lights are fluorescent or halogen, or if the freezers are upright or in a coffin case — what they are looking for is value,” he said.

Typical Save-A-Lot stores are 15,000 square feet, although sizes range from 10,000 to 20,000 square feet. Sales average about $80,000 per week, Supervalu has said, although the company does not publicly disclose profit metrics for the division.

The company's existing licensees — many of whom are operators of other retail formats — have been able to take advantage of the incentive plan, and some have also been experimenting with new concepts in terms of the design of their Save-A-Lots.

Rich Niemann Jr., president and CEO, Niemann Foods, Quincy, Ill., has opened “about three or four” new stores using the incentive funds, and now operates 12 total Save-A-Lots along with a roster of other retail formats.

“It is a nice incentive package — you have training, and you have other, one-time costs that this helps with the first year and a half cash flow on the project,” he said.

Among Niemann's new Save-A-Lots are two with expanded service deli departments and one with a leased space for a local pharmacist.

The ground-up replacement Save-A-Lot in Decatur, Ill., that leases space to a local pharmacist has shown promise, Niemann said. “That had been a high-volume store, and it has gained. It's a nice package.

“A couple of years ago, that [concept] might have met with some resistance — but with their new flexibility and their new attitude, these things can get done,” he said.

In addition, the company in the last year opened two stores in Rock Falls, Ill., and Auburn, Ill., that contain small delis offering sandwiches, fried chicken — a strength of Niemann's traditional supermarkets — rotisserie chicken and ready-to-eat pizza, straying from the minimalist merchandising that characterizes Save-A-Lot's business model.

“We have to be very careful about labor costs in stores like that,” Niemann explained, noting that the company is still seeking to learn from the two test locations, one of which is in the center of town, and other outside of the main business district.

Tom Jamieson, another Save-A-Lot licensee based in Uniontown, Pa., said he would consider experimenting with an 8-foot deli in one of his Save-A-Lots if it was the only store in town.

“If there's another store that you are competing against that already has a service deli program, then it might not work in a Save-A-Lot,” he said.

Jamieson operates 10 Save-A-Lots, some of which he has co-located — either alongside, in the same shopping plaza or in the same building — with his Shop 'n Save supermarkets.

The tandem locations have been effective, he said, since Save-A-Lot draws from a greater distance. His company's highest-volume stores of both banners, in fact, are the adjacent Shop ‘n Save and Save-A-Lot in Uniontown.

Jamieson has opened two stores under the incentive program, both in West Virginia.

“We've been using the money toward building the business and marketing,” he explained.

Jimmie Gipson, chairman and CEO of Bowling Green, Ky.-based Houchens Industries, the nation's largest Save-A-Lot licensee, said his company has opened about half a dozen Save-A-Lot stores through the financial incentive program.

“It's been a good incentive, from our perspective,” he said. “The way the program is structured, it gives you a portion of your capital costs back, and that makes it attractive.”

He said he was encouraged by Supervalu's support of Save-A-Lot's growth, although he questioned the potential for the chain to meet its growth target.

“You can open that many stores in that period of time, but opening them profitably is another story,” he said. “I think the financial piece they put together was positive, but I think the goal is not realistic, in today's environment, with independents having to borrow money — the timing of it is a major challenge.”

His Save-A-Lots had positive comps in 2010, he pointed out, while Niemann said his were negative, a fact he attributed both to the impact of the economy on low-income consumers and to price pressure from traditional operators.

Mike Stout, director of new business for Save-A-Lot, said the incentive program — which can be used toward equipment purchases or cash back — has been “hugely successful” in both attracting new retailers and helping existing licensees expand. Supervalu recently elected to continue to offer a similar program for fiscal 2012, which began in late February.

In addition, he said, the capital needed for opening new stores can be cut by 15% to 30% through the relaxed leasehold and fixture requirements.

Save-A-Lot has been aggressively pursuing new licensees through the incentives, in an effort to reach its expansion targets.

“We are at an all-time high in speaking with new license candidates,” Stout said.

Save-A-Lot also has been seeking to improve its sales performance through marketing and merchandising efforts, Shaner explained, including a more localized product offering, with about 15% of merchandise that can be customized to the local market.

In the last six months, Save-A-Lot also has returned to TV advertising, with “savings made simple” spots that emphasize the convenience of shopping at the banners in addition to the cost savings

It has also launched a new twice-monthly flier, with bulk goods and bundle-packs promoted at the start of the month and more “belly fillers” in mid-month, when customers' benefits might be running low.

About 40% of customers at corporately owned stores receive government benefits to pay for their groceries, Shaner explained, up from 27% just a few years ago. “Customers are under pressure, and our core customers, those making $40,000 a year or less, are even more stressed, and they are trading down, and making different choices to stretch their dollars further,” he said.

FACING CHALLENGES

Analysts said they think Save-A-Lot still faces many challenges in its effort to grow both store counts and sales volumes.

“Aldi, Wal-Mart and the dollar stores are to a large degree going after the same customer,” said Chuck Cerankosky, an analyst with Northcoast Research, Cleveland. “It's not an untapped market anymore.”

He said his firm's own research has indicated that to some shoppers, a dollar store can represent a trade up from concepts like Save-A-Lot because dollar stores — the fastest-growing retail niche — might carry more branded product.

On the plus side for Save-A-Lot, it has a bevy of independent customers of Supervalu's wholesale arm that it can seek to leverage to build out Save-A-Lot.

“I think Save-A-Lot has a great reservoir of candidates out there, both in terms of operators and store sites,” Cerankosky said. “So they can catalyze the process just by recruiting more owner operators to be in that business.”

Karen Short, a New York-based analyst with BMO Capital Markets, said she thinks Save-A-Lot has been having a tough time selling potential licensees on the Save-A-Lot banner.

“It seems fairly clear they are not having as much success getting licensed stores open, so they have had to open more company stores to meet their goals,” she said, noting that offering incentives to defray start-up costs “doesn't change the economics or the sales trends of the store.”