How Giant Eagle Diversifies With Value Format

Giant Eagle isn't the first conventional supermarket to target the discount sector for growth, but its new value format takes a unique approach to this effort while helping to diversify the operator (read a related story by associate editor Jon Springer).

The retailer's year-old small-store concept, called Valu King, is based on solid underpinnings. First, it focuses on private label, which is more widely accepted today by consumers. Second, it competes in a space currently served by limited-assortment stores, such as Aldi and Save-A-Lot, which may be one of retail's few underserved sectors. In fact, one financial analyst, John Heinbockel of Goldman Sachs, has been saying for some time that this hard-discount segment has room to grow dramatically in the United States.

A few other supermarket companies recently have tapped into the value sector with outlets that are smaller than conventional ones. This includes Hy-Vee with its Heartland Pantry, which focuses on private label and avoids specialty departments such as floral, service meat and service deli.

Meanwhile, the track record of Food Lion's 28-unit Bottom Dollar limited-assortment operation also underscores the potential of discounting. The company recently said it plans to nearly double the size of that operation in 2010.

This brings us back to Giant Eagle, which takes an intriguing approach to its discount entry. Valu King now includes three units in Ohio with a few more being planned. These stores run less than 30,000 square feet with roughly 7,000 items per store. The emphasis is on the top 20% of supermarket items, and it's mostly private-label products supplied by Topco, with labels including Valu Time, Food Club, Full Circle and World Classics. There are some national-brand and dollar items too.

The store's strategy might appear uneven at first glance. On the one hand, it emphasizes low-cost operations (including real estate) and reduces expenses partly by training employees to work across many different tasks. Yet, it also runs service meat departments with butchers. There's a good reason for this: It turns out that the meat department represents more than 30% of the store's volume.

Some innovative touches are employed to reduce costs. For example, a special front-end system enables the stores to offer free bags and bagging with minimal labor.

Valu King is a format worth watching, even though it's still too small to have any notable impact on the chain's overall performance. Giant Eagle contends that these quickly profitable units will do well in good times and bad because shoppers are increasingly drawn to value. It sees the format as a means to battle Wal-Mart as well. But the retailer also maintains insurance by operating a wide range of other outlets, including conventional (Giant Eagle), convenience (GetGo), express (GEX) and foodie-oriented (Market District). Like any smart investor, Giant Eagle knows the value of a diversified portfolio.

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