EXPAND-A-LOT

DAVID ORGEL

ST. LOUIS -- Save-A-Lot, the limited-assortment retailer based here, is widening its geographic and customer bases as it marks its 20th year. The only thing limited about Save-A-Lot's expansion plan is the range of products sold, which remains about 1,250 stockkeeping units to provide the efficiencies to cut costs and prices.

In an interview with SN, William Moran Jr., president and chief executive officer, who founded Save-A-Lot in 1978, said the company plans to more than double its nationwide store count of 700 in the next five years, mostly by expanding its licensing base. Save-A-Lot operates 142 corporate stores and 558 licensed independent units. Save-A-Lot's reach has extended to 31 states serviced by 11 distribution centers. The company is a self-distributing, freestanding subsidiary of Supervalu, the Minneapolis-based wholesale/retail giant. Annual sales for independents and corporate stores combined are now at a little more than $3 billion.

Broadening the target customer base is a key element of the retailer's plan. For years, Save-A-Lot's low-price format reached households in the $25,000 to $35,000 income range. They have been attracted to the retailer's custom-brand products, which are priced at up to 40% less than conventional supermarkets'. Now the company also hopes to reach shoppers with incomes of $35,000 to $45,000 in many markets with merchandising directions intended to please middle-income customers, including some upscale products and expanded perishables.

"We won't lose our customer base," Moran said. "We won't forget who brought us to the dance. But we want to please existing customers while broadening our appeal to newer ones. Price is still the primary driver, but today a better total shopping experience is more important."

Financial analyst Charles Cerankosky, senior vice president at Tucker Anthony Inc., Boston, said Save-A-Lot may be able to increase its customer following with the right execution. "It's a matter of merchandising," he said. "Price will attract a variety of people. As someone once said, 'Rich people like to save money and poor people need to save money.' If the quality is there and the price is right, they can broaden their appeal."

The company must also keep pleasing its independents, who are attracted to the everyday-low-price operator as an alternative to launching more costly conventional independent stores. Currently, 70% to 75% of new stores are opened by retailers already in the program, and a challenge is to bring more new participants into the program. Increased uniformity of stores is considered a plus by many.

"As an independent, we get the discipline of the program," said Don Haltenhof, a licensed Save-A-Lot retailer, who co-owns about 20 Save-A-Lots in the United States. "There's more continuity throughout the chain; the stores look more alike."

While Save-A-Lot stores compete with many food retail formats, their small imprint -- roughly 11,000 square feet of selling space -- enables them to co-exist with other retailers without causing the kind of effect that would spark a price war, Moran said. Save-A-Lot typically only takes about 3% to 4% of the market share in any one area. The small size also offers a convenient walk-through alternative to consumers, who are accustomed to much larger spaces for conventional stores. Save-A-Lot's major national limited-assortment competitor is Aldi, the Batavia, Ill.-based unit of the German company Aldi.

One key learning for Moran over the past 20 years is that the limited-assortment format isn't reliant on a recessionary economy. "People told me early on that the format was a fad, but that hasn't proven true," he said. "When we came out of the recession of the early 1990s, I saw no change in the level of customer demand -- no significant correlation between the economy and the success of our business."

Moran has guided Save-A-Lot through a variety of ownerships. He launched the concept in 1978 under the sponsorship of General Grocer Co., a St. Louis-based wholesaler. Save-A-Lot was purchased by St. Louis-based wholesaler Wetterau Inc. in 1983, and shortly after that Moran himself acquired the limited-assortment operation. In 1988, after a few years of expansion, Wetterau reacquired Save-A-Lot, exercising a buy-back option. Save-A-Lot became a subsidiary of Supervalu in 1992 when the wholesaler acquired Wetterau.

Currently, Save-A-Lot's store locations reach from the West Coast to the East Coast, although it is concentrated in the Midwest and East. It has a major stronghold in the Kentucky/Tennessee area, and has a big presence in Florida. Its stores reach north to Michigan and Maine, and extend into Texas and Oklahoma.

The company plans to open about 110 independent stores and 30 corporate stores in the fiscal year that began March 1.

Some of the areas of fastest growth for Save-A-Lot will be in southern California and the Southwest, New York and New England, and the Southeast.

"There will be significant growth in southern California in the next two to three years," Moran said. "It will be a blend of corporate and independent stores."

The big jumpstart in that region was Supervalu's 1996 purchase of Save-U Foods, a limited-assortment chain, from Fleming Cos., Oklahoma City. The agreement included a 100,000-square-foot distribution center in Rancho Cucamonga, east of Los Angeles, which has been expanded to about 140,000 square feet.

Save-A-Lot currently owns 23 units in that market. Only two of the acquired units have been converted from the Save-U-Foods banner so far, Moran said. About seven to eight of the Save-U-Foods units will be converted to the Save-A-Lot banner, and replacement stores will be built for many of the remainder, Moran said. The company just opened its first brand-new Save-A-Lot in the area.

"We think southern California will accommodate at least 200 Save-A-Lots," he said. "The rate of development will depend in large part on the interest of independents. We seed the market with corporate stores and then the interest develops for independents."

From the southern California base, the retailer will move into the Southwest markets of Phoenix and Tucson, Ariz. "Expect Phoenix to start in the next few months, and we're now talking to independents in Tucson," Moran said.

On the other side of the country, Save-A-Lot has already opened a handful of units in New York state and plans significant growth there this year. The company is targeting areas including Buffalo, Syracuse and Albany. These stores are being served by a newly opened distribution center in Alderland, N.Y., the retailer's eleventh distribution center. Alderland will also supply the New England area, which was previously handled by the company's Williamsport, Md., center.

In New England, the company is eyeing states including Vermont, Maine and New Hampshire.

Save-A-Lot also plans to grow its business in the Mid-South and Southeast, including the Carolinas, West Virginia, Alabama, Georgia and Mississippi, Moran said. One challenge in the South is that acceptance of the format takes a little longer. "Acceptance of a radically different concept takes a little longer in the Southeast," Moran said. "It takes a little longer to get name recognition."

In Florida, the company is moving the expansion into the Panhandle. Save-A-Lot is also building its business in New Orleans. A new distribution center will be built in the mid-Southeast as stores develop, possibly in the Charlotte, N.C., area, Moran said. Save-A-Lot has a heavy concentration in Kentucky and Tennessee, which were among the first locations for store openings.

The retailer is gearing to open new national headquarters in September in Earth City, St. Louis County. It will include a test kitchen and a 5,000-square-foot ministore to help in merchandising and training programs, including front-end projects.

A pivotal part of Save-A-Lot's growth strategy is attracting the higher-income customers. "Our presentation is right for a broader base than just those who must save money," Moran stressed. "We have a cleaner, brighter, fresher look. No longer does the consumer feel the need to trade down. We're putting more stores in higher-income areas."

Much of this direction hinges on merchandising changes. Moran has tweaked the assortment to layer in some products considered upscale relative to the rest of the mix. "We have added affordable luxury items," he explained. For example, Save-A-Lot offers a deluxe packaged macaroni and cheese dinner at a $1.39 price compared with 25 cents for the basic version. But the retailer's price-oriented customers are going for the more expensive box because it's viewed as "a well-priced item for those who want nicer products but wouldn't normally be able to pay the price," Moran said.

The strategy is backed up by packaging and labeling efforts.

Save-A-Lot's growing purchase volume has convinced packers to improve the appearance of cases, which are displayed stacked in stores. Once plain cardboard, these cases now often describe the products they hold with colors tied into product packaging.

"We're also giving more and more attention to labeling," Moran emphasized. The company's extensive efforts have resulted in some 100 registered custom labels representing about 73% of items carried and 85% of store sales, and growing in share. Rather than using the store name, Save-A-Lot's home-grown brands are often different by category and even item. "We want the impression that we have new brands they haven't seen before," Moran said.

But it's not all private label. National brands are selectively promoted when the retailer can make buys at sharp prices.

Save-A-Lot's overall presentation has been boosted by expanded perishables sections. "With our expanded meat and produce, we offer today a viable alternative to conventional stores," Moran said. "We've recently been getting into distribution of produce, meat, ice cream and eggs with our own trucks, rather than regional distributors. This way it yields better consistency and quality."

The store makes heavy use of signage carrying the message of everyday low price. But because EDLP can get staid, the retailer has moved to create some additional excitement.

"We've created seasonal displays and theme promotions to create the impression of variety beyond what's really there," Moran said.

Stores often dedicate a wall to this program, which changes once a month. For Easter, stores showcased $9.99 baskets with chocolate rabbits and other candies, among other items. Another recent theme was "Big Stuff," offering items in larger than conventional sizes, although not quite club sizes.

Save-A-Lot is also adapting store layouts, with some stores putting frozens and perishables up front for more visibility.

Some observers have noted that Save-A-Lot's direction differs from its limited-assortment rival Aldi on a number of fronts. Aldi maintains a more limited mix -- fewer than 700 SKUs -- and hasn't appeared to attempt a major upscaling of the assortment.

But one area of focus for Aldi is also a key concern for Save-A-Lot. Building efficiencies into the operation is a prerequisite to lower costs and prices. Many of Save-A-Lot's shipping cases arrive without tops to reduce labor at retail and the retailer likes to deal with full palettes of merchandise.

Because independent operators are the life-blood of the Save-A-Lot program, the company offers a wide range of services -- from field counseling to retail accounting -- to get them started and keep them in business. "We do everything to put independents into business other than securing the building and the money," Moran said. "If they have those things, it can be a turnkey operation."

Moran considers the format a low-risk, profitable alternative for independents, which is much less expensive to launch than conventional stores. He said one sign of success is that many operators expand to multiple Save-A-Lot units. All operators must keep to a set of company standards, and a few are terminated for not complying.

"Having independents running stores brings an entrepreneurial spirit," Moran said. "We've developed interest by word of mouth."