SUPERVALU EXITS DENVER MARKET

Mark Hamstra

MINNEAPOLIS -- Supervalu here said last week that it planned to end its corporate retailing and wholesaling operations in the Denver market, citing the company's weak position there.

It agreed to sell four of its nine Cub Foods stores in the Denver area and its 695,000-square-foot warehouse facility in Aurora, Colo., to Kroger Co., Cincinnati, for undisclosed terms. The acquisition, which would fold the Cub Foods stores under Kroger's King Soopers division, is expected to close late next month.

Supervalu is in talks to sell the remaining five Cub stores, and it is working with the 25 independent retailers who were served by the facility to help them find new suppliers, Lynne High, a Supervalu spokeswoman, told SN.

"The company's retail strategy is really focused on expansion in those markets where we are No. 1 or No. 2, and that was not the case in Denver," she said. The company now has one of the top two market share positions in all of its remaining markets, she added.

Supervalu continues to franchise four Save-A-Lot stores in Colorado, which are served by a different warehouse. The new experimental Sears Grand store in West Jordan, Utah, which includes a small grocery department that had been supplied by Supervalu's Denver warehouse, will now be supplied from Supervalu's distribution facility in Billings, Mont., High told SN.

Analysts described the transactions as a good strategic fit for both Kroger and Supervalu, although Kroger said it has not finalized its plans for the acquired warehouse and the associated 64,000-square-foot office building.

"I think in Supervalu's case, they have had a very focused approach to getting a return on assets," said Chuck Cerankosky, analyst, McDonald Investments, Cleveland. "This was an area in Colorado that was indeed underperforming."

Jason Whitmer, analyst, FTN Midwest Research, also in Cleveland, said Cub Foods captured "barely over a 2% share of the market" in Denver, where Kroger, Safeway and Albertsons all have a stronger presence.

"For Supervalu to continue to operate those stores and that facility there without being able to operate efficiently, this does make more sense," he said.

Supervalu said it expects the transaction to generate net cash proceeds, and a loss on the sale of the assets. It slightly revised its earnings-per-share guidance downward for the current fiscal year, which ends in February, to $2.04 to $2.10, vs. previous guidance of $2.05 to $2.12. The sale of the Denver operations is expected to improve earnings in fiscal 2005.

Both analysts pointed out that for Kroger, the purchase of the four Cub Foods stores fits its strategy of making small acquisitions in markets where it already has a dominant presence.

"Kroger has shown a penchant for buying small store groups where they can be tucked into their strong operating areas," said Cerankosky, "and King Soopers is very strong in Denver, so it's a sensible transaction that very much serves both companies' strategies."

Other recent acquisitions by Kroger include 13 Food Town stores in Toledo, Ohio.

Kroger said it has 129 stores under the King Soopers and City Market banners in Colorado. The newly acquired stores, which average 66,000 square feet, will be reflagged as King Soopers, Kroger said.

"Denver is an important area that offers significant opportunities for future growth," said Russ Dispense, president, King Soopers, in a prepared release. He could not be reached for further comment.

Separately, Supervalu said its Advantage Logistics subsidiary had secured a contract to provide third-party logistics to Atkins Nutritionals, Ronkonkoma, N.Y., from a different warehouse in Aurora. The fact that both announcements concerned facilities in Aurora was coincidental, Supervalu said.