SUPERVALU: RETAIL GAINS TO OFFSET KMART LOSS

DAVID GHITELMAN

Supervalu, Minneapolis, said it is preparing for life after Kmart by looking to bolster its own retail operations.

Jeff Noddle, Supervalu president and chief operating officer, told investment analysts at the Credit Suisse First Boston Food & Drug Conference in New York that the company's retail sales had grown 17% to $9 billion last year.

He also said Supervalu had been preparing for weeks for the loss of its biggest wholesale customer, the Troy, Mich.-based mass merchandiser.

Supervalu, which had been the largest supplier of supermarket-type items to Kmart, withdrew from the bidding process to become Kmart's sole provider of such products in January. Earlier this month, on the eve of the CSFB Conference, Kmart announced it has reached a 10-year agreement with Fleming, Dallas, that will have the supplier provide Kmart with $4.5 billion worth of products in the first year.

"There are tough calls in business, and this was one of them," Noddle said. "It became clear to us the economics were reaching a point where a deal might hinder our future.

"We did not want to have that much of our future tied to one organization. We thought we would jeopardize our future. We didn't want to put our customer base at risk."

Asked if Supervalu's contract with Kmart, which Kmart will terminate on June 30, calls for charges in case of early termination, Noddle said it did.

The fines " will be paid," he said. "We will recover."

The steps Supervalu will take to deal with the lost business include:

Reducing its capital budget this year by $100 million. As previously reported, Supervalu will focus more on remodels, less on building new stores.

Growing within existing markets. Noddle said he expected the company to see particularly strong growth in the Baltimore-Washington region, with the consolidation and expansion of Metro Food Markets and Shopper's Food Warehouse, two chains Supervalu acquired when it took over Richfood Holdings in 1999.

Accelerating the growth of Sav-A-Lot, Supervalu's price-impact format.

"We saw that consolidation left a niche for the price-impact format," Noddle said. "Especially in an economic slowdown."

Pamela K. Knous, Supervalu executive vice president and chief financial officer, told the conference the company expects 125 to 150 net Sav-A-Lot openings this year. "There is a lot of geography available to us," she said.