SUPERVALU'S STRENGTH

ELLIOT ZWIEBACH

MINNEAPOLIS -- Supervalu here is determined to be firmly in control of its own destiny.

With last month's acquisition of Richfood Holdings, Supervalu solidified its position as the nation's largest food distributor and strengthened its status as a major food retailer.

"What we want to do is continue to grow significantly at retail and be a major consolidator at the wholesale end," Mike Wright, chairman, president and chief executive officer, told SN.

He said he'd like to see Supervalu's retail sales exceed 50%, "because that allows us to control our own destiny even more." Retail sales are actually already approaching 50%, he pointed out, if volume from Supervalu's 639 licensed Sav-A-Lot units is included.

Wright said he anticipates more food-industry consolidation, with Supervalu primed to play a major role in that process.

"We're always in contact with people, but there's more contact on the retail side right now -- for us to acquire regional chains looking to sell or to get retailers to switch to us."

In assessing the future of U.S. wholesaling, Wright said the most important element will be a continued emphasis on removing costs from the system to make the supply chain more efficient.

Efficiency is important, he explained, "because competition is not one retail store against another -- competition comes at the supply-chain level. Is your supplier getting product to your store's shelves more efficiently than someone else's supplier?

"If you look at it logically, the industry needs more consolidation to become more efficient -- that's the way wholesaling will survive," Wright said.

"People say wholesaling is dead because it's a slow-growth industry. But we've changed the components of our business.

"At Supervalu we've increased our sales from $9 billion or $10 billion in 1990 to $23 billion or $24 billion as we exit the decade, and profits have also grown significantly.

"In 1990, 10% of our business came from controlled volume, and now we're close to 50% -- and we're more efficient at distributing and in a stronger position financially to help the independent retailer grow."

As it prepares for the next decade, Wright said, Supervalu's prospects include the following:

Building on the strengths of the corporate stores it acquired in the Richfood deal.

Exploring the possibilities of expanding Richfood's dairy business and its private-label line.

Adding $2.3 billion worth of volume from Kmart -- a boost that enabled Supervalu to reverse a decision to shut a handful of distribution centers.

Expanding its Activity-Based Sell program to a broader base of retail customers.

Centralizing administrative functions for its corporate chains over the next three to four years.

Considering whether to expand its regional distribution center coverage.

Continuing to expand its Sav-A-Lot limited-assortment format.

Supervalu serves more than 2,800 stores in 48 states -- including 458 corporate-owned locations -- from 36 distribution centers. Its projected volume for the year ending in February is $23.1 billion, including about $15.1 billion, or 65% of the total, from wholesale distribution, and $8 billion, or 35%, from corporate retail.

The Richfood acquisition added $4 billion of volume, including $1.8 billion on the retail side.

That volume increased Supervalu's already considerable buying clout, Wright said. "As an organization that's doing more than $23 billion of volume, we've earned a place at the table with manufacturers -- and if you take the combined volume of all the independents we serve, we represent more than $40 billion as a virtual chain, which certainly makes us a dominant player."

Wright said he is still excited about the Richfood acquisition. "It's the premiere regional wholesaler in the industry, and it's a company that really fits our profile to a T," he told SN.

"It's highly efficient, with a nice track record of growth over the last several years, plus it has a wonderful group of independent customers that are good, solid, progressive and growing companies -- companies like Ukrop's, Genuardi's, McGruder's and Boyer's.

"And the fact that Richfood had 94 terrific corporate retail stores was another big attraction that fit very well with our strategy of growing retail."

Richfood's corporate stores include 37 units of Shoppers Food Warehouse, Lanham, Md., a price-impact format; Metro Markets, Baltimore, Md., a superstore chain of 18 stores; and Farm Fresh, Norfolk, Va., a group of 39 upscale service-oriented stores.

Wright said Supervalu has no plans to make any changes at this time in any of the three chains or their expansion plans.

"Each of the companies has a good team in place and good growth plans, and we will encourage them to grow each business as fast and as prudently as they can.

"We'll operate under the Richfood plan for now," Wright said, "and as we get closer to the end of our fiscal year in February, we'll start the planning cycle for each chain's growth for next year."

Although he declined to pinpoint any current or future growth plans, he indicated Supervalu will help the three chains grow at a faster pace than Richfood did because of its larger capital base.

Wright said Shoppers Food Warehouse should benefit from operating expertise gleaned from Supervalu's own price-impact superstores, Cub Foods here and St. Louis-based Shop 'n Save.

"We have a lot of experience operating price-impact superstores, and we all can benefit from exchanging best practices and learning from one another. That's part of the synergies of doing acquisitions," he explained.

He said he expects Supervalu to benefit from the three chains' buying practices and from Richfood's private-label program. "We like the Richfood label -- we think it's something we may be able to use in other parts of our operation."

Wright said Supervalu is the largest private-label procurer in the United States, "but we have different labels that we use in different parts of the country, and Richfood is a label that may fit into other regions," he said.

Another plus in the acquisition, Wright said, is Richfood's dairy operation -- "something we don't have, and something we expect to learn from," he acknowledged.

While Supervalu has been driven to grow the retail side of its business "as fast and as effectively as we can, and to be the biggest, best food distributor we can, manufacturing has not been part of our strategy," Wright said.

Supervalu has historically done little vertical integration, he explained, "which is part of the reason we sold our bakery operation (Hazelwood Farms Bakeries, St. Louis) last spring.

"We were very effective running a frozen-dough operation, but a milk plant is different. However, Richfood has been growing that business for years, and we will continue to operate it and see if we should consider other strategies in dairy as well."

With Richfood becoming Supervalu's largest region, the distributor decided to establish Richfood as a separate marketing division. Accordingly, it dissolved its Northeast division and transferred oversight of distribution centers in Perryman, Md., and Reading, Pa., into the Richfood operation, which also directs distribution centers in Richmond, Va., and Harrisburg, Pa.; it simultaneously shifted administration of former Northeast division distribution centers in Milton, W. Va., Pittsburgh and Easton, Pa., into the central region. While Supervalu works on integrating Richfood, it is also streamlining its own operations by repositioning its six premerger corporate chains -- Cub Foods, Shop 'n Save, Bigg's, Scott's Foods, Laneco and Hornbachers -- into one company, to eliminate duplication of such functions as accounting and computer technology.

"On the merchandising side we're looking at centralizing category management and procurement for high-volume items, but we're emphatically leaving in place the people who run the various retail organizations and the local merchandising teams -- to make sure our operations maintain the local characteristics that allow us to market to local consumers," Wright said.

"Our goal is to consolidate these businesses internally, fully leverage our size and scale, and streamline administrative functions," he explained. "The end result will be a more flexible and responsive organization, geared to take full advantage of a lower overall cost structure."

Because Cub is headquartered here, "it will be easier to take care of that operation first," Wright said. "But it will take time to transition through the total Cub organization, because the administrative staffs are in so many regions."

Wright said he expects it will take three or four years to complete the companywide process, with Richfood's retail operations last on the schedule. "Any changes at Richfood are still sometime in the future, at least one or two years away," he noted.

Gary Giblen, New York-based managing director of Banc of America Montgomery Securities, San Francisco, told SN he views Supervalu's decision to operate its retail chains as a single company as a positive step.

"Supervalu never had an overriding plan for all those stores before, but now it's on new ground, determining what formats make sense and coordinating the buying and merchandising functions to develop a quasi-chain instead of a confederacy of regional operations," he said.

It's a formula Giblen said he believes other wholesalers should follow, "since imitation is the sincerest form of flattery."

He said wholesalers like Fleming Cos., Oklahoma City, and Nash Finch, Minneapolis, are already following the Supervalu model without necessarily acknowledging it. "Fleming is trying to turn itself around by consolidating its retail operations and operating larger distribution centers, and Nash Finch is also narrowing down the focus of its retail formats and consolidating distribution centers," Giblen said.

Chuck Cerankosky, a securities analyst with McDonald & Co., Cleveland, agreed that other wholesalers may be looking at Supervalu as a model, "but it's an unattainable goal to aspire to, given the huge competitive advantage Supervalu's sophistication provides in electronic information systems and logistics."

Another Supervalu advantage, Cerankosky said, is its ability to help independents grow "by selling them some of its own corporate stores, which helps the operator grow and keeps the wholesale operation growing."

That advantage was demonstrated earlier this month, when Supervalu picked up part of the business of Coborn's, St. Cloud, Minn., by agreeing to sell three corporate stores to the retailer and allowing it to convert four existing stores to the Cub Foods banner.

According to Don Wetter, Coborn's chief executive officer, the deal "aligns with our objective of continued growth through marketing expansion and product development."

A burst of new business from an unexpected source prompted Supervalu to reverse a decision earlier this year about closing distribution centers, Wright said.

Supervalu had made tentative plans to shutter a handful of distribution centers and combine some of those facilities at other locations, he noted -- until July, when the company expanded its distribution agreement with Kmart Corp., Troy, Mich., to add $2.3 million of volume to the $600 million Supervalu was already doing with the discount chain.

"The closures that we contemplated were not significant in the overall picture, but with the addition of that Kmart business, we reconsidered the decision (to close warehouses) because we were adding so much volume," Wright recalled.

He said Supervalu had considered closing the facilities last May, at the same time it announced the closing of its bakery. "There were already some discussions going on with Kmart at that time, but we didn't know the amount of volume we might get or where it might come from until Kmart made its decision," he said.

"As it turned out, we picked up sufficient volume in certain areas and decided we needed all the facilities we had."

Under the Kmart deal, Supervalu will distribute and replenish an average of 3,250 grocery-related items to about 1,350 Big Kmart Pantry and Super Kmart stores from 14 distribution centers in the Northeast, Pacific Northwest, Southeast and portions of other regions.

According to Cerankosky, the additional Kmart business "represents a nice big chunk of volume, so there's no surprise that it's using a large amount of warehouse capacity.

"And the nice thing for investors is that new volume presumably carries nice operating

profit margins that will represent incremental earnings to the company."

In other developments on the distribution front, Supervalu opened a new fast-mover dry-grocery warehouse in August in Hopkins, Minn. -- a 568,000-square-foot flow-through pallet and cross-docking facility with 126 truck dock doors.

One wing of the building is designed to accommodate cross-docking operations to reduce handling, labor and storage costs -- savings that are passed to on customers, Wright noted.

The new warehouse will handle 6,800 items for Supervalu's locally based division, "because we've had significant growth over the past 10 to 15 years in Minneapolis, and we need this kind of facility," Wright said.

The Hopkins warehouse could serve as a model for similar facilities in other regions, he pointed out, "but at this point it's probably unique because of the tremendous volume we're doing here."

Supervalu operates two regional facilities for slow-moving merchandise -- one in Anniston, Ala., that handles grocery and nonfood items for five Southeastern distribution centers; the other in Oglesby, Ill., for nonfoods at 16 distribution centers in the company's Midwest, central and northern regions, with groceries expected to be added sometime in the future, Wright said.

Supervalu had considered opening a regional facility in the Pacific Northwest, "but what's held us back is the fact that distances are so great in areas like Montana and Washington that we haven't pursued it yet," Wright said.

To be more responsive to its customers' needs, Supervalu has been introducing an Activity-Based Sell program to customers for more than a year -- a program in which pricing reflects the actual cost the distributor pays for merchandise, with all performance dollars passed on to retail customers to enhance their sales performance.

Wright said approximately one-third of Supervalu's volume already operates under the ABS program, with another third likely to be added within a year.

"Wherever ABS is in place, retailers tell us they're very pleased and they say they see improvements in their gross profits." he said. "And from our end, we see that it takes costs out of the supply chain, which is reflected in our pricing to independent retailers.

"Wherever we have implemented ABS, we see the cost of goods coming down and gross margins improving, and that's a win-win deal."

According to Cerankosky, the ABS program has helped Supervalu attract new customers to its wholesaling segment. "What ABS really does is create a virtual chain that's attractive to independent retailers and lets the vendor know the street money he provides for promotional allowances is falling through to retailers.

"The whole process is volume-driven and gets rid of the old set of suspicions that wholesalers use promotional dollars to make inside margins."

Wright said rolling ABS out companywide is taking longer than Supervalu had anticipated, "but we're very excited about getting there."

Supervalu continues to regard its limited-assortment format, Sav-A-Lot, as a tremendous growth vehicle. The company operates 152 corporate units and licenses 639 stores.

Sav-A-Lot stores usually run 13,000 to 15,000 square feet, with about 1,250 stock-keeping units, of which 85% to 90% are private-label products, Wright said.

"Sav-A-Lot offers retailers an opportunity to operate a second format in the same town," Wright said. "Many Supervalu retailers have nice 40,000- to 60,000-square-foot stores, and opening a Sav-A-Lot enables them to attract another market segment in the same area."

The format is so fast-growing, Wright explained, "because it doesn't take a lot of capital to open one, and it doesn't require a lot of volume to make money. It's a niche market for people earning $35,000 or less, which is an underserved segment, and we still see great potential there."

Although he declined to pinpoint new geographic areas set for Sav-A-Lot expansion, He believes it's a concept that can be utilized coast to coast, "and maybe even internationally," Wright said, though there are no plans at this time to take it overseas, he noted.

The appointment of Bill Shaner to the new post of executive vice president and chief operating officer of Sav-A-Lot will enhance the chain's prospects, Wright said.

Shaner was formerly head of Supervalu's central division and, before that, ran the company's Laneco stores, "so he has the perfect experience on both the wholesale and retail sides to step in at Sav-A-Lot and help Bill Moran," Sav-A-Lot's president and CEO, Wright explained.