SUPERVALU SEEN FUELING RICHFOOD OPERATIONS

ELLIOT ZWIEBACH

MINNEAPOLIS -- The pending acquisition by Supervalu here of Richfood Holdings, Richmond, Va., is likely to result in major capital investments by Supervalu in its new corporate stores and retail accounts, industry analysts told SN last week.

The deal also signals that consolidation will continue to drive the wholesale sector and that Supervalu will be a leader in that effort, analysts said.

Supervalu's actions with Richfood, according to analysts, are likely to include:

Offering the Sav-A-Lot limited-assortment format to operators in the Mid-Atlantic region Richfood serves;

Expanding Shoppers Food Warehouse in the Washington area and enhancing its performance through sharing of best practices; and

Being more willing than Richfood has been to make loans to grow retail customers.

Supervalu officials said the company is in a quiet period prior to the merger and declined comment. The pending merger, disclosed earlier this month, is expected to close in the fall.

Gary Giblen, New York-based managing director of NationsBanc Montgomery Securities, San Francisco, said the Supervalu-Richfood merger "underlines the ongoing trend toward consolidation, which is being driven in part by the fact there are more and more compelling buying advantages being achieved through national volume.

"Richfood has a very high regional volume, but there are now more national deals, which puts Richfood at a disadvantage, and that's one of the driving factors in wholesale consolidation."

Chuck Cerankosky, a securities analyst with McDonald & Co., Cleveland, said the Supervalu-Richfood merger "shows there will be ongoing consolidation in the wholesale as well as the food-marketing sector, and we will see more deals like this one. Certainly, Supervalu has the capacity to make both wholesale and retail acquisitions."

Industry observers have previously suggested that Supervalu is a potential candidate to partner with Jitney-Jungle Stores of America, Jackson, Miss., if Jitney goes ahead with plans to seek a strategic partner -- although the company has recently backed off on the certainty of pursuing such a strategy.

Supervalu's strong financial position should prove a boon for retailers served by Richfood, observers told SN.

According to Mark Husson, an analyst with Merrill Lynch, New York, Supervalu's balance sheet "allows it to aggressively expand its most promising retail operations, so I'm looking for a massive expansion program for Shoppers in the Washington, D.C., area. "In addition, where Richfood has shied away from making loans to its most promising customers to grow their business, Supervalu encourages it, so we can expect more growth among independent customers as well."

According to Cerankosky, Supervalu has more experience operating retail stores than Richfood, which got into that business in a major way only last year, "and Supervalu will make retail a bigger part of the Richfood operation as part of a key strategic effort," he told SN.

Part of that effort may be the expansion of Sav-A-Lot into the Mid-Atlantic market, Cerankosky said. "Some independent customers might be attracted to alternate formats that Supervalu offers, particularly Sav-A-Lot. Independent retailers have a vision of the local market and they know how to segment it, and Supervalu has the ability to provide the right upscale or downscale format to fit each operator's needs."

Giblen said Supervalu's ability to source the Sav-A-Lot stores through Richfood's facilities should make the spread of Sav-A-Lot "very reasonable."

Analysts also said Shoppers is likely to be a major beneficiary of the merger. Shoppers, Lanham, Md., is the 37-unit price-impact format Richfood acquired in May 1998.

"Shoppers is No. 3 in the Washington, D.C., market, which is a good market to be in," Jonathan Ziegler, a San Francisco-based analyst with Salomon Smith Barney, New York, said, "and Shoppers can definitely benefit from sharing best practices from Cub."

According to Cerankosky, "The Mid-Atlantic is a nice growth area for retail, and Richfood's Shoppers Food Warehouse will appeal to Supervalu, given the fact it operates the price-impact Cub format."

Analysts said other synergies from the merger may include the following:

An ability to make distribution patterns more efficient in the Mid-Atlantic region, including a possible consolidation of warehouses as Supervalu integrates the two companies -- which could prompt Supervalu to open additional regional distribution centers;

Better buying by Supervalu, to the benefit of Richfood customers;

A better knowledge of retail operations by Supervalu;

More economies of scale through personnel rationalization; and

A rationalization of private label, which would give Supervalu opportunities to expand its corporate program.

Analysts expressed agreement that Supervalu's acquisition of Richfood was a direct result of Richfood's pending loss of the business of Giant Food Stores, Landover, Md.

Giant had been Richfood's largest volume customer, accounting for annual sales of about $76 million per year, or about 18% of the distributor's total volume. However, since Giant's acquisition by Netherlands-based Ahold last year, it has begun to phase out purchases from Richfood in favor of self-supply through Ahold's distribution system.

That phaseout is scheduled for completion this summer.

"Clearly the loss of the huge chunk of business done by Giant was the catalyst for the merger," Husson said. "There was not much business to pick up in Richfood's trade area to fill that volume hole, and Richfood's core customers were not growing at a rate that would drive a compelling earnings story.

"So the options were to peck away at the business in a difficult environment with one hand tied behind its back because of declining volume or realize value by combining with a company like Supervalu."

The price of the deal -- $18.50 per share -- made the merger very attractive for Richfood shareholders, Husson added. "Richfood's stock price had bottomed out at about $13 a share -- down from $20 before it lost the Giant business -- and Supervalu was offering a price Richfood shareholders were unlikely to get in the foreseeable future."

According to Ziegler, "When Richfood looked at the loss of its Giant volume, it had to ask itself how it could continue to grow. It had already gone fairly far with consolidation in the Mid-Atlantic area, and it realized its future returns would be more marginal.

"So merging with Supervalu made sense, because Supervalu had no presence in that area, and it has broader distribution, better buying power and a strong retail sense that could benefit Richfood's shareholders -- and at $18.50 a share, Richfood shareholders certainly got a super value."

Officials at Richfood told SN last week the number of people whose jobs will be eliminated will be minimal. "At the corporate offices there will be some redundancy, and some people won't be going forward with the company," John Belknap, senior vice president and chief financial officer, said.

"But Supervalu is buying this company to grow it, and most people will remain."

Belknap said he has no long-term plans at all. "I'm here to see Richfood through the closing of the deal, but Supervalu already has a good chief financial officer in Pam Knous, and they don't need two chief financial officers."

John E. Stokely, chairman and chief executive officer, could not be reached for comment last week.