SUPERVALU SELLS DEAL$ TO DOLLAR TREE

MARK HAMSTRA

MINNEAPOLIS - Supervalu here said last week it had agreed to sell its Deal$ - Nothing Over a Dollar chain to Dollar Tree, a Chesapeake, Va.-based operator of dollar stores.

"We've achieved the primary objective of the Deal$ acquisition, which was the introduction of general merchandise into the Save-A-Lot grocery stores," said Haley Meyer, a spokeswoman for Supervalu. "We've now made a strategic decision to focus on our core Save-A-Lot business and what we do best: providing high-quality food at the lowest possible price to our consumers."

The price is $30.5 million in cash, plus an undetermined amount based on the level of inventory Dollar Tree ends up acquiring. The transaction is scheduled to close by the end of March. Supervalu said it would incur an after-tax charge of $9 million in the fourth quarter of fiscal 2006, which ended last week, related to the sale.

Meyer said the sale was completely unrelated to Supervalu's pending acquisition of Albertsons, Boise, Idaho.

Deal$ currently has 138 locations in 16 states, from Pennsylvania west to Oklahoma, and from Michigan south to Alabama.

Supervalu acquired Deal$, then a 45-store chain, in 2002, for an undisclosed sum. It quickly rolled out the chain to additional locations, while beefing up its own limited-assortment Save-A-Lot stores with dollar merchandise from the Deal$ stores. Supervalu said it would continue to expand the combination Save-A-Lot format with expanded GM offerings.

Supervalu currently operates and licenses 1,277 Save-A-Lots, approximately 480 of which are combination stores. The combo stores do not carry the Deal$ banner.

In a conference call discussing its earnings for the fiscal year that ended Jan. 28, Dollar Tree said the acquisition would help fill out some Midwestern markets and would also allow it to experiment with offering a broader range of price points. At year-end, Dollar Tree operated about 2,914 stores and nine distribution centers in 48 states.

The company currently prices all of its merchandise at $1, but said it would examine closely the multi-price-point strategy pursued by some Deal$ combo stores in an effort to capture more sales.

Bob Sasser, president and chief executive officer, Dollar Tree, said in the earnings conference call that the company could be leaving a lot of revenue on the table by not offering more product at higher price points.

"We sell a lot of household plastics for a dollar, but we can't sell the large trash cans - it just doesn't fit the price point," he said. "But we know where and how to buy the item, and we could give the customer a great value at $2 or maybe $3. We sell washcloths, but we can't consistently offer a great value on a bath towel. By lifting the price point restriction, we can complete the assortment, leverage our competencies to offer value and drive incremental sales. Our customers are buying this product somewhere, and why not from Dollar Tree?"

By becoming more flexible with its price points, Dollar Tree also sees the opportunity to offer larger sizes of some items. For example, Sasser said that laundry detergent currently is a strong seller at $1, but customers often buy multiple packages to stock up. Offering a larger size at a higher price point might be more convenient for the shopper.

In addition, Sasser said Dollar Tree could begin offering more closeout items at prices higher than $1 as "in-and-out" specials.

"We believe that lifting the restriction of the price point could enable us to offer even more value, and the acquired stores provide a good platform for the development of that strategy," Sasser said. "The Deal$ store base is large enough to provide meaningful trials, but not so large as to adversely affect the enterprise. Our strategy is clearly aligned with our key competency, which is providing extreme value to the customers. We have the competency and infrastructure to make it successful, and we believe it will provide a vehicle to grow the company to even greater market share."

Sasser also noted during the call that the chain's rollout of coolers - slated to go into about 200 stores last year - is driving overall sales, both from the added SKUs and from increased sales of other merchandise in the stores to food shoppers.