SUPERVALU SET IN THIRD-PARTY LOGISTICS BID; KROGER SIGNED

ELLIOT ZWIEBACH

MINNEAPOLIS -- Supervalu here plans to go after additional business from retail chains by offering third-party logistics support, beginning with a supply contract with the Michigan division of Cincinnati-based Kroger Co., officials told shareholders at last week's annual meeting here.

"This is a fairly new growth focus for our company," said Jeff Noddle, president and chief operating officer of Supervalu's food distribution company, "but we believe the efficiencies resulting from our new Activity-Based Sell pricing system and our emerging multitier distribution system provide us with the opportunity to gain business from self-distributing chains."

According to Noddle, "More and more chains, both industry leaders and those that are capital-constrained, are outsourcing distribution to minimize capital deployed in support so they can focus on growing retail operations and reducing costs. We believe we are well positioned to benefit from this expanding industry trend."

In other meeting highlights, Supervalu disclosed the following:

Sales and earnings for the first quarter ended June 20 reached record levels, and the company said it plans a two-for-one stock split next month.

It anticipates expanding corporate-owned retail stores into new, unspecified parts of the country.

It will open its second regional distribution center later this summer in Oglesby, Ill.

It expects to expand the Save-A-Lot limited-assortment format into Arizona and Colorado for the first time later this year.

Supervalu said overall sales for the first quarter rose 3.4% to $5.2 billion, including an increase of 3.6% in its food-distribution segment and 3.2% in its retail segment. Same-store sales at corporate-owned stores rose 1.6% for the quarter.

According to Mike Wright, chairman, president and chief executive officer, "Sales increases in our distribution business are the direct outgrowth of the investments made over the past several years," with market-share gains in both full-service distribution and limited-assortment businesses resulting primarily from the addition of new customers and stores.

"Our retail business also continues to achieve strong year-over-year sales growth," Wright said, partially generated by a net increase of 13 stores, reflecting 40 store openings or acquisitions and 27 closures or sales. Supervalu operates 332 corporate stores.

The company said net income for the quarter was up 4.1% to $51.8 million, while operating earnings grew 3.7% on the distribution side and 2.9% on the retail food side. Wright said Supervalu plans a two-for-one stock split, to be effected by a 100% stock dividend payable Aug. 18 to shareholders of record July 20. He said Supervalu has a history of splitting its stock when the stock price reaches the range of $40 per share, and this latest split is the sixth since 1971.

He said the company's stock price since the beginning of the fiscal year has risen 38%, from $32 to $44.

Addressing shareholders about plans for third-party logistics support, Noddle said Supervalu's first customer will be Kroger's Foodland distribution center in Livonia,, Mich., which has historically provided goods to independent retailers as well as Kroger's Michigan stores.

According to Noddle, "We are in the process of converting the distribution center to a Kroger-only facility, and we've converted many of the independents formerly served by Foodland to Supervalu's Fort Wayne, Ind., facility."

He also said Supervalu "will have the opportunity" to bid on future outsourcing projects for Kroger.

Among Noddle's other comments at the meeting:

The newest format Supervalu is offering to customers is "Fresh Focus," which emphasizes perishables. He said retailers have converted to or built 40 Fresh Focus stores, with 25 additional projects under way.

Supervalu plans to reduce costs by lowering the number of inventory days outstanding by two days, for a savings of about $50 million; and by improving shipping logistics through multiple distribution paths and new routing software.

The distributor's Anniston, Ala., facility -- its first regional distribution center for slow-movers -- has achieved volumes 20% higher than originally anticipated when it opened in June 1996.

In addition to enabling Supervalu to pick up additional business in the Southeast -- including Bruno's, Birmingham, Ala.; Jitney-Jungle Stores of America, Jackson, Miss.; and Schwegmann Giant Super Markets, New Orleans -- "we have leveraged the valuable experience gained in the Southeast to get two additional chain accounts in different parts of the country: Valu Food in Baltimore and (the Milwaukee division of) Jewel Food Stores in the Midwest."

Supervalu will open a second regional distribution center, in Oglesby, Ill., later this summer that will serve 12 distribution centers in the Midwest. "Because of its size, we are starting out with only general merchandise and health and beauty care and will add other slow-moving product over time," Noddle said.

Bill Bolton, president and chief operating officer of Supervalu's retail food companies, said the distributor plans "to be more strategic with market expansion in the future, filling in existing markets with the right stores from our stable of formats and expanding into new ones.

"Our goal is to become one of the major food and drug retailers in the country," Bolton said, noting that Supervalu's corporate stable of 328 stores is equivalent to the 13th largest food retailer in the United States, with sales just under $5 billion.

He said expansion plans this year include five new corporate Cub Foods stores, three Shop 'n Save units, one Scott's and 30 corporate Save-A-Lots; in addition, Supervalu customers will open two Cub franchises and 110 licensed Save-A-Lot stores this year, Bolton said.

"We also have new initiatives in place to add to sales by increasing the size of the average purchase and the frequency of shopping trips, using new relationship-marketing tools and improving customer service," Bolton said.

Among Bolton's other comments:

Supervalu plans to increase the percentage of private-brand items in the sales mix of its corporate stores, based in part on the broad acceptance of private-brand merchandise at its Cub stores since their introduction in 1996.

The company will focus on cost management, with an emphasis on inventory reduction through implementation of category management programs and installation of new systems, including an upgraded labor-scheduling system.

Because all the company's retail operations were acquired, one of Supervalu's goals this year is "standardizing systems to reduce costs and increase operating efficiencies," Bolton said.

Expanding on that theme in Supervalu's annual report, Bolton said the retail team plans to initiate a process "to uncover, standardize and adopt best practices and thus increase operating efficiencies" for corporate stores, including economies of scale in store and financial systems and check authorization systems; a common approach to labor scheduling; and cost-reduction opportunities throughout the stores.

Dave Boehnen, executive vice president in charge of Save-A-Lot, said the company intends to grow its limited-assortment format "into a national presence," beyond its current primary operating areas in the Midwest and Southeast.

Among new market areas for Save-A-Lot expansion this year, he said, are Arizona and Colorado.

1ST-QUARTER RESULTS

Qtr Ended 6/20/98 6/14/97

Sales $5.2 billion $5.0 billion

Change 3.4%

Same-store 1.6%

Net Income $51.8 million $49.8 million

Change 4.1%

Inc/Share 85 cents 74 cents