SUPERVALU TO DEBUT NATURAL BANNER

Mark Hamstra

MINNEAPOLIS -- Supervalu here said last week that it would enter the burgeoning natural-and-organics retail space with a value-priced format called Sunflower Market.

The retailer/wholesaler said the new banner would debut in January 2006 in Indianapolis.

"We are seeing a growing demand for affordable organic foods with exceptional taste and nutritional quality," said Jeff Noddle, chairman and chief executive officer, Supervalu, in a prepared statement.

He said the Sunflower Market would draw on Supervalu's expertise in operating limited-assortment stores and its supply-chain know-how. The stores are expected to measure 12,000 to 15,000 square feet and carry 8,000 to 12,000 stockkeeping units that are "organic wherever possible, minimally processed, with no artificial colorings, sweeteners, flavors or preservatives." More than 100 of those items will be private label, under Supervalu's new "Nature's Best" label, the company said.

Departments will include grocery, frozen, dairy, produce, bulk foods, deli, bakery/cafe, wellness and meat and seafood. Stores will also carry beer and wine, Supervalu said.

Unlike its Save-A-Lot limited-assortment stores, many of which are operated by licensees, all Sunflower Markets will be operated by Supervalu, the company said.

A natural-food chain called Sunflower Markets already exists, but a spokesman for that chain, based in Longmont, Colo., said it has an agreement with Supervalu, which owns the Sunflower Market trademark, to use the name in several Western states.

The Colorado-based company, founded by Wild Oats founders Mike Gilliand and Elizabeth Cook, operates 11 stores in Colorado, New Mexico, Arizona and Nevada, and also has the rights to use the name in Utah, according to Bennett Bertoli, vice president of real estate at the chain.

"They [Supervalu] are concentrating on the Eastern part of the country, and we are concentrating on the West," he told SN.

Analysts seemed receptive to the idea of Supervalu entering the natural/organic retail space.

"I think strategically, it's an excellent idea," said Andrew Wolf, analyst, BB&T Capital markets, Richmond, Va. "It sounds a lot like Trader Joe's, which I think is the No. 2 natural chain behind Whole Foods. It's always a good idea to try to copy an already successful format, especially in a growing market, because there's room for more stores."

Wolf agreed with analysts from Goldman Sachs, New York, who noted in a research report that Supervalu's entrance into the natural/organics arena could spill over into its distribution business as well.

"We view this as a potential, albeit somewhat distant, threat to Wild Oats, and, to a lesser extent, [Dayville, Conn.-based wholesaler] United Natural Foods," the report said.

The report also indicated that Sunflower Markets, which Goldman said would be targeted at secondary, less-urban markets, did not appear to be a threat to Whole Foods, which tends to operate in more upscale areas.

Separately, Supervalu last week reported that net income for the second quarter that ended Sept. 10 was less than half of last year's second-quarter net income, which it attributed in part to charges for the planned sale of its Shop 'n Save stores in the Pittsburgh market.

The company also said its comparable-store sales were down 1.6% in the quarter and are expected to be flat for the year, excluding what the company called "planned in-market expansion." Such cannibalization contributed 0.5% to the company's comp-store decline in the second quarter.

Heightened competition and cautious spending by consumers are also having an impact, Noddle said in a conference call with analysts.

"We saw aggressive competitive activity in our Fort Wayne, Ind.; Cincinnati; and the Washington, D.C., markets as other retailers opened new square footage and stepped up their sales activity," he said. "This competitive activity included retailers utilizing fuel deals to attract consumers, who are heavily focused on saving pennies at the pump."

Retail sales in the quarter were flat at $2.5 billion, which reflected a higher rate of store closings, primarily in the Save-A-Lot banner.

Retail operating earnings for the quarter were $39 million, vs. $105.3 million last year, reflecting charges of $57 million for the previously disclosed plan to sell 20 Shop 'n Save stores to licensees in the Pittsburgh market and $5 million related to property damage from Hurricane Katrina, primarily at Save-A-Lot stores in Louisiana. Six Save-A-Lots in the state were still closed last week.

In the conference call, Noddle said Save-A-Lot licensees would open fewer stores than previously projected this year -- about 65 to 75 -- because they are focusing on remodeling instead.

Net income for the quarter totaled $33.77 million, vs. $78.54 million a year ago, while total sales for the second quarter were up about 2%, to $4.56 billion.

Through the first half, Supervalu reported net income of about $125 million on revenues of $10.53 billion, vs. net income of $228 million on revenues of $10.4 billion in the year-ago span.

Noddle said he predicted more opportunities for the company's independent wholesale customers to grow in the near future as more stores become available for acquisition through the potential breakup of Albertsons and other rationalizations.

"We've been saying for some time that we think that there's a rationalization of retail square footage that will occur and needs to occur in a lot of markets," he said. "I think the Albertsons situation is an early indicator that that is probably true [and] probably will lead to more activities of that type. Weaker players will leave markets, and some of the stores will be picked up by other in-market players. A lot of times we think those are great opportunities for independent retailers."

2nd-QUARTER RESULTS

Qtr Ended: 9/10/05; 9/11/04

Sales: $4.56 billion; $4.49 billion

Change: 1.6%

Comp-store: -1.6%

Net income*: $33.77 million; $78.54 million

Change: -57%

Inc/Share: 24 cents; 55 cents

28 Weeks: 2005; 2004

Sales: $10.53 billion; $10.4 billion

Change: 1.3%

Comp-store: N/A

Net Income*: $125 million; $228 million

Change: -45%

Inc/share: 88 cents; $1.60

* Net income includes after-tax charges of $45 million for the planned sale of 20 Pittsburgh stores, start-up costs related to growth initiatives and losses from Hurricane Katrina.