Is Supervalu on course?

Supervalu is on the mend. The company’s back-to-basics approach focusing on the hard discount Save-A-Lot banner and its wholesale business has been getting results.

A year and a half after CEO Sam Duncan took the reins at the troubled company, analysts applaud Supervalu’s improvement so far, but say the company still has a lot of work ahead of it.

“They’re doing a good job, but they just have a huge mountain to climb,” said Scott Mushkin, managing director, Wolfe Research.

“They’re doing a good job, but they just have a huge mountain to climb,” says analyst Scott Mushkin of Wolfe Research.

“They have a big mountain to climb to make this a business that actually grows its profitability. If you look at our model we don’t really have that. We have kind of flattish EBIDTA dollars,” he said.

Supervalu has looked to improve operations wherever possible.

Net sales for Supervalu’s three business segments — Save-A-Lot, independent grocery services and traditional retail banners — were $4 billion in the 2015 fiscal second quarter ending Sept. 6, a 1.8% increase from the same quarter last year. Net earnings, on the other hand, dropped 23% to $31 million.

Save-A-Lot is a bright spot in Supervalu’s business portfolio with a net sales increase of 8%. Some analysts see the banner as central to the company’s overall growth.

“Nothing gets turned around overnight. So I think they’ve clearly demonstrated that they’ve been able to drive the top line at Save-a-Lot; it’s just a question of what that’s going to take to have that flow through the bottom line,” said Karen Short, managing director, Deutsche Bank Securities, New York.

Fresh focus

With a footprint of 15,000 to 20,000 square feet, Save-A-Lot stores are operated by both Supervalu and licensees. Supervalu has invested in bringing retail prices down, improving the produce and private label offerings, and rolling out a saw-cut meat-cutting program.

“We are now working on more deeply integrating meat into marketing and promotional cadence which given the importance of the center look plate protein to the Save-A-Lot customer, we would expect to provide us a competitive advantage in the hard discount space,” said Duncan in a conference call with investors. Supervalu declined to comment for this article.

“Save-A-Lot is their growth engine,” says analyst Joe Feldman.

Identical store sales for all Save-A-Lot stores were 6.5% for the quarter ending Sept. 6, and Save-A-Lot’s corporate-run stores had identical store sales of 8.2%. Sales for the quarter were the highest on record, the company reported.

Basket size ticked up 1.8% and traffic increased 8.2% compared to the same quarter last year.

Supervalu expects sales from these initiatives to help the company’s bottom line going forward.

“As we move into the third and fourth quarters of a fiscal year, we expect Save-A-Lot’s operating margin to improve, as we began to cycle the same investments that began last year,” said Duncan.

One challenge for the future growth of Save-A-Lot is intense competition in the food retail space.

“Save-A-Lot is their growth engine, and it’s the deep discount model that seems to be resonating with customers, but they’re not alone in that world,” said Joe Feldman, retail analyst and senior managing director at Telsey Advisory Group, New York.

“You’ve got Aldi coming into the U.S., you have Walmart on a day-to-day basis that they’re competing with — let alone the grocers. I understand how you can position against the traditional grocer — maybe offer the lower prices — but it’s a competitive environment.”

From Save-A-Lot’s perspective, Duncan is eager to win business from any retailer.

“We’ll take it from anywhere. We are not afraid to put a store next to anybody. I’m not afraid to put a Save-A-Lot next to a Walmart or Aldi or whoever because of the great operation we have now,” said Duncan in a July call with investors.

By the end of the fiscal year, Supervalu anticipates increasing the Save-A-Lot store count by 65 new locations.

Eye on wholesale

The independent grocery services segment remains the largest part of Supervalu’s business — with over 45% of net sales in the second quarter.

After Supervalu sold the banners originally acquired from Albertsons to Cerberus Capital Management in a $3.3 billion deal in March 2013, Supervalu said it was going back to its wholesale roots.

The company has been trying to grow its customer base, adding service to 38 new stores last quarter, but it also lost business from other retailers, including former banner Jewel-Osco, which transitioned to supplying itself. Last quarter sales declined 1.1%.

Growing the independent business takes “time in terms of building the pipeline and then switching costs,” says analyst Karen Short of Deutsche Bank Securities.

“I would say they haven’t had great success with that [growing the independent business] at all, but those things generally take time in terms of building the pipeline and then switching costs,” said Short.

In March, Supervalu consolidated its three-region business into two — East and West — to bring down costs.

Analysts said that the distribution business is a challenging one to grow.

“It’s not just them, it’s anyone in the business. SpartanNash struggles with growing their distribution business,” said Mushkin.

Sales 4 All Seasons

Fitting with its renewed wholesaler focus, Supervalu held its first three-day national sales expo Sales 4 All Seasons in St. Paul, Minn., this August. The event had 3,800 attendees who included independent retailers, suppliers and other business partners from across the country, said Duncan.

“By replacing our regional shows with this one big selling event, we were able to leverage Supervalu’s size to bring unique promotional offers to our retailers,” said Duncan.

Retailers told SN they liked the new expo format with expanded networking and buying opportunities.

“By replacing our regional shows with this one big selling event, we were able to leverage Supervalu’s size to bring unique promotional offers to our retailers,” says CEO Sam Duncan.

“They brought in vendors from the West Coast and the East Coast so we got to see a flavor that we don’t usually get to see when we just do a regional one,” said Anthony Gigliotti, VP of sales and marketing at Boyer’s Food Markets, Orwigsburg, Pa.

“I thought it was really neat for that part of it. We got to talk to a lot of people and looked at programs that we wouldn’t have necessarily seen had it just been in our region,” he added.

The expo also offered a series of educational workshops and seminars. Boyer’s president Dean Walker and Gigliotti attended a seminar that highlighted the different perspectives among generations.

“I think a lot of retailers there were kind of shocked at some of the information he put out. For instance, when does a Millennial really believe that they’re an adult? Most answers [from the audience] were 18, 21, but Gen Y is pretty much 30 years old when they consider themselves an adult,” said Gigliotti.

The expo was C&K marketing manager Stacey Reynold’s first, and it left a positive impression.

“I thought it was really an amazing show. There is a combination of elements there. There was an educational piece that I thought was really valuable and I thought that Supervalu really did a great job of putting it together and bringing in expert speakers who talked about very relevant issues,” Reynolds said.

Both Boyer’s Food Markets and C&K Market, Brookings, Ore., were winners of Supervalu’s 2014 Master Marketer Competition that recognizes innovative marketing campaigns (see sidebar).

New traditional look

The traditional retail part of Supervalu’s business is slowly growing sales, but not as the same rate as Save-A-Lot. In the 2015 fiscal second quarter ending Sept. 6, identical store sales were 0.4% and the traffic increased 1.4% compared with the same quarter last year. Basket size dropped by 1%.

Supervalu’s traditional retail segment is much smaller since the sale of the Albertsons, Jewel-Osco, Acme and Shaw’s/Star Market banners. However, the remaining banners — Cub Foods, Hornbacher’s, Shoppers and Farm Fresh — still represented 27.5% of net sales last quarter.

The company is remodeling several of these stores for a better shopping experience with expanded private label offerings. By the end of the fiscal year, Supervalu expects to introduce 400 new store brand products.

The banners will also have more natural private label products including the return of the Wild Harvest line and the introduction of the “Raised Without” meat line.

“Moving forward, we will continue to invest in our store base including where appropriate adding new offerings such as coffee bars and sushi,” said Duncan.

Stores for sale?

Because of lackluster sales growth in this segment, analysts Karen Short and Scott Mushkin argued that Supervalu would like to sell off this part of the business.

“I think honestly that they’d probably sell it if they could still. I just don’t think it’s a focus of the company and the performance is just — it’s doing OK,” said Mushkin.

Short pointed out that selling these banners would be difficult because Supervalu would like to hold onto the distribution business for these chains.

“The problem that you have is that you may have buyers for them but not necessarily buyers who want to use Supervalu as a distributor. So that’s why they haven’t been able to fairly rapidly sell those assets. In my opinion, if they could sell them, they would have,” said Short.

“They are hard at work, and they’ve made it clear that this isn’t something that is going to be fixed in a single quarter or year,” says analyst Chuck Cerankosky of Northcoast Research.

Because of the impact a sale would have on distribution volume, Chuck Cerankosky, managing director at Northcoast Research, Cleveland, doesn’t think Supervalu is ready to sell off these banners just yet.

“My view generally is that everything is for sale at every company. It’s just a matter of finding the buyer willing to pay a high-enough price, and we’re not there yet,” said Cerankosky.

All in all, Supervalu is has been taking a long haul approach to improving company performance. Feldman described the strategy “as a refocus on operational improvement.”

“They are hard at work, and they’ve made it clear that this isn’t something that is going to be fixed in a single quarter or year,” said Cerankosky.

By all appearances, Supervalu’s leadership team is satisfied with the progress made so far and is confident about future financial performance. In fact, CFO Bruce Bensanko indicated that the performance is on track.

“What’s essentially unfolding throughout the company, but at Save-A-Lot as well, is almost – very close to what we had planned,” said Bensanko in a call with investors.

“That is to say that we would make investments in order to grow the business and that over time those investments would grow gross margin dollars and therefore benefit our shareholders. And so what we are seeing largely unfolding is that plan.”

—By Jenna Telesca; additional reporting by Julie Gallagher

Sidebar: Data breach damage

The two breaches on Supervalu’s network in August and September cost the company a pretty penny.

The aftermath of the network intrusions came with legal fees and expenses for computer forensics and customer notification.

So far, Supervalu has had $2 million in expenses associated with the breaches, said company CFO Bruce Besanko in a conference call with investors last month. After insurance, Supervalu was responsible for only about $1 million of those expenses.

“Looking forward, we expect to incur additional costs related to the intrusions announced by the company, most of which we believe will be covered by insurance we maintain for cyber and privacy threats,” said Besanko.

“Unfortunately the consumer seems to be a little more used to [data breaches] at this point — more jaded,” says analyst Joe Feldman of Telsey Advisory Group.

Both the breaches involved Supervalu’s network that processes payment card transactions at retail stores. On the second breach, the company thinks that malware captured data at select checkout lanes at four Cub Foods franchise stores in Minnesota.

The investigations are ongoing, and Supervalu said it isn’t yet able to determine whether shoppers’ cardholder data was stolen.

“I can personally assure everyone that this is a matter that Supervalu takes very seriously, and we will continue to make investments in technology and our business, that will enhance our information security,” said Sam Duncan, Supervalu CEO and president.

Industry observers don’t expect Supervalu’s security breaches to deter shoppers in the long term or significantly hurt the company’s reputation. With the recent rash of breaches by retailers like Home Depot and JP Morgan Chase Bank, consumers may have made peace with the fact that their credit card numbers might get stolen.

“Unfortunately the consumer seems to be a little more used to it at this point — more jaded,” said Joe Feldman, retail analyst and senior managing director at Telsey Advisory Group, New York.

“It’s almost like assumed something is going to happen. Not to say it doesn’t hurt a little bit because if your competitor down the street doesn’t have a data breach, then obviously that might steer somebody to shop there. However, I don’t know that’s been a big deterrent to people shopping in their stores.”

—J.T.

Sidebar: Supervalu highlights independents' marketing efforts

Wisconsin-based Festival Foods transports Boston-caught fish, fresh, from shore to store in as little as 36 hours. A commercial detailing the journey was one of 20 winners selected across 10 marketing categories as part of Supervalu’s 2014 Master Marketer Competition. One of 450 entries, the commercial won the Tier 2 category, which is based on size and volume. “The Master Marketer recognizes the best of the best when it comes to our independent retailers’ advertising and marketing campaigns,” said Janel Haugarth, EVP, and president of independent business and supply chain services at Supervalu, in a press release.

Supervalu’s 1,800-plus independent retailer customers were eligible for the awards. Winners were unveiled at the wholesaler’s Sales 4 All Seasons national sales show.

“The commercial explains the time it takes from the catch to the processing to the finished product that you see in our stores,” explained Marlin Greenfield, Festival Foods SVP and COO. “There were a lot of good ads in that competition so we were quite honored to receive that award.”

C

In addition to individual category winners, Coborn’s, Inc. was named 2014 Grand Master Marketer for its marketing campaigns over the year. Overall Master Marketers were also named in each of the two tiers. Boyer’s Food Markets of Pennsylvania won the award for Tier 1, and Sentry Foods from Wisconsin, in Tier 2.

“There were 10 categories and we submitted entries in every category,” explained Dean Walker, president of Boyer’s, which was recognized for its “Shop Fast & Save Money” branding campaign, which was designed to alter the negative perception of independent stores that are less than 30,000 square feet, while emphasizing that the smaller footprint allows you to quickly shop the store and take advantage of money-saving programs, such as its annual buy-one, get-two-free anniversary sale, according to its contest entry. Since Shop Fast & Save Money launched in 2010 the 18-store chain has seen a 16.9% increase in sales; customer count is up 7.1%; and the average transaction has grown by over $2 per customer, the retailer said.

Boyer’s also won the Tier 1 Private Brand category for its Mrs. B’s Pie Extravaganza. After finalizing a recipe for in-store baked pies, it branded them under its Mrs. B’s label. The bakery and management team that sold the most pies during the two-for-$10 pie extravaganza won the right to throw pies at Boyer’s president Dean Walker. Bakery sales for the event were 20% over normal weekly averages, and weekly pie turns are up 300% over pre-event sales, according to Boyer’s contest entry.

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Another prize-winning event focused on a free giveaway. C&K Market’s Ray’s Food Place’s was the Tier 1 winner in the Extra Effort Advertising category for its Lunchbox Giveaway. As part of the retailer’s 2013 back-to-school effort, lunchboxes filled with snack items and nine relevant coupons were given away to children ages 12 and under at Ray’s 36 stores in Oregon and Northern California.

“Every year we try to do an event to give back to the kids in our community,” explained Stacey Reynolds, marketing manager at C&K Market. “We had 11 sponsors that year, so they really made this possible.”

The winners are automatically entered into the National Grocers Association’s Creative Choice awards, which will be presented at the industry’s annual conference in February, according to Supervalu.

—J.G.

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