July 12, 2012
Supervalu Exploring ‘Strategic Alternatives’
Grocery giant Supervalu is exploring a sale of all or parts of the company following on the heels of a quarter where same-store sales fell 3.7 percent and earnings declined 45 percent.
The company, which hired Goldman Sachs and Greenhill & Co. to pursue a sale, also announced it would suspend its dividend and that it is planning an additional $275 million in operational cuts to the $75 million previously announced.
"From administration to retail stores to distribution centers, we are identifying opportunities to become leaner and more efficient," Craig Herkert, chief executive officer and president of Supervalu, told analysts, according to the Star Tribune.
While Albertsons is generally acknowledged to be the weakest link in the Supervalu chain, the company’s sales problems extend way beyond that. Even Save-A-Lot, the limited assortment concept that Mr. Herkert had pegged for aggressive growth, saw its same-store numbers slip 3.4 percent in the last quarter.
Mr. Herkert sees lower prices as the means for Supervalu to better compete across the board.
"It is essential that we move even more aggressively to lower prices, and anticipate and respond to competitor actions. We expect our business transformation to meet our customers’ demands for great quality at lower prices," he said in a statement.
While Supervalu’s shares are relatively cheap, dropping to $3.90 in after-hours trading, a sale may prove difficult.
"Nobody views it as a viable buyout candidate anymore," Bob Summers, a grocery analyst with Susquehanna Financial Group, told Reuters. "Why pay for them when you’re going to get the market share for free?"
Mr. Herkert, who continues to remind the investment community that Supervalu is profitable, said, "With our first fiscal quarter results falling well below our expectations, we must wage a more forceful response to the competitive challenges we face. We believe that the steps we are taking are prudent and will be beneficial to all of our constituents."
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Discussion Questions
Discussion Questions: Is Supervalu pursuing the right steps to become more competitive in the marketplace? Do you expect that the entire company will be sold or just parts of it? What companies are likely to be doing the buying?
Poll
I don’t see Supervalu surviving simply by lowering prices in its midtier stores. From my experience shopping in stores like Jewel or Star Market, there are stronger grocery operators out there (Kroger, for example) who would be smart to look at selected acquisition targets in the Supervalu store portfolio. Meanwhile, the best breakup value for investors might lie in a spinoff of Supervalu’s original supply chain business.
Lower prices lead to lower profits, unless the service level drops down to bare bones, like a Save-A-Lot.
It is very difficult to operate a slew of different store formats, and Supervalu will struggle to sell their business. Fleming used to be the largest player in the country, along with A&P, and look what happened. Unless this economy dramatically improves, more stores will begin to feel the same impact, as shoppers search for bargain basement deals. We are seeing a thinning of the heard, and it will settle itself, without any government intervention, as it should.
When you think about the short list of likely suitors for Supervalu, one would have to have to agree with Mr. Summers, of Susquehanna Financial Group, who stated (paraphrasing) “why pay for them, when you can pick up their market share while they implode?” Of course, there are always other wholesalers that might be interested in bits and pieces, but hardly the optimal situation for Supervalu shareholders.
To that end, I believe Supervalu will need to shore up their business to the extent that their comps are flat to slightly positive, before any serious discussion of merger or acquisition is viable. To effect this turnaround, it is not just about cutting costs at HQ and lowering prices at retail. Banner strategies and market positioning vis-a-vis the competitive set in each of their critical markets is mandated.
Much the same as the current travails of Food Lion in the southeast, Supervalu has lost relevance to many shoppers, being neither the cheapest, the freshest, or the most convenient place to shop. William Ander and Neil Stern co-wrote one of the best books on retail positioning I have read, “Winning at Retail.” I would recommend the senior executive team at Supervalu to read this book from cover to cover and work to re-build a winning position for their banners and their business as a whole.
Supervalu is an amalgam of stores to begin with … so it makes sense that they would sell pieces of it to improve their position. In any case though, I could envision a scenario where the company was whittled away to a slender reed. The reason? Their equity isn’t as strong as it needs to be in the Darwinian retail world of today.
Supervalu has not been competitive in the marketplace for several years. They can’t figure out how to sell groceries as cheap as Walmart, they can’t provide customer service with skeleton crews, and they can’t provide modern facilities with no money for cap ex. They are Fleming, A&P, and Penn Traffic all over again.
Lowering prices they can’t and won’t do. Otherwise they would have done that already rather than promise to do it in two years after it’s too late. Overpaying for under-performing stores and worse yet, borrowing money to do it. Not the greatest move when they’re really not very good at retail to begin with.
I would expect it to be sold off in piecemeal. The competition has already been expanding and growing the past two to three years assuming SVU will fold, rather than try to buy their assets. The possible buyers are far too numerous to name since I think it will be sold in a hundred pieces. With so many low volume, under-performing stores, expect to see a lot of dark real estate.
Supervalu will be so much better off to sell off some of the banners it owns. It just has not worked out well to have so many separate supermarket chains, and even one drug chain, all controlled from the one office in Minnesota. Each of the banners has lost their regional appeal and points of differentiation, and I have often wondered what is the point of even keeping each banner? Many of them have lost their brand image anyway.
Furthermore, from the supplier’s perspective, Supervalu is one of the most difficult and most expensive retailers to work with for distribution and promotion, and it’s also very difficult to partner and manage over the brand’s business.
Become competitive by cutting expenses? So same store sales results were poor because operations were too costly? Buck up and do it right vs. shrinking your investment in merchandising, floor experience and display. Supervalu has tremendous leverage and excellent store locations. What is the root of the problem? Why aren’t they competitive? Where are their loyal customers shopping if not with them to the same degree of frequency and spend? Sure, sell it all off to Sainsbury’s and they will right the ship in a hurry.
Goldman Sachs should do well in the proposition, and the Board will be “protected” from making any questionable moves.
However, the real fact of the matter is, the assemblage of banners in Supervalu has been messy at best over the past 20 years. Breaking up this company will be even more of a challenge. Some sharp strategic minds from operations, marketing, merchandising, and financial are going to have to be involved in determining if and what banners buyers and sellers should cobble together.
Supervalu is going to have to be willing to sell out entire markets. This will take some tough-minded discipline from execs in saying it is time to “STOP DOING THIS MARKET,” in order to free up decisions in other areas of the company.
Not pleasant. It has to be done. Get started.
Not sure “Lower Prices” is the answer to Supervalu’s competitive challenges. Supervalu needs to find an area they can differentiate themselves from competitors and price is not it. As I have stated in past comments, Walmart has won the low price battle. HEB and Dollar stores hold their own in the arena.
There are some other opportunities for Supervalu:
Update and enhance customer service – Maybe associates walk you out to your car and pack your groceries for you.
Add a small indoor play area for children that is monitored so parents can shop while their children play.
Hand a balloon to each child that comes in with a parent.
Partner with a local charity where one day a week a portion of sales goes to that charity – Drives traffic and community support.
Heavily promote Private Label options. Trader Joe’s model.
Work on creating huge and unique programs with National Brands participation – BBQ competitions in the parking lot, food truck’s set up in parking lot one night each week, live cooking demos.
Local stores could secure farmer’s markets to set up one day each week in the parking lot. Sounds competitive, but it will attract customers and provides the shoppers with a unique experience – Whole Foods model.
Some of these ideas sound way outside the box and that is what makes them attractive. To compete effectively you can’t do what others are doing. It is always best to be first with an idea than to follow others that came up with it. Walmart owns low price. Find an area that no one owns, or you know you can be the best at.
The answer to the first question is, “Yes, and, No.”
Supervalu needs to pursue all viable avenues as part of its fiduciary responsibilities. This obviously includes thinking about alternative approaches to leveraging existing assets.
On the other hand Supervalu’s problems extend far beyond the confines of the corporate offices or the unyielding judgment of the balance sheet. The market is changing. The consumer is changing. Lifestyles and eating patterns are changing. In fact, the only thing that isn’t changing — or, more correctly, isn’t changing fast enough — is Supervalu’s value proposition.
Assuming a sale — and that’s a large assumption — I would expect it to be parted out rather than sold in one piece.
As to who a buyer might be — look to VC or PE buyers.
Being competitive in the marketplace is not a rocket science demand upon management. It involves consistent pricing, steadily building favorable perceptions and not biting off more than you can chew. A company can lose when any one of these elements is sacrificed.
How can a once-great company lose its way? Supervalu had become a leading-edge company in the 70s and 80s. It always kept its objectives straight, earned 3 stock splits in that era and was the most dynamic company in the industry. During the next 2+ decades SVU had to confront new challenges in the changing marketplace. It embraced “hope” and took on expensive “opportunist” acquisitions that confused its identity and modified its objectives.
Reality, delayed as it may be, has now loomed in gloom and it is rather late to find the magical right steps to be more competitive as management and the board must realize they are late, late, late for a very important date with destiny just as the white rabbit was in Alice in Wonderland.
Whether the whole of SVU will get sold is more in the hands of fate than with the board of directors, but … parts will probably get sold or further shrunk. If there are component sales, the likely buyers will most likely be financial opportunists outside the industry.
If there is a moral in the SVU dilemma, it is that a company must always keep its objectives straight and keep its focus on serving its customers better than any one else could serve them. Hope, debt and confused objectives conflict with that … and that SVU apparently has accomplished.
Some folks have said from the beginning that a business model founded on logistics efficiency should not also try to run retail stores. Split the two and sell the retail banners to either a) the strongest player in an adjacent market (Kroger coming to Chicago sounds like a plan) or b) the investment banker willing to invest in the turnaround.
If Supervalu can still make money wholesaling groceries to Midwestern independents, great. If not, shut the doors.
It took a long time to get all the Albertsons renovations completed. The company may not have a long period of to wit and evaluate success. Selling part or all the company depends upon how desirable the real estate is to other retailers.
Kroger bought market leaders in Dillions and King Soopers and Supervalu bought distressed assets like Acme, Albertsons, and Shaws. Kroger may be interested in Hornbachers or Cub, but that’s about it. I think Ahold is a more likely suitor for Jewel-Osco. I disagree with whoever said one company can not run multiple formats and do it well. Kroger does it with Fred Meyer (Mass), Kroger banner (Grocery), and Food 4 Less (discount). That being said I think the real “prize” in the Supervalu retail presence is Sav-A-Lot. With the proliferation of the Dollar channel it likely has the most upside.
This piece shows just how successful Walmart has been at the lower end of the market. Agility is going to be key to continued growth here, but that is a tough sell for a company of Supervalu’s size.
Walmart could sure use the real estate for their smaller concepts, and the Dollar Stores could go nuts with a lot of that space. Problem is, you’re talking about 10 cents on the dollar so, could be a long, painful process.
A Chain is as weak as its weakest link: Albertsons. Never a bride, this perennial “bridesmaid” has always trailed three to six “steps” behind the market leaders everywhere. Throw her the bouquet…Beef up the Save-A-Lot selling proposition (Hello, Dollar Stores?)…Reorganize regional/independent banners into more cohesive units…offer these groups greater services and better buying deals. Did we say more SERVICE?
Well, this is sad. Actually, it isn’t… A company that went along pretty peacefully for years buys the “premium” assets of Albertsons, decides to roll Albertsons ideas out (tried and true failures) across its entire operation, and then fails? Who would have thought?
The thing that impresses me is SVU has managed to run the Albertsons operations into the ground even worse than the old publicly traded Albertsons, Inc. already had. That REALLY takes effort.
But everyone who buys any amount of stores from Albertsons (Stater excluded) seems to have problems. I go into former Albertsons Stores all the time and these people who buy them somehow manage to screw up the merchandising, decrease the cleanliness, increase the prices… and business falls off even worse than it already was before the buyers bought the stores; the worst buyers are Save Mart or the folks who bought stores in Oklahoma (various parties, all terrible). But to be perfectly honest, many of the Albertsons Stores I go into that are still operated by Supervalu today are worse than the average Save Mart or the average Oklahoma former Albertsons. The ones up in Oregon and Washington are the worst; SoCal and Vegas is very uneven.
This will be a good opportunity for some stronger regionals to pick up stores.
I predict Stater will pick stores up in Las Vegas and SoCal. I predict OR/WA/ID/MT/UT (5 stores left…)/WY will see many closures and some piecemeal sales to Safeway and independents; maybe some to Kroger. Jewel will be the Jewel and multiple parties will try to get it. Hard to say what will come of some of the odd stuff like Shoppers in DC, Cub, or the long-failing Acme and Shaws divisions….
The longer SVU holds on to these properties, the more their losing strategies will continue to drive off sales, the less value these stores will have.
Yes, SV may be profitable, but its model is long outdated. Change should be the first and last words out of SV’s management’s mouths every day. Starting with pricing, their distribution model, how they manage logistics, etc. SV has many opportunities and the only true way to solve these may be just to start over.
Albertsons’ redux, but with some interesting scenarios. First, spinning off Save-A-Lot as a cooperative much like Shurfine, IGA and Wakefern/Shoprite/SaveRite. With almost 1,000 stores franchised, this would make a lot of sense.
Next, what to really keep. They could exit the East Coast, and salvage both the wholesale division and the rest of the company. ShopRite has its eyes on the prize with Shoppers, while there may be breakup interest in Farm Fresh, Burkle wants Acme at a fire sale price, and Shaw’s is up for grabs, maybe in pieces similar to when A&P exited much of New England.
Supervalu just bit off more than it could possibly chew. Too much debt was never offset by the revenue stream.
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I don’t see Supervalu surviving simply by lowering prices in its midtier stores. From my experience shopping in stores like Jewel or Star Market, there are stronger grocery operators out there (Kroger, for example) who would be smart to look at selected acquisition targets in the Supervalu store portfolio. Meanwhile, the best breakup value for investors might lie in a spinoff of Supervalu’s original supply chain business.
Lower prices lead to lower profits, unless the service level drops down to bare bones, like a Save-A-Lot.
It is very difficult to operate a slew of different store formats, and Supervalu will struggle to sell their business. Fleming used to be the largest player in the country, along with A&P, and look what happened. Unless this economy dramatically improves, more stores will begin to feel the same impact, as shoppers search for bargain basement deals. We are seeing a thinning of the heard, and it will settle itself, without any government intervention, as it should.
When you think about the short list of likely suitors for Supervalu, one would have to have to agree with Mr. Summers, of Susquehanna Financial Group, who stated (paraphrasing) “why pay for them, when you can pick up their market share while they implode?” Of course, there are always other wholesalers that might be interested in bits and pieces, but hardly the optimal situation for Supervalu shareholders.
To that end, I believe Supervalu will need to shore up their business to the extent that their comps are flat to slightly positive, before any serious discussion of merger or acquisition is viable. To effect this turnaround, it is not just about cutting costs at HQ and lowering prices at retail. Banner strategies and market positioning vis-a-vis the competitive set in each of their critical markets is mandated.
Much the same as the current travails of Food Lion in the southeast, Supervalu has lost relevance to many shoppers, being neither the cheapest, the freshest, or the most convenient place to shop. William Ander and Neil Stern co-wrote one of the best books on retail positioning I have read, “Winning at Retail.” I would recommend the senior executive team at Supervalu to read this book from cover to cover and work to re-build a winning position for their banners and their business as a whole.
Supervalu is an amalgam of stores to begin with … so it makes sense that they would sell pieces of it to improve their position. In any case though, I could envision a scenario where the company was whittled away to a slender reed. The reason? Their equity isn’t as strong as it needs to be in the Darwinian retail world of today.
Supervalu has not been competitive in the marketplace for several years. They can’t figure out how to sell groceries as cheap as Walmart, they can’t provide customer service with skeleton crews, and they can’t provide modern facilities with no money for cap ex. They are Fleming, A&P, and Penn Traffic all over again.
Lowering prices they can’t and won’t do. Otherwise they would have done that already rather than promise to do it in two years after it’s too late. Overpaying for under-performing stores and worse yet, borrowing money to do it. Not the greatest move when they’re really not very good at retail to begin with.
I would expect it to be sold off in piecemeal. The competition has already been expanding and growing the past two to three years assuming SVU will fold, rather than try to buy their assets. The possible buyers are far too numerous to name since I think it will be sold in a hundred pieces. With so many low volume, under-performing stores, expect to see a lot of dark real estate.
Supervalu will be so much better off to sell off some of the banners it owns. It just has not worked out well to have so many separate supermarket chains, and even one drug chain, all controlled from the one office in Minnesota. Each of the banners has lost their regional appeal and points of differentiation, and I have often wondered what is the point of even keeping each banner? Many of them have lost their brand image anyway.
Furthermore, from the supplier’s perspective, Supervalu is one of the most difficult and most expensive retailers to work with for distribution and promotion, and it’s also very difficult to partner and manage over the brand’s business.
Become competitive by cutting expenses? So same store sales results were poor because operations were too costly? Buck up and do it right vs. shrinking your investment in merchandising, floor experience and display. Supervalu has tremendous leverage and excellent store locations. What is the root of the problem? Why aren’t they competitive? Where are their loyal customers shopping if not with them to the same degree of frequency and spend? Sure, sell it all off to Sainsbury’s and they will right the ship in a hurry.
Goldman Sachs should do well in the proposition, and the Board will be “protected” from making any questionable moves.
However, the real fact of the matter is, the assemblage of banners in Supervalu has been messy at best over the past 20 years. Breaking up this company will be even more of a challenge. Some sharp strategic minds from operations, marketing, merchandising, and financial are going to have to be involved in determining if and what banners buyers and sellers should cobble together.
Supervalu is going to have to be willing to sell out entire markets. This will take some tough-minded discipline from execs in saying it is time to “STOP DOING THIS MARKET,” in order to free up decisions in other areas of the company.
Not pleasant. It has to be done. Get started.
Not sure “Lower Prices” is the answer to Supervalu’s competitive challenges. Supervalu needs to find an area they can differentiate themselves from competitors and price is not it. As I have stated in past comments, Walmart has won the low price battle. HEB and Dollar stores hold their own in the arena.
There are some other opportunities for Supervalu:
Update and enhance customer service – Maybe associates walk you out to your car and pack your groceries for you.
Add a small indoor play area for children that is monitored so parents can shop while their children play.
Hand a balloon to each child that comes in with a parent.
Partner with a local charity where one day a week a portion of sales goes to that charity – Drives traffic and community support.
Heavily promote Private Label options. Trader Joe’s model.
Work on creating huge and unique programs with National Brands participation – BBQ competitions in the parking lot, food truck’s set up in parking lot one night each week, live cooking demos.
Local stores could secure farmer’s markets to set up one day each week in the parking lot. Sounds competitive, but it will attract customers and provides the shoppers with a unique experience – Whole Foods model.
Some of these ideas sound way outside the box and that is what makes them attractive. To compete effectively you can’t do what others are doing. It is always best to be first with an idea than to follow others that came up with it. Walmart owns low price. Find an area that no one owns, or you know you can be the best at.
The answer to the first question is, “Yes, and, No.”
Supervalu needs to pursue all viable avenues as part of its fiduciary responsibilities. This obviously includes thinking about alternative approaches to leveraging existing assets.
On the other hand Supervalu’s problems extend far beyond the confines of the corporate offices or the unyielding judgment of the balance sheet. The market is changing. The consumer is changing. Lifestyles and eating patterns are changing. In fact, the only thing that isn’t changing — or, more correctly, isn’t changing fast enough — is Supervalu’s value proposition.
Assuming a sale — and that’s a large assumption — I would expect it to be parted out rather than sold in one piece.
As to who a buyer might be — look to VC or PE buyers.
Being competitive in the marketplace is not a rocket science demand upon management. It involves consistent pricing, steadily building favorable perceptions and not biting off more than you can chew. A company can lose when any one of these elements is sacrificed.
How can a once-great company lose its way? Supervalu had become a leading-edge company in the 70s and 80s. It always kept its objectives straight, earned 3 stock splits in that era and was the most dynamic company in the industry. During the next 2+ decades SVU had to confront new challenges in the changing marketplace. It embraced “hope” and took on expensive “opportunist” acquisitions that confused its identity and modified its objectives.
Reality, delayed as it may be, has now loomed in gloom and it is rather late to find the magical right steps to be more competitive as management and the board must realize they are late, late, late for a very important date with destiny just as the white rabbit was in Alice in Wonderland.
Whether the whole of SVU will get sold is more in the hands of fate than with the board of directors, but … parts will probably get sold or further shrunk. If there are component sales, the likely buyers will most likely be financial opportunists outside the industry.
If there is a moral in the SVU dilemma, it is that a company must always keep its objectives straight and keep its focus on serving its customers better than any one else could serve them. Hope, debt and confused objectives conflict with that … and that SVU apparently has accomplished.
Some folks have said from the beginning that a business model founded on logistics efficiency should not also try to run retail stores. Split the two and sell the retail banners to either a) the strongest player in an adjacent market (Kroger coming to Chicago sounds like a plan) or b) the investment banker willing to invest in the turnaround.
If Supervalu can still make money wholesaling groceries to Midwestern independents, great. If not, shut the doors.
It took a long time to get all the Albertsons renovations completed. The company may not have a long period of to wit and evaluate success. Selling part or all the company depends upon how desirable the real estate is to other retailers.
Kroger bought market leaders in Dillions and King Soopers and Supervalu bought distressed assets like Acme, Albertsons, and Shaws. Kroger may be interested in Hornbachers or Cub, but that’s about it. I think Ahold is a more likely suitor for Jewel-Osco. I disagree with whoever said one company can not run multiple formats and do it well. Kroger does it with Fred Meyer (Mass), Kroger banner (Grocery), and Food 4 Less (discount). That being said I think the real “prize” in the Supervalu retail presence is Sav-A-Lot. With the proliferation of the Dollar channel it likely has the most upside.
This piece shows just how successful Walmart has been at the lower end of the market. Agility is going to be key to continued growth here, but that is a tough sell for a company of Supervalu’s size.
Walmart could sure use the real estate for their smaller concepts, and the Dollar Stores could go nuts with a lot of that space. Problem is, you’re talking about 10 cents on the dollar so, could be a long, painful process.
A Chain is as weak as its weakest link: Albertsons. Never a bride, this perennial “bridesmaid” has always trailed three to six “steps” behind the market leaders everywhere. Throw her the bouquet…Beef up the Save-A-Lot selling proposition (Hello, Dollar Stores?)…Reorganize regional/independent banners into more cohesive units…offer these groups greater services and better buying deals. Did we say more SERVICE?
Well, this is sad. Actually, it isn’t… A company that went along pretty peacefully for years buys the “premium” assets of Albertsons, decides to roll Albertsons ideas out (tried and true failures) across its entire operation, and then fails? Who would have thought?
The thing that impresses me is SVU has managed to run the Albertsons operations into the ground even worse than the old publicly traded Albertsons, Inc. already had. That REALLY takes effort.
But everyone who buys any amount of stores from Albertsons (Stater excluded) seems to have problems. I go into former Albertsons Stores all the time and these people who buy them somehow manage to screw up the merchandising, decrease the cleanliness, increase the prices… and business falls off even worse than it already was before the buyers bought the stores; the worst buyers are Save Mart or the folks who bought stores in Oklahoma (various parties, all terrible). But to be perfectly honest, many of the Albertsons Stores I go into that are still operated by Supervalu today are worse than the average Save Mart or the average Oklahoma former Albertsons. The ones up in Oregon and Washington are the worst; SoCal and Vegas is very uneven.
This will be a good opportunity for some stronger regionals to pick up stores.
I predict Stater will pick stores up in Las Vegas and SoCal. I predict OR/WA/ID/MT/UT (5 stores left…)/WY will see many closures and some piecemeal sales to Safeway and independents; maybe some to Kroger. Jewel will be the Jewel and multiple parties will try to get it. Hard to say what will come of some of the odd stuff like Shoppers in DC, Cub, or the long-failing Acme and Shaws divisions….
The longer SVU holds on to these properties, the more their losing strategies will continue to drive off sales, the less value these stores will have.
Yes, SV may be profitable, but its model is long outdated. Change should be the first and last words out of SV’s management’s mouths every day. Starting with pricing, their distribution model, how they manage logistics, etc. SV has many opportunities and the only true way to solve these may be just to start over.
Albertsons’ redux, but with some interesting scenarios. First, spinning off Save-A-Lot as a cooperative much like Shurfine, IGA and Wakefern/Shoprite/SaveRite. With almost 1,000 stores franchised, this would make a lot of sense.
Next, what to really keep. They could exit the East Coast, and salvage both the wholesale division and the rest of the company. ShopRite has its eyes on the prize with Shoppers, while there may be breakup interest in Farm Fresh, Burkle wants Acme at a fire sale price, and Shaw’s is up for grabs, maybe in pieces similar to when A&P exited much of New England.
Supervalu just bit off more than it could possibly chew. Too much debt was never offset by the revenue stream.