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Risks Loom at Supervalu as Initiatives Launch

Supervalu (SVU) is in the midst of a major effort to boost the efficiency of its operations under pressure from alternative food retailers not unlike the one it operates, Save-A-Lot.

In the circumstances, Save-A-Lot may be the vehicle that gets -- and holds -- Supervalu on the road to a better future.

Scaled down to 15,000 square feet and focused on providing low-priced national brand and private label products, Save-A-Lot is a cost effective grocery store operation that has become successful by providing quality that surpasses the expectations its prices create, even as it runs neat, bright, easy-to-shop sales floors.

Save-A-Lot is the apple of Supervalu CEO Craig Herbert's eye and, he said, the economic climate makes it an opportunity ripe for picking. In a conference call this past Tuesday, as transcribed by SeekingAlpha, he asserted:

Among the growth vehicles that Supervalu possesses, none is as potent as Save-A-Lot. I am committed to doubling the size of this hard discount format over the next five years--next year's capital plan calls for a doubling of Save-A-Lot's new store openings. We continue to refine our execution with the opening of each new store and have approved an aggressive growth plan for fiscal 2011, which includes opening 100 locations. We believe the current commercial real estate market only enhances the already strong growth opportunities available to Save-A-Lot. Over the past four months our real estate team has been working at a feverish pace to fill our pipeline. Already we are seeing interest from new prospects to license Save-A-Lot stores, and we continue to market locations to existing licensees. We believe our ability to grow both licensed and corporately owned stores will ensure that Save-A-Lot achieves its growth targets and maximizes the potential of this format.
As noted, the Save-A-Lot chain includes stores that are corporately owned and others that are owned by independent retailers who operate them under license to Supervalu. Herkert has referred to the independent operators with which Supervalu works as assets that can drive growth and instill the kind of vigor in the company's operation he clearly desires.

In fact, his plans for the company, including simplifying corporate structure, are designed to give Supervalu management more of the flexibility independents enjoy. He said:

As we look to the future, speed and simplicity will be Supervalu's mantra especially from an operating perspective. We will shine a light on inefficiency and bureaucratic decision making to streamline operations and facilitate operations. As I commented last quarter, we are embarking on a metamorphosis that will redefine and reposition the company over the long-term. Going forward, we will be America's neighborhood grocer, a company that is focused on the consumer with fair everyday prices, partnering with the finest independent retailers in the country, operating with a lower cost structure, ruthlessly allocating capital, leveraging our national scale while remaining locally relevant, operating with best in class systems and easier to do business with.
Herkert and Supervalu are taking on a lot and doing it in a hurry. In some ways, the urgency is warranted. Many of the company's competitors have been doing better than it has in the recession. Indeed, the recession hit at a particularly bad time for Supervalu, just after it acquired major supermarket properties from Albertsons, taking on debt to do so. As a result Supervalu has been hard pressed to balance the costs of integrating the new properties, remodeling stores to standards necessary to keep them competitive and giving customers the kind of price breaks they're looking for in the soft economy.
Yet, in urgency is the germ of haste. Already, Supervalu has talked about lowering requirements for its Save-A-Lot licensees. Several of the company's initiatives count more on approaches that can be termed entrepreneurial, and, while some hold that word almost sacred -- as encapsulating the best spirit of enterprise -- the reality is a lot of entrepreneurs fail.

Herkert is intent on bringing Supervalu resources to bear where they can quickly get the company moving in the direction of his vision for it, but no segment of food retailing provides an easy road to success. Even in what it identifies as its best opportunity, Save-A-Lot, Supervalu needs to push as retailers ranging from Walmart (WMT) to Family Dollar (FDO) develop more convenient and less expensive variations on their existing operations. Those are retailers that go after that same consumer Save-A-Lot targets. In the end, Herkert has a particular challenge, driving Supervalu based on its inherent strengths but keeping a diverse company that includes a wide range of store formats and an entire distribution business from flying apart as he does so.

Herkert faces the additional challenge of fitting the many traditional supermarkets Supervalu operates to an environment where they are confronted with highly efficient competitors and frugal consumers. But more on that to come.