Supervalu Builds on Strengths as It Struggles To Transform

Last Updated Nov 30, 2010 7:00 PM EST

Supervalu (SVU) surpassed analyst estimates on earnings in the third quarter even as it fell short on sales, yet the company reported progress in transforming operations in a marketplace where not only supermarkets but also a range of alternative food retailers are pressuring the organization.

In the process, Supervalu executives are advancing efforts that leverage what they see as important advantages the company enjoys even as they reconfigure the traditional supermarket operation to make it more efficient and competitive.

Supermarkets were developed to serve the broadest possible range of food shopping preferences. Then a new generation of food retailer emerged, most conspicuously represented by warehouse clubs but including supercenters and specialty operations such as Trader Joe's, that focused on a specifically designated consumer needs in more cost-effective formats.

Craig Herkert, Supervalu's CEO is a former Walmart (WMT) executive and he clearly believes the company must focus on specific strengths for it to thrive, just as his former employer leveraged its distribution advantages to effect. For Supervalu, that means tailoring operations to address consumer preferences as they exist in the variety of constituencies it serves.

Supervalu runs a range of store formats in addition to traditional supermarkets including more service oriented food and drug combination stores under Jewel-Osco and other names. It also operates discount grocery stores under the Save-a-Lot name and even a hypermarket, one of the few such operations to survive in the United States, named biggs.

Herkert told analysts in the conference call Tuesday, as transcribed by SeekingAlpha:

No one format we operate can effectively meet the varying needs of consumers in all the markets we serve. However, our complimentary operations in multiple formats are a key strength that both differentiates Supervalu from other retail competitors and provides us significant flexibility in addressing the local needs of each market.
Herkert has used the example of Save-A-Lot to demonstrate how one Supervalu operation can support another when he discussed integrating the discount operation into Jewel-Osco territory in and around Chicago. In visiting various Supervalu facilities, Herkert said he has been considering how the company's food distribution business and customers can supplement store operations in the effort to reach critical consumer groups. He noted:
Some of the Hispanic retailers I met during my trips operate in-store tortillaria's and offer vast arrays of meats and cheeses as well as freshly prepared foods tailored to their neighborhood customers. Partnering with these local entrepreneurs will allow Supervalu to capture incremental market share that today is not available to our traditional retail banners.
No other major supermarket chain in the United States has a distribution business serving independent retailers on the scale of Supervalu's operation. And while it serves many small independents, the distribution operation also serves major chains, including Target (TGT).

Herkert continued:

While we have a meaningful retail presence in many major markets across America, focusing on hyper-local independents will offer Supervalu another incremental growth opportunity that leverages existing capabilities without having to invest in retail store locations. Again, this is incremental growth that would not come from our retail banners as they exist today, and it is a unique growth opportunity available only to Supervalu.
Beset by competitors that are more narrowly focused and in many ways more nimble in addressing the needs of core customers, Herkert is looking to build on what he identifies as Supervalu strengths to direct the company's resources where they will have the best effect. If that means using the distribution business to target Latino consumers, that's a route he's happy to take. But Supervalu today makes most of its money selling directly to the consumer. How the company means to transform its approach to food retailing is a topic for a post tomorrow.