Supervalu Set to Squeeze Suppliers In an Effort to Beat Walmart at Its Own Game

Supervalu (SVU) will call on suppliers to make a bigger contribution to its turnaround as the company reworks buying and promotional practices to bring more muscle to bear on the market.

Retailers are continually haranguing their suppliers with suspicions that competitors are getting better prices than they are. Supervalu CEO Craig Herkert, a former Walmart executive, would know better than most just how much leverage big sales volume command. Few retailers are better at coaxing breaks from their vendors than Walmart is. Maybe Bed, Bath & Beyond (BBBY), but not many others besides. Herkert and his Supervalu colleagues are in a pretty good position to ascertain just what kind of breaks they can demand relative to the sales volume they can generate.

In a first quarter conference call announcing declining results, Herkert said Supervalu will more closely integrate its traditional supermarket, discount grocery and distribution divisions to emphasize the sales volume it can generate -- and the amount of buying it can do -- with suppliers who can give it better breaks on pricing and promotion. Indeed, Supervalu ran two promotions recently designed to persuade vendors that they ought to consider how to provide the kind of the breaks the company believes it deserves.

In the conference call, Herkert said, as transcribed by SeekingAlpha:

In May, we successfully ran a national sales promotion on soup across our 4,300 store network, including Save-A-Lot and our independent retailers. This promotion drove several million incremental unit sales within the category. In June, this event was followed by a similar promotion in the cereal category. Both power sale events went well, met sales targets and serve as an initial marker for our vendor partners that Supervalu can execute company-wide programs and move product quickly. Each successful event builds vendor confidence in our company-wide capabilities and should ultimately level the playing field with others in the industry.

Additional promotional consolidation should give Supervalu a particular lift among its traditionally oriented supermarket chains, such as Jewel and Shaw's. They focus more on service, and natural and gourmet food than its discount-oriented Save-A-Lot chain does, and they took a sales hit after the recession struck and some shoppers came to perceive them as too pricey.

Reorganization can help Supervalu not only on the promotional part of its pricing strategy but another it is pursuing. Supervalu plans to change how it handles convenience products that consumers expect to find in stores but that don't necessarily drive purchasing when they go on sale, Herkert said. Going forward, Supervalu plans to offer them at basic everyday prices that it will set close to the lowest offered by competitors.

The move takes them out of the promotional cycle and allows the company to cut labor costs associated with tasks such as regularly changing prices. Yet, Supervalu can benefit in another way as well. To the extent Supervalu works with vendors to unify and consolidate purchasing across the divisions, it can scale back marginal items, drive sales on the remainder and, with volume gaining, quality for bigger price breaks from those companies supplying what it still carries. With those volume discounts hand, Supervalu can set everyday prices lower and/or take more profit.

Considered together, the changes planned will help Supervalu focus promotions on products that generate a big reaction from consumers when they are offered on sale, driving more shoppers through its doors. They will provide suppliers with opportunities to drive higher sales volumes themselves, but at the cost of helping the company lower prices and inform customers that shopping its stores is less expensive, making Supervalu more competitive with its rivals.

Related:

• Herkert Brings the Right Stuff to Supervalu
• The Future Still Trying To Catch Save-A-Lot