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To Succeed Supervalu Must Rationalize Traditional Supermarket Thinking

In a market where alternative food retailers operate leaner and so more financially efficient operations, Supervalu (SVU) knows that the traditional supermarkets that make up the bulk of its retail operation have got to change to realize CEO Craig Herkert's expressed vision for the company.

If Supervalu is to become America's fairer priced and more locally relevant food retailer, what Herkert says he wants, then it has to tailor operations to make them more efficient economically. The company also has to become more effective at providing what consumers need in the neighborhoods where its supermarkets operate.

So Supervalu supermarkets are simplifying and focusing operations. Herkert noted that the company is moving away from a combination of high everyday prices and deep, diffuse discounts to provide more competitive prices across the store and target promotions to win the long-term loyalty of the core consumer groups it targets.

Another way Supervalu will simplify and focus is through SKU rationalization. SKUs â€" stock keeping units â€" are individual items as designated by kind and size. So a 64-ounce bottle of diet Mountain Dew represents one SKU. Supermarkets have undertaken SKU rationalization with a vengeance, Kroger and Ahold USA being conspicuous examples. They have swept out less popular products, often replacing them with private labels, in effect swapping variety for a price break. The top- and second-selling item in an assortment usually are safe, but further along, any product can be the target of SKU rationalization.

At Supervalu, Herkert noted in the company's latest conference call, as transcribed by SeekingAlpha:

We remained on track to complete SKU rationalization across our retail network within the next 15 months. Let me add that SKU rationalization is going well. During the quarter we completed the review of 15 product categories that will be implemented beginning in February. Among the categories we looked at was bath tissue. To give you some insight into this category, each national brand offers multiple distinct varieties of tissue and historically Supervalu has carried four to five pack sizes in each assortment.
By February, we will have pared back tissue SKUs by 25 percent. This will reduce the number of package sizes across brands but still keeps those varieties that are most relevant to our customers. This will increase holding power for our best selling items and add space for Supervalu's owned brands. If you think about what this does, it makes shopping easier because it reduces clutter and more clearly defines choices for consumers. It also makes it easier for our store associates who manage inventory and logistics.
Although many suppliers gnash their teeth at mention of SKU rationalization, supermarket operators regard the process as necessary. Most of the alternative food retailers they face carry fewer SKUs than they do. Costco carries about 4,000 SKUs while even a modest supermarket carries about 25,000. Fewer products mean purchasing and logistical efficiencies. With fewer products to sort and stock, fewer expensive employee hours are required to keep stores in operation. For supermarkets, SKU rationalization not only means less labor and supply chain cost, but also lower expenses related to damaged or disappeared product. Shrink, as the expense is termed, represents a real problem particularly for retailers that stock food.

Returning to the case of bathroom tissue, Herkert enthuses:

Consider this: the changes in this one category will eliminate one supplier from our operations, reduce store inventory by one pallet and trim in-store labor associated with maintenance. Now multiply these savings by 1,200 stores in a traditional retail network. You can see where I am going. With each category review and implementation Supervalu drives savings and improves the shopability of our stores.
It also makes the company more competitive. Supervalu's future growth may rely on the partnerships it develops through its distribution system and the expansion of its Save-A-Lot alternative grocery store, but, if it can't improve results in the traditional supermarkets it operates from coast under names including Shaw's, Acme, Jewel, Cub and Albertsons, the company will remain at a standstill at least. In the end, Supervalu's performance will be judged as much by how it makes traditional supermarkets more competitive as by how it operates closer to retail's cutting edge.