MINNEAPOLIS -- Supervalu here believes it has a variety of options to grow its business.
As a full-service logistics supplier, Supervalu sees opportunities for expanding all its bases, including retail customers, corporate stores and a growing list of third-party businesses, Jeff Noddle, chairman, president and chief executive officer, told SN on the eve of the company's 135-year anniversary next year.
"We want to push the envelope on the customer base that's available to us," he said.
"At Supervalu, we have the opportunity to consider whether we want to enter a market as a retailer, as a wholesale distributor, or both -- or to enter solely with Save-A-Lot. We consider all the possibilities when contemplating our options."
Noddle said Supervalu sees some opportunities for growth through acquiring other wholesalers, "although much of the business today is done by cooperatives, and it's harder to buy those companies because they are fraternal.
"But there are still a number of traditional retailers that are using other wholesalers whose business we can try to attract without acquiring those companies."
Supervalu also sees Save-A-Lot, its limited-assortment, extreme-value operation, as a potential entry vehicle into areas where it doesn't have traditional wholesale distribution, Noddle said. "We're always mindful of what's going on in those markets where Save-A-Lot is growing, and keeping an eye on what opportunities might exist."
Another option, Noddle said, is third-party outsourcing, "where we operate a facility that we own or one that the customer owns or something in between, where we can use that arrangement as a beachhead from which to grow."
Supervalu has boosted its income by picking up third-party accounts over the last six years through its Advantage Logistics program, "which has enabled us to serve larger retailers in a different way," Noddle said.
"It differs from our basic model because we don't own the assets and the inventory, and we don't report the income from those businesses as sales because the only revenues are the fees we charge to operate their facilities. The return on capital is high, though."
Through Advantage Logistics, the company handles distribution for Kroger facilities in Livonia, Mich., Phoenix and Denver, "and hopefully we'll get more Kroger business," Noddle said. Supervalu also provides logistics support for Atkins warehouses in Aurora, Colo., and Atlanta, and for a Target facility in Fort Worth, Texas.
"We believe, ultimately, there are a lot of big chains that might be interested in a third-party deal utilizing our technology and systems that focus on logistics as a science," he said.
"We think we can grow and become more of a utility in that business. There seems to be more receptivity as we build that business and as we add technologies and processes geared specifically to that kind of third-party situation."
Building Upon Its Assets
Supervalu is the nation's largest wholesale distributor, serving more than 3,200 stores out of 24 distribution centers (in addition to 16 Save-A-Lot facilities, with 14 for food and two for general merchandise). It also operates a retail segment of 261 stores (of which 230 are corporate-owned and 31 are franchised) and 1,252 Save-A-Lot stores (of which 409 are corporate-owned and 843 are licensed).
According to Edouard Aubin, an analyst with Deutsche Bank, New York, Supervalu has continued to transform itself over the last few years "from a low-profitability wholesaler with operations dispersed across significant portions of the U.S. to a successful operator of mainly discount-food formats, of which Save-A-Lot is now the biggest component."
He said Supervalu has rationalized retail assets other than Save-A-Lot by exiting markets like Denver, while expanding in markets where its corporate stores hold a top position, including its home base here. It has also centralized back-office functions for non-Save-A-Lot retail formats, integrated various divisions to cut costs and improve brand recognition, and established Advantage Logistics to capitalize on future supply chain outsourcing.
Supervalu services retail customers all over the United States, except the Northeast, which it exited last year when it gave up its New England operations in a swap with C&S Wholesale Grocers, Keene, N.H.; the Southwest and the West (although Supervalu is represented with a third-party account in the Southwest and Save-A-Lot stores in the Southwest and California).
Sales for the year ending Feb. 25 are expected to decline approximately $3.5% to $19.5 billion, compared with $20.2 billion in 2003, with the difference coming in its wholesale food segment.
Most of that difference is a result of the asset exchange last fall with C&S, in which Supervalu swapped its New England business for former Fleming accounts in the Midwest that had been acquired by C&S after Fleming liquidated its wholesale assets.
According to Noddle, Supervalu saw that volume as a means to make several of its Midwest distribution centers more efficient. At the same time, C&S saw Supervalu's New England business as a complement to its existing business in the Northeast.
The exchange involved roughly the same number of retail stores, although the sales Supervalu gave up in the New England operation were higher than the sales it added in the Midwest, Noddle acknowledged. "The difference between what we gave up in volume and what we took back was a negative $400 million," Noddle said. "But doing that transaction enabled us to move additional volume through nine of our facilities, which boosted productivity and profitability."
If he had it to do over again, Noddle said, he would still be willing to sacrifice the revenues for the profitability.
A limited non-competition agreement between Supervalu and C&S is in place for New England "that will last for a few years," Noddle said.
Looking ahead, Noddle said Supervalu anticipates growth in its wholesale and retail segments. "We expect relatively tangible growth from each segment, though we think retail will remain a larger part of the total because of the growth of Save-A-Lot," he pointed out.
Corporate retail sales account for slightly more than 50% of Supervalu's annual revenues. Noddle said he's not sure how much higher that segment will go, "though there's no magic number."
A Powerful Format
Save-A-Lot alone accounted for more than $4 billion in sales last year -- approximately 20% of Supervalu's total volume and close to 40% of its retail volume -- encompassing sales by licensed operators as well as corporate-owned stores.
John Heinbockel, an analyst with Goldman Sachs, New York, said Save-A-Lot's volume has the potential to rise to $14 billion within 10 years.
"Hard discounting is dramatically underdeveloped in the United states, [but] not likely to stay that way," Heinbockel said. "At present, hard discount stores have only a 1.8% national share, [but] given the growing low-income and elderly population in this country, there is no reason a 5% share cannot be attained within the next decade.
"Save-A-Lot currently has an estimated 45% share of the hard-discount market. But even if its share dropped to 35% to 40% during the decade, total volume would approximately be $13 billion to $14 billion, which would provide a strong, highly defensible growth opportunity most food retailers can only dream about," Heinbockel said.
Aubin praised the Save-A-Lot format, calling it "one of the most powerful concepts in the U.S. food retail industry, combining convenience -- easy in, easy out, no coupon hassles, and everyday-low pricing -- with discount prices on par with Wal-Mart Stores for national brands while outpricing Wal-Mart on private label, and featuring perishables and a treasure-hunt type of general merchandise offering that competitors simply cannot beat."
With 1,252 stores -- 70% of which are licensed and 30% of which are corporate-owned -- Save-A-Lot is the fifth-largest grocery chain operating under a single banner, Noddle pointed out. He said he expects Save-A-Lot to continue to be Supervalu's major growth vehicle, with expansion projected at 100 to 150 new stores a year.
Stores average 13,000 square feet, with 1,250 stockkeeping units -- primarily private-label merchandise -- geared to households with annual incomes of $35,000 or less, Noddle said.
"It's a dignified place to shop, and it delivers unbelievable values," he pointed out. "The stores are brightly lit, and it's a pleasant place to shop that delivers one of the best retail food values in any marketplace."
Nearly 400 of the 1,252 Save-A-Lots are hybrid stores that combine Save-A-Lot's conventional grocery assortment with general merchandise from Deal$ - Nothing Over a Dollar, a chain of dollar stores Supervalu acquired two years ago. "We've added 2,000 to 3,000 square feet to the Save-A-Lot footprint [to create the combo stores]. The combos are attracting more consumers than the basic Save-A-Lots do, with better volumes," Noddle said.
All new Save-A-Lots that open will be combos, he said, and the company hopes to convert most existing stores to the combo format, although there is no specific timeline, Noddle said.
Asked how the company determines which locations should be corporate stores, Noddle explained, "Some major metropolitan areas may require more stores and capital, so we usually go into those areas with corporate stores."
Corporate store ownership has been a significant part of Supervalu's business for the past 25 years.
Early on, the company would only acquire stores when a customer went out of business, Noddle said. However, in 1980, Supervalu acquired Cub Foods, a five-store group in the Twin Cities area, "because our executives then [Jack Crocker, chairman and CEO, and Mike Wright, president] had the foresight to see that Cub had legs for expansion," Noddle said.
"We bought Cub to put Supervalu in the retail business and to anchor our wholesale distribution business."
Supervalu operated Cub initially as a corporate chain and subsequently franchised some units in several markets.
Besides Cub, Supervalu operates three other price-impact formats: Shop 'n Save in St. Louis and Pittsburgh; Shoppers Food and Pharmacy in Washington, D.C., and Baltimore; and bigg's in Cincinnati. It also operates three conventional formats: Farm Fresh in Virginia; Scott's in Indiana; and Hornbacher's in North Dakota and northern Minnesota.
A Missed Deal
One retail company that may have gotten away was Dominick's, the Chicago-based division of Safeway. When Safeway could not reach an accord with the unions at Dominick's in 2003, Supervalu reportedly had the inside track on buying it -- until the deal fell apart, apparently because the union declined to negotiate with Supervalu, prompting Safeway to take the chain off the market.
Noddle declined comment on the reports.
In Supervalu's food distribution segment, revenues have declined this year because of the loss of the New England business, Noddle said. Yet profitability is up and other metrics are strong, including return on investment, cash flow, cost of goods, and supply chain costs in general.
Noddle estimated Supervalu's distribution centers have been operating at about 70% to 75% capacity since the company picked up the former Fleming volume. "With the addition of that business, we improved the percentage by several basis points because most of our lower utilization distribution centers were in New England," he noted.
Supervalu is always looking for ways to improve warehouse productivity, Noddle said, "but increases in health care and pension costs continue to affect everyone. We've got to find more ways to ratchet up productivity."
One such effort two years ago was a move to voice-pick technology at all distribution centers, which Noddle said has resulted in improved order-selector productivity and a 65% reduction in mispicks.
In another effort at cost-effectiveness, Supervalu is in the process of converting its customers to activity-based costing, in which Supervalu nets out all costs and charges customers on the basis of cost per service, "which introduces true economics to the system," Noddle explained. "We think that's the right way to address where the food industry is going."
MINNEAPOLIS -- "Supervalu: Tradition, excellence and future promise."
That's the postscript attached to Supervalu's new mission statement, reflecting its past, present and future as it prepares to observe the 135th anniversary of its founding.
According to Jeff Noddle, chairman, president and chief executive officer, "This company has a rich history behind it. While that doesn't assure us a future, it gives us strength and a foundation to stand on that means something."
Composing a new mission statement was an attempt to move with the times, Noddle explained. "The guiding principles of the past are still valid, but it was time to bring them up to date," he said.
The new statement was adapted from one composed in 1973 by Jack Crocker, Supervalu's chairman and CEO from 1973 through 1982.
"That statement served the company for 30 years, but we're a different company today and we operate against a much different marketplace that requires us to think differently. So we decided to update it to reflect some of our current values," Noddle said.
The mission statement reads, in part:
"Our mission at Supervalu always will be to serve our customers better than anyone else could serve them. We will provide our customers with value through our products and services, committing ourselves to providing the quality, variety and convenience they expect.
"Through open communication with our customers, employees, communities and shareholders, we will adapt to changing times while holding trust to the fundamentals that support both our growth and stability.
"We shall pursue our mission with a passion for what we do and a focus on priorities that will truly make a difference in our future."
Noddle said the mission statement is "a celebration of Supervalu's success historically and looking forward, but the basic idea behind it then as now is to serve customers better than anyone else can serve them."
Developing the mission statement took close to nine months, he said, with a panel of employees making suggestions and Noddle modifying them before returning them to the panel for more input. "At the end, I retained editorial rights. I think that statement will stand as part of my legacy to this company," Noddle said.
Noddle's Tough Decision
MINNEAPOLIS -- Attention, Kmart shoppers!
One of the earliest and most significant decisions Jeff Noddle has had to make as chairman, president and chief executive officer of Supervalu here was whether to bid for all of Kmart's food business three years ago.
Supervalu was already supplying two-thirds of the groceries Kmart was selling at its Super Kmart Centers and the Pantry sections of its discount stores in the Midwest, amounting to $2.4 billion a year. Dallas-based Fleming was supplying the other third, totalling about $1.2 billion worth of product, to Kmart stores in the Southwest.
In 2001, Kmart decided to go with a single wholesaler.
"Chuck Conaway had just come in as Kmart chairman, and he decided that food would be a growth vehicle for Kmart. He told us the $3.5 billion Kmart was doing would grow to $6 billion or $8 billion over the next few years, and he preferred buying from a single supplier. So he gave us six months' notice to decide if we wanted to bid for the whole account," said Noddle.
At the time, Kmart accounted for 11% to 12% of Supervalu's volume, Noddle told SN, "and we had to determine the viability of Kmart's plan and its ability to succeed long-term. We went through a lot of different iterations in thinking it through, but the more we continued down that path, the more uncomfortable the management team and I were getting. Finally, after a couple of sleepless nights, I decided we couldn't do it.
"We were working on our own strategies at the time of how to move the company forward, and we realized that if we did the Kmart deal -- and even if it was successful, which was questionable, and given all the resources we would have to devote to it -- we wouldn't be able to do everything we wanted to do. So it made more sense for us to pull out of the bidding.
"It was a painful decision in the short run because we knew it meant laying off 5,000 people [who were working on Supervalu's Kmart business at the time], and we knew Wall Street wouldn't like it. But for the future of the company, we felt we couldn't sacrifice our other strategies for this one deal. We also doubted Kmart's economics and believed the return was not satisfactory enough to bet all our resources against.
"So Fleming got all the business, and our last shipment to Kmart was in October 2001. Three months later, Kmart filed for bankruptcy. A year after that, Fleming filed. So, clearly, we believe we made the right decision for the future of Supervalu."