SUPERVALU THINKS BIG

MINNEAPOLIS -- Supervalu's future is all about size.That's the thinking behind Michael W. Wright's strategy for the nation's largest food wholesaler and 14th largest corporate food retailer, as detailed in an interview with SN here.Wright, chairman, president and chief executive officer, stressed that the benefit of size will become even more important as costs spiral, food deflation reigns, technology

MINNEAPOLIS -- Supervalu's future is all about size.

That's the thinking behind Michael W. Wright's strategy for the nation's largest food wholesaler and 14th largest corporate food retailer, as detailed in an interview with SN here.

Wright, chairman, president and chief executive officer, stressed that the benefit of size will become even more important as costs spiral, food deflation reigns, technology advances and new food competitors take root.

Accordingly, he has mapped out a plan

for Supervalu to further build its portfolio on both the retail and wholesale fronts, actions that will move the industry further toward consolidation.

The consolidation and merger theme is all-important at Supervalu's offices these days, and is even evident in the furnishings. Wright's interview was conducted at a conference table just delivered to Minneapolis along with other pieces from the recently shut Wetterau Inc. headquarters in St. Louis. Supervalu acquired Wetterau in a deal that closed Oct. 31, 1992.

Wright's strategy calls for Supervalu to follow this course:

Acquisition of wholesalers and efficient consolidation: The company -- still digesting its acquisitions of Wetterau and Sweet Life Foods -- will continue to target other wholesale opportunities. Following such acquisitions, the emphasis will be placed on efficient consolidation, perhaps leveraging from the experience of the Wetterau consolidation.

Growing retail from within and without: Supervalu is "open to buy for the right retail opportunity," Wright said. But it also will focus on growing its existing chains and pursuing new formats.

Supervalu's game plan is impressing some securities analysts for its integrated approach. "Given what's going on in the industry, economic power is moving toward the integrated retailer-wholesaler," said Charles Cerankosky, an analyst at Hancock Institutional Equity Services, Cleveland.

"And Supervalu is well into that process, even though they have a long way to go. For instance, there are plenty of additional opportunities for Supervalu to grow by acquiring regional chains in retail. Concentrating on size is important in today's business, as long as its manageable. So far, in Supervalu's case, it's manageable."

In discussing industry consolidations, Wright talked in terms of powerful and clear-cut forces.

"We see pressures coming for wholesalers to consolidate so they have a greater mass and bigger capital base," said Wright. "It used to be that if a wholesaler was doing $300 million or $400 million, it was probably OK. But today, even in the billions it still gets tough to accomplish all those things. It was those kinds of decisions that really led Wetterau to look elsewhere and say, 'We need a stronger partner,' -- and they were a $5 billion company!"

Supervalu posted volume of $15.9 billion for its fiscal 1994 ended Feb. 26. Without the strength that consolidations can produce, many wholesalers will lack the economic clout necessary to keep their independents viable, Wright stressed.

"If independent grocers are to compete long-term with the giants of the food and now general merchandise discount industry, they've got to have the resources that will enable them to compete: technology, distribution efficiency, massive buying power to match up and a source of capital and help to get into newer, bigger stores so they can satisfy their customers."

Supervalu "anticipates continuing to be a part of the consolidation of the industry and being a major acquirer of other wholesale opportunities," Wright said. The top candidates are smaller, regional wholesalers that could be made healthier through association with a food industry giant. "We think there are a lot of areas where there would be great efficiencies by continuing to consolidate some of the smaller wholesalers, and that consolidation would work to the best interests of independent retailers in those areas because we can bring better services, better technology and capital for their growth."

Observers have noted that the biggest gaps in Supervalu's supply network are in the Southwest, California and southern Florida. "I would say these are gaps in areas where we're not currently serving independent retailers," Wright said. "But the traditional way of getting into areas is through acquisition of existing wholesalers, and there just isn't much opportunity. There aren't many wholesalers in those areas which you could merge with. So while they are gaps in the territory, they're not necessarily high-priority."

Where, then, are the likely areas for wholesaler acquisitions? "You could almost throw a dart," he said. "There are a lot of them out there where it would make sense. However, oftentimes things get in the way. People are proud of their distribution center and hold on till it's too late."

He pointed to the case of Keller, Texas-based Affiliated Food Stores, the wholesale cooperative that liquidated its operations last summer after two bankruptcy filings and years of operating in a tough economy.

"That co-op probably should have looked for a stronger partner 10 years ago, and not wait until everything's lost," Wright said.

Supervalu hopes future acquisitions will follow the efficiency lead of the Wetterau deal. That one has become a case study in economies of scale and is sharply fueling operating profit. Wetterau delivered some 1,700 primary new independent retailer customers and extended Supervalu's coverage to reach 47 states. Supervalu's buying power has been advanced markedly by the merger, with big gains on the private-label side in particular. The private-label buying functions of the two organizations were merged, reducing the cost of private label to former Wetterau customers up to 15% to 20%. "That has become possible because we centrally buy private label and Wetterau did not," Wright said. The acquisition also led to the merging of administrative functions. Wetterau's St. Louis headquarters recently shut, and the transition occurred "about a year and a half to two years prior to the time we thought it would happen," Wright said. The elimination of administrative duplications will reduce expenses at an annualized rate of between $25 million and $30 million by this summer.

In other efficiencies, Supervalu is pressing ahead with its program of implementing regionalized food buying and centralized purchasing of general merchandise and health and beauty care items. In the case of food buying, it is setting up regional offices in the upper Midwest and New England, patterned after its successful experiment in the Southeast. The aim is to pool buying power across multiple divisions. "These are things we've got to keep evaluating," Wright said. "If regionalized buying makes you more efficient but also gets better product costs for the customer, then that's the way you've got to go." Some of Supervalu's biggest efficiencies are being achieved from the consolidations of corporate wholesale facilities. In the wake of the Wetterau merger and the resulting redundancy of certain warehouses, Supervalu has now shut or is in the process of eliminating five facilities. For instance, it merged its two western Pennsylvania divisions into a single Pittsburgh unit, combined two Southeast facilities into a new Southeast division, and announced the closing of the Bloomington, Ind., warehouse. The latter unit's function will be assumed partly by the Champaign, Ill., division.

"By consolidating facilities, you get an enhancement of the efficiencies of the surviving distribution center," Wright said. "We looked at Bloomington and Champaign, and it made sense that because they're so close and we had excess capacity in Champaign, we should merge them. It was just an obvious thing that had to be done."

Fortunately for Supervalu, the financial rewards from shutting facilities will be generated for some time to come.

In the case of the Bloomington closure, "that only took place late in calendar year 1993, so most of the benefits of that would really move to this year and the year after," Wright said. "The consolidation of the two facilities in Pittsburgh is still to unfold in terms of the benefits: We did it last year, so you don't see improvements till this year or next year. And the closing of the St. Louis Wetterau headquarters will have some benefits this year and next year. So we've only realized portions of the benefits and they'll continue to roll out this year and the following year."

The process of merging redundant wholesale facilities is mostly complete, except in Supervalu's New England territory. In that region, the acquisition of Suffield, Conn.-based Sweet Life, a deal completed in March, changed the corporate strategy. The deal expanded the local distribution base to 280 additional retail customers and added some $650 million in sales. But it also created a new set of warehouse duplications in New England that will need to be addressed soon. "We haven't made a final decision, but there will be facilities consolidating," Wright asserted. "There has to be. There's just no other choice.

"As we consolidate into fewer facilities in New England, we think we can become more efficient and bring some services and financial help to the independent retailers served so they can get on aggressive growth paths. So we see New England over a period of time becoming a very successful region for independent retailers and for Supervalu."

Some trade observers have speculated that Supervalu will opt to keep the more modern Sweet Life facilities at the expense of Supervalu's other units in New England. But Wright declined to comment, saying only that he hoped for a decision within a few months.

The other side of Supervalu's business, retailing, received a giant boost from the Wetterau merger. That deal added 141 corporate stores and nearly 300 licensed units to Supervalu's total. It brought new chains to Supervalu, including Shop 'n Save, a discount food operation in St. Louis; Laneco, which runs a variety of formats in the Mid-Atlantic states, and Save-A-Lot, a limited-assortment chain in 13 states. Supervalu operated 258 corporate stores at the close of the past fiscal year, and expects that number to rise to about 290 this fiscal year. The biggest gainers will be Cub Foods, adding nine units, and Save-A-Lot, picking up 20.

"We're continuing to grow our retail entities, although we're not looking to expand current operations to new geographic territories at this time," Wright said.

Part of growing corporate retail entities involves experimenting with additional formats. The newest Cub format, called Cub Too, is a smaller version whose prototype opened in Columbus, Ohio, Feb. 2. At 28,000 square feet, the store is considered more shopper-friendly for some consumers. "It's a smaller store and doesn't have as many dry groceries," Wright said. "So it appears as if the perishables mix is larger. It's experimental. If it provides us with a good return, we'll see more of them."

Another Cub prototype, built in Apple Valley, Minn., provides an expanded presentation of general merchandise, cosmetics and fresh foods, Wright said. Supervalu is, of course, setting its sights on more than just existing banners.

"We have pretty much told the investment community that we are open to buy for the right retail opportunity," Wright said. "We will continue to look for appropriate acquisitions of regional retailers. They could be relatively small -- like Scott's or Shop 'n Save or Hornbachers -- or they could be larger regional groups." This strategy will provide additional market penetration and add to the efficiency of Supervalu's distribution centers, Wright said. While many of the company's corporate retail units are in the Midwest now, its search for new candidates is national, Wright added. Supervalu, however, hasn't been able to escape the negative same-store sales trend affecting the grocery business. Like-store sales declined 2% in both the third and fourth quarters of last year. However, Wright said those numbers only tell part of the story.

"If you're opening a lot of stores that20cannibalize existing stores, your same-store sales get impacted," he said. "No doubt sales are tough. But some of it is cannibalization, so we know what's going on."