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Supervalu's Future: Will It Survive?

July 12, 2012
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Editor's Note: This is the first of a two-part series. Coming next week: The role private label can play in the company’s future, including feedback from Supervalu.

In its March 2011 cover story, PLBuyer magazine asked: Can Private Label Save Supervalu?

As Supervalu announced Wednesday that it would explore strategic options, including a sale of the company, after sluggish first-quarter sales, the question now is whether the company will be around long enough for its private label program to help steady the ship.

Supervalu has begun a new fair price plus promotion at its Jewel-Osco banner that it said should get half of the company stores in line with competitors’ pricing by the end of the fiscal year, and the remainder in line by the end of fiscal 2014.

“While near- and medium-term operating profit margins will come under pressure as price reductions initially outpace cost takeouts and volume improvement, the acceleration of these price investments is expected to create a path to improved longer-term performance and market share growth,” Supervalu CEO Craig Herkert said in a news release announcing fiscal first-quarter earnings.

“While our shift to a fair price plus promotion strategy is right for our business, it is essential that we move even more aggressively to lower prices, and anticipate and respond to competitor actions.”

Jim Hertel, managing partner for Barrington, Ill.-based Willard Bishop, a retail consulting firm, says the company might have to make substantial changes – such as suspending its dividend, as the company announced Wednesday, or selling off parts of the company – to buy time for the pricing changes and private label success to help the bottom line.

“I actually think the likelihood is that major changes are the most likely outcome,” he says. “They may have time, but at this point, they’re not the only stakeholder making the decision. In a publicly held company, when the board tells you it’s time to explore strategic options, the senior management can not feel real comfortable about that. I think we’re at that point.”

Among the reasons for the slumping sales is a customer experience that needs to change, said Jim Wisner, president of Wisner Marketing Group in Liberyville, Ill.

“The one thing they never fully addressed is, while they’ve addressed private label and a lot of other things, they’ve not fundamentally in any sort of major way changed what the shopping experience is,” he said. “One of the reasons consumers are leaving is, maybe their finding a better price, but in more cases, they’re finding a superior shopping experience somewhere else than what Supervalu offers.”

Craig Espelien, a  vice president at Consumer Products Inc., spent 17 years with Supervalu before leaving in 2006. He says the company needed a big move to give itself a chance to succeed.

“If it was me, I would probably sell Save-a-Lot first, and I would separate all the retail banners from the wholesale business,” he says. “ Then I’d sign a long-term supply agreement with a minimum distribution requirement to help with the efficiencies.

“And then I’d start to see how the chains operate on their own, and give them enough breathing room. Then I’d surgically invest my capex in those chains that have value and go market by market on pricing, the way they’re doing with Jewel. But pricing isn’t going to solve Jewel’s problem; they’ve got old, tired facilities, and their customers don’t want to come and spend at their store when they’ve got a brand new Dominick’s or Meijer or something else across the street.”

Private brands account for $6 billion in annual sales, Supervalu said, and the company has trimmed its private label brands from more than 100 down to 15 across three tiers. Essential Everyday, its mid-tier private label, rolled out last year with 1,200 items across 40 categories, and the company announced this summer that it would add 1,500 products by the end of 2013.

But have the moves come too late?

“They’ve had an impact, but not a sufficient impact,” says Hertel. “I think their issues, it’s fair to say, are more fundamental in terms of price/image and, quite frankly, the store base. And private label could have been, certainly on the pricing side, a real benefit. I think it’s probably necessary, but not sufficient.”

Although there are some aspects of the launch that are not his favorite – Espelien says the packaging and name “Essential Everyday” helped make the tier look more like a value brand than it probably should be – he says the private label program was the least of Supervalu’s concerns.

“Quite frankly, Supervalu has much more systemic problems,” he says. “I think its private label is on the right track, and its grand plan is right on consolidating labels, its marketing is better.

“Private label is kind of like the quarterback on the football team. It shouldn’t get all the credit for a win and it shouldn’t get all the blame when it loses.”

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