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Supervalu PL Still Has ‘Tremendous Opportunity’

July 19, 2012
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Editor's Note: This is the second of a two-part series on the future of Supervalu. This week we discuss the role private label can play in the company’s future.

When Eden Prairie, Minn.-based Supervalu last week announced that it posted lower-than-expected earnings and that its board was undergoing a strategic review of the company, the grocer had other announcements to make.

It continued to be profitable. It continued to pay off debt. It had an operating cash flow of more than $1 billion.

But as sales slumped and the focus turned to the company’s future, investors and industry watchers were left to wonder whether there would be a future for the company. Supervalu announced that it would accelerate its fair pricing plus program, which will lower prices across half its banners by the end of this fiscal year, with the other half transitioned over fiscal 2014.

A major part of the pricing plan is the company’s private label program, and specifically its rollout of Essential Everyday, the national brand equivalent mid-tier line that is replacing banner brands for all the company’s stores.

With the strategic review under way that could lead to a sale of some or all of the company’s stores, though, many are wondering whether there is time for Essential Everyday to fully roll out and realize some of the cost savings that Supervalu had planned.

“I think we still have a tremendous opportunity,” Supervalu Vice President of Private Brands Sam Mayberry told PLBuyer exclusively Thursday. “We have a lot of opportunity to focus on private brands and grow private brands. I don’t think it’s too late. I think with the economy, where it’s currently at, we’re providing shoppers with ample incentive to look for value and savings. And as long as that exists, there’s always an opportunity to take advantage of the climate."

“I’m still very bullish on private brands.”

But others are not so confident. Analysts watching the company say its competitive disadvantage in pricing has hurt the bottom line, and there might not be enough time to correct that aspect, even with the fair pricing plus rollout and the adoption of Essential Everyday.

“Many of Supervalu’s performance issues stem from it being just too late to the party in terms of strategic shifts in pricing, private label/merchandise, and even store maintenance,” said Sandy Skrovan, Planet Retail’s Research Director – U.S. “Supervalu unfortunately finds itself stuck in the middle – and the middle is not a good place to be today.”

Jim Hertel, managing partner at Barrington, Ill.-based Willard Bishop, a retail consulting firm, said the pricing issues extended beyond the private label program. He said because Supervalu had dug such a hole to its competitors in terms of pricing and image, a refreshed private label program would not have been enough to make up the difference.

“I think that’s too much to overcome that kind of a challenge, from a store base standpoint, when you look at how long it’s been since their last remodel, and in terms of their locations,” he said. “It would have been a big obstacle to overcome.”

Hertel said the fair price plus move, plus the extended rollout of private label products, could start to show gains for the company within six months to a year. But to fully realize the benefits, he said, could take three to five years. And the company has to be careful with how the changes are made, he cautioned.

“It can’t be looked at as a promotion; it really has to be something that’s built in, where there’s a process and management visibility up and down,” he said. “If you think of it from a shopper perspective, all their chains’ shoppers have been there for years, so they’ll know whether it’s something that’s stuck to for six months, or something that has a commitment behind it.”

Mayberry said the reaction from the store’s customers has been positive to Essential Everyday. The tier has launched more than 1,200 products in 40 categories since it rolled out last year, with 1,500 products over an additional 60 categories scheduled to debut by the end of 2013.

“There’s been very good acceptance,” he said. “The feedback we’re getting from stores and our calling center, the information coming back is good.

“Our goal was to develop a program that allowed all 3,300 of our stores to access the same items and leverage those items when necessary. Essential Everyday is a big part of that. It’s the largest brand we have, period. It will provide for us a foundation to create new items and also meet our consumers’ expectations for quality and value in a brand that’s easily able to identify with us.”

The move to one main mid-tier private label line was the culmination of years of effort, said Craig Espelien, vice president at Consumer Products Inc. Espelien spent 17 years with Supervalu before leaving in 2006.

“The goal to get to a single brand had been in the works for multiple years, so kudos to them to make it happen,” he said.

But Espelien said he had concerns over the slow rotation of previous banner brands out of stores –  “There’s four generations of labels on the shelf at some stores,” he said – and the amount of savings the consolidation has been able to provide for Supervalu.

“I think going through their cost renegotiation, I’m not sure they got the savings they claimed they got,” he said.

That issue was echoed by Jim Wisner, president of Wisner Marketing Group in Libertyville, Ill.

“They are moving in a much better direction than they were, and they are paying far better attention to price spreads, but are they moving fast enough?” he said. “I can’t say for sure.”

Mayberry said he was comfortable with the savings being achieved by the consolidation into Essential Everyday.

“It’s meeting our expectations and delivering what we thought we’d see when we consolidated into one brand,” he said. “I see a lot of that coming through [Supervalu’s] value transformation, and private brands are part of that value transformation that we announced.”

Analysts agree that Supervalu’s problems extend beyond its pricing and private label programs, though.

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

“Looking across the U.S. grocery landscape, key grocery competitors like Walmart, Kroger and Safeway began freshening and remodeling stores several years ago,” Skrovan said. “They consolidated and rationalized private label portfolios a lot earlier on than Supervalu decided to. Kroger and Safeway both have strong private label umbrella brands that cut across categories, which they leverage across their store base and various banners to reduce costs. Walmart continues to evolve Great Value."

“And look at what Target has done in this three-year span – updated and remodeled nearly 1,000 stores, which include expanded grocery and perishables, not to mention the launch of the up&up brand across non-food categories, and ongoing enhancements to Archer Farms.”

All of which leaves Supervalu behind the times, they say, with time potentially running out.

“Do I think Supervalu implemented some of its new strategies – private label and pricing – too late? Yes,” Skrovan said. “It has a lot of ground to make up, but that’s not to say it’s impossible, it just won’t be an easy road to tow.”

Espelien said Supervalu’s problems shouldn’t be laid at the feet of its private label program.

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