A Supermarket War in Store

With its acquisition of Albertsons, Supervalu is likely to give Wal-Mart a run for the money in the grocery aisle

Mounting a challenge to Wal-Mart Stores (WMT ) might look like a suicidal strategy for a company. But guess what? Grocery retailer Supervalu (SVU ) on Jan. 23 struck a deal to buy supermarket chain Albertsons (ABS ), a combination that will give it a total of 2,656 stores, making it the second-largest supermarket company in the U.S. -- and providing the heft it needs to combat giant Wal-Mart's 3,700 stores.

This time, no one's laughing. That's because Eden Prairie (Minn.)-based Supervalu has become one of the nation's most successful grocery chains with its "extreme value" stores like Save-A-Lot groceries, as well such discounters as Shop 'n Save and Bigg's. While only the eighth-largest U.S. chain until the transaction, it has attracted legions of shoppers by offering store-branded goods that are priced even cheaper than those at Wal-Mart.

"Supervalu has been one of the most effective retailers in the country in competing with both Wal-Mart and the warehouse-club stores," says Burt Flickinger III, director at marketing consultant Strategic Resources in New York. "In fact, at some of the stores, its [dollars-per-store figure] is higher than Wal-Mart's." On Monday, Supervalu's stock was up $2.13, or 6.69%, to $33.98.

The Jan. 23 deal involves buyers Supervalu, drugstore giant CVS (CVS ), and an investment group led by Cerberus Capital Management (see BW, 10/3/05, "What's Bigger than Cisco, Coke or McDonald's?"), who together agreed to acquire Albertsons for $17.4 billion in cash, stock, and debt. Supervalu will acquire supermarkets Acme Markets, Bristol Farms, Jewel-Osco, Shaw's Supermarkets, Star Markets, and Albertsons, while CVS will acquire all stand-alone Osco Drug and Sav-on pharmacies. But for those who like to handicap retail battles, the pending set-to between Supervalu and Wal-Mart for the bargain-conscious shopper gets top billing.

EVOLVING SHOPPING HABITS. Of course, it's not going to be easy. Albertsons itself has tried to rival Wal-Mart, with little success. Albertsons Chief Executive Larry Johnston was hired from General Electric (GE ) in 2001 to turn around the company. He invested heavily in technology, but didn't manage to revive Albertsons as Wal-Mart started competing directly in groceries (see BW, 1/24/05, "The Jack Welch of the Meat Aisle"). Wal-Mart's revenue from groceries rose to 28% of its U.S. store sales, from 18% five years earlier, and it has stolen share from Albertsons in many markets.

At the same time, Albertsons found it difficult to compete because its labor is unionized, and labor makes up 70% of a traditional grocer's overhead. To top it all, a 20-week strike in 2003 and 2004 led to sharp profit declines.

Yet, more than anything, today's winners and losers in the supermarket business are determined by consumers' changing shopping habits. Shoppers are moving toward two sides of the price spectrum: supercheap at Wal-Mart and the dollar stores, or high-end organic at retailers like Whole Foods (WFMI) (see BW, 10/24/05, "Eating Too Fast at Whole Foods"). They view the supermarkets in the middle, such as Albertsons or U.S. market leader Kroger (KR ), as offering no value. No wonder those in the middle have suffered, and Albertsons has been looking for a buyer for several months now.

CHALLENGES AHEAD. Supervalu is expected to tackle both ends of the spectrum. This month, it rolled out a natural-foods store chain under the Sunflower Market brand name -- which likely will compete with Whole Foods and Trader Joe's -- and has plans to open 50 more over the next five years.

It wouldn't be surprising if Supervalu starts to reduce prices at the Albertsons stores, in order to compete directly with Wal-Mart by employing its own successful discounting strategy. There are other synergies: Both Albertsons and Supervalu have thriving private-label store brands, such as HomeLife and Carlita, where they can put more pressure on manufacturers for higher margins.

The combined grocery-store chains will also be able to take advantage of Supervalu's own supply-chain network, which already supplies 2,200 stores. Supervalu even said, in a filing with the Securities and Exchange Commission, that it expects improved margins and cost savings of up to $175 million from the deal.

Jeff Noddle, chairman and CEO of Supervalu and the combined company, asserts, "This combination creates a very strong competitor." Of course, a lot will ride on execution, and Noddle must shoulder weighty challenges. Not only does he have to compete with a behemoth like Wal-Mart, but he'll also be managing a company that's three times its current size. "Supervalu has been successful in a unique niche of the market, but large grocery-store mergers do not have a similar track record of success," notes B. Craig Hutson, an analyst at research firm Gimme Credit.

"GOOD TIME TO STRIKE." Noddle has one thing going for him, though: Wal-Mart's under a lot of strain from all sides. The world's largest retailer is spending more on public relations and attorneys as it battles anti-Wal-Mart activists and laws that target its bottom line. Currently, its lawyers are looking at a way to respond to a new Maryland law that requires companies with more than 10,000 employees in the state to spend more money on health insurance (see BW Online, 1/17/06, "First Wal-Mart. Then Who?"). Wisconsin has introduced similar legislation.

All this is happening amid a couple of high-profile management departures at Wal-Mart. EBay (EBAY ) recently hired Matt Carey, Wal-Mart's chief technology officer. Six months ago, Kevin Turner, who was CEO of Wal-Mart's Sam's Club unit, was appointed chief operating officer at Microsoft (MSFT ).

"As Wal-Mart is in a transitional phase, Supervalu will find it a good time to strike," says Strategic Resources' Flickinger. And, if well executed, it clearly will be one of the most closely watched U.S. retail battles.

READER COMMENTS

Gogoi is a reporter for BusinessWeek Online in New York
Edited by Phil Mintz

BW MALL SPONSORED LINKS

Mutual Funds at Fidelity Benefit from years of mutual fund management experience.
High interest checking, No ATM fees! 2.02 APY, FDIC insured, mobile banking and no fee bill pay. Incredible!
Hot Careers in Internet Marketing Get prepared for your new career with online degrees from Full Sail University!
Online PHR Certificate Program w/ Villanova Univ SHRM Approved HR Certificate Program from Villanova University. 100% Online - Find Out More Now!
Your Customers Speak Email: Do You? You Already Have What You Need to Maximize ROI: Your Current Customers.

Buy a link now!

Get BusinessWeek directly on your desktop with our RSS feeds. XML

Add BusinessWeek news to your Web site with our headline feed.

Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video.

To subscribe online to BusinessWeek magazine, please click here.

Learn more, go to the BusinessWeekOnline home page