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|  | JANUARY 25, 2006
Supervalu's Supermarket StrategyWith the purchase of 1,124 Albertsons grocery stores, CEO Jeff Noddle plans to build "a very locally tailored chain"It's official. Albertsons (ABS ) was sold on Jan. 23 to a trio of buyers for a total of $9.8 billion. In the deal, Supervalu (SVU ) walks away with 1,124 stores that operate under a host of names -- including Albertsons, Jewel-Osco, Acme Markets, Shaw's, Bristol Farms, and Star Markets -- in different regions of the country. Drugstore chain CVS (CVS ) will buy Albertsons' 700 freestanding drugstores, while real estate investors led by Cerberus Capital Management will buy Albertsons' 655 remaining supermarkets. The deal elevates Eden Prairie (Minn.)-based Supervalu to the second-largest conventional supermarket chain in the U.S., behind Kroger (KR ). Already the nation's largest grocery wholesaler, that business will decline from 46% of Supervalu's sales to 20% with the addition of Albertsons' stores to its 1,500-store base. While Supervalu has predominantly operated discount-oriented supermarkets, such as Cub Foods in the Midwest and Save-A-Lot, a smaller discount store, it does run some upscale chains like Farm Fresh in Virginia. It also just launched a natural and organic grocery chain called Sunflower Market, which offers lower prices than Whole Foods Market (WFMI ) in smaller stores. But can Supervalu can succeed where Albertsons has struggled? Like most American supermarket chains, Albertsons has floundered in the face of stiff competition from Wal-Mart Stores (WMT ), which, with its Supercenter and Neighborhood Market formats, has become the nation's largest grocer. Shortly after the sale announcement, BusinessWeek Chicago Correspondent Robert Berner caught up with Supervalu Chief Executive Jeff Noddle. Here are edited excerpts from their conversation: How do you plan to revive Albertsons' stores? We operate a retail portfolio of regional banners. These chains are very much tailored to local needs of the local market. We have no plans to change any of the names of [Albertsons'] stores. We are going to enhance their local market ability. How? This transaction is going to add significant size and scale to the combined companies. Our roots are in the wholesale distribution business. So we bring a significant focus on supply-chain activities. We are in the process of implementing a very substantial technology and automation project in one of our highest-volume [distribution centers] in Minnesota. Going forward, we will be applying that sort of thinking to a broader network. What about the stores? Under CEO Larry Johnston, Albertsons planned to tailor goods to better meet local needs, but he never got the results. We will probably give more effort, or emphasis, on letting people in the market make those decisions on what's best for the Chicago consumer or what's best for the Philidelphia consumer. We will share best practices with them. Today we operate a very broad portfolio of very different kinds of businesses. We take a lot of learnings from it. We will deliver that to them. And, by the way, they do a lot of things at their company that we will bring back into Supervalu. We, for example, are just in the process of developing a line of private-label natural and organic products. Those will be featured in our Sunflower stores. But we intend to offer those broadly throughout the whole distribution network, independent and corporate. So, obviously, we would offer this to [Albertsons' stores] as well. At the same time, they have a line of high-end private-label product. That is a product line we don't have. We will most likely bring that back into some parts of Supervalu. We don't sit with the knowledge in Minnesota that we know everything that turns customers on or off in Chicago or any other market. We really depend on people who are really close to the customer. There is a subtle difference that we will bring. This will take some time to develop. We supply some of the premier independent chains in the country. We have learned from them. It is hard to start listing all the specific items. But, over time, you will see us be a very locally tailored chain that will serve customers very well. How about individual sections of the stores? Produce is another area we have put a lot of emphasis on. We just built a brand-new, produce-only [distribution] facility in Champaign, Ill., W. Newell & Co., that just opened last August. Produce is a real distinctive way for retailers to set themselves apart from others. In Chicago, we operate Save-A-Lot. [Albertsons' stores] appeal to a different demographic. I am not saying Jewel is going to look anything like a Save-A-Lot. Of course not. We operate upscale chains as well. We have a chain called Farm Fresh in Norfolk, Va., that is upscale and is the fastest-growing chain in that market. All those different learnings add up to a number of different programs for us, and it is very difficult for me to be specific about what we will do in Jewel or what we will do in Acme. Could you eventually convert some Albertsons stores to your new Sunflower Market, speeding up that rollout, or convert some to Save-A-Lot? I never say never. It is very possible there could be some locations in Jewel that would be conducive to a Sunflower, for example. But most of the Jewel stores are far too large. At Sunflower, we are targeting in the 10,000- to 13,000-square-foot range. We want to be a small-box, yet value-priced natural and organic stores. Most Jewels don't fit that. They are more like 40,000 square feet [in size]. But throughout the entire Albertsons network, there may well be stores that lend themselves to that opportunity. All the major conventional supermarket chains' earnings have suffered in competing against Wal-Mart's low prices. Is there room for traditional supermarkets anymore? Yes. An in-neighborhood supermarket. That is a very important part of food shopping today. But if you stay conventional in your thinking and you don't evolve, you are always going to be at risk to the competition, to the other standard supermarkets or to Wal-Mart. With the combination of the two companies, there are a lot of ideas on how to evolve formats. Today the supermarket industry is a $600 billion industry. Let's say Wal-Mart is doing 10% of the food business. That still leaves a half-trillion dollars that someone else is going to do. And the good operators are going to win, and we certainly intend to be one of them. But the big chains have still struggled with Wal-Mart. How will this combination make things different? There is a lot of perception out there. Remember, we didn't buy the whole Albertsons company. That is a very important distinction. We bought those markets and those store brands that we felt were the best ones and fit our approach to the business and our portfolio of retail companies. The EBIDA [earnings before interest, depreciation, and amortization as a percent of overall sales] is 7.2% for the group of stores we bought. That is better than Kroger, better than Safeway, and certainly better than Supervalu. Our total EBIDA is 4.8% today. It is going to be 6.2% with this combination. We bought Jewel in Chicago. Acme in Philadelphia. Shaw's in New England. Albertsons in Southern California and the Inter-Mountain region and Pacific Northwest. What we didn't buy is Albertsons in Florida, Texas, Arizona, Colorado, what they call the Rocky Mountain region, and Northern California. Those markets did not have the share or market value or outlook we were comfortable with. By definition, they were [lower performers] than the ones that we bought. Everything we bought is either No. 1 or No. 2 [in terms of market share]. If we had to buy the whole company, we would not have done it. Is Wal-Mart's Neighborhood Market, which Wal-Mart is using to fill in markets between its larger Supercenters, a bigger threat to traditional supermarkets? They have been very slow about the Neighborhood Market. They only open a few dozen a year. They haven't seemed to be really dedicated to that. It's a lower return on capital for them. We think we can compete very well with a Wal-Mart Neighborhood Market. We perform better in perishables and service and those kind of things. We aren't as concerned with that as we are with what happens with the Supercenter development. Some regional chains -- like Wegman's in the East, H-E-B in Texas, and Publics Supermarkets in the South -- continue to thrive, even against Wal-Mart. What are they doing right? [They] really focus on the customer preferences in those markets. Food is a very personal thing. Nothing tells more about a person than their ethnic background, the kind of foods they eat. You got to be local and really tailored to that. We think the way we operate and the stores we have plucked out of Albertsons fit that mold very well. That's how we intend to operate, as regional operator. 
BW MALL
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