Why SuperValu prospered and how strengths of the company could survive

SuperValu
Over the past 30 years, SuperValu achieved success by focusing on the distribution side of the business and building up Cub Foods.

I still remember wandering away from my mom and getting lost at the 7-Hi Red Owl when I was about 6, checking out at SuperValu and getting Gold Bond stamps, and shopping at Country Club Market while my siblings had their piano lessons. 

Only SuperValu remains, but its future is uncertain. SuperValu, like its Fortune 500 cousin Best Buy, is fighting to survive amidst the most recent changes to sweep through retailing. How will it turn out? Let’s begin at the beginning.

Evolution of grocery stores

The grocery business followed a path parallel to the one I described for retailing in general.  Grocers in the mid-19th century were small, local retailers that bought produce along with canned and packaged food via wholesalers.  Bakeries sold bread, butcher shops sold meat, and a typical shopper went to multiple stores to make the weekly food purchases.

National chains that integrated wholesaling and retailing started to appear in the 1880s, the best known being the Great Atlantic and Pacific Tea Co., i.e. the A&P.  The chains soon started stocking bread, especially in the 1890s and 1900s when large integrated baking plants sprang up in cities such as New York and Chicago.  Meat counters took longer to make their way into grocery stores, but by the 1920s they were a regular feature in urban stores.

The 1920s and 1930s saw the development of self-service markets. Previously, items were displayed on shelves behind a counter; customers would select their articles and clerks would pull the items down from the shelves and box up the order.  Now, customers walked through aisles containing shelves of merchandise, with each individual item displaying its price on a tag. They deposited their goods items in shopping carts and paid for the purchases at check-out counters.

This latter type of store is pretty familiar to us today, and in a sense the store we shop in is an evolution of this concept.  It’s behind the scenes where the true revolution has occurred over the past 60 years.

Keeping track of inventory and making sure that the goods customers want to purchase are available lie at the heart of retailing. Grocers know this as well as any other merchant, and in the 1950s and 1960s computers made their way in the larger chains to meet these needs.

But there was still a big problem: each individual item had to be tagged with its price, check-out clerks had to read each item’s price and ring up purchases, with the cash register recording each transaction on paper tape, and finally the information from the tapes had to be hand-entered into computers. This was a labor- and time-intensive process with many places for errors to pile up.

Enter the Universal Product Code (UPC) and the barcode. In the early 1970s, a standard for barcodes was introduced that allowed scanners to read the code and digitally record the necessary information about each item quickly and accurately.  It eliminated the need to tag each item, since the UPC could be printed on the factory label, and made a direct connection between the cash register and computer system.

All of this meant labor productivity rose dramatically, either because a given workforce could run a larger store or because a given store could operate with a smaller number or people. Cub Foods is an example of an early adopter of these ideas. Workers using forklifts could lift cartons of merchandise on to shelves, cut open the packages, and have items ready for sale in a matter of minutes as long as the product’s UPC was programmed into the computers.

What next for SuperValu?

Over the past 30 years, SuperValu rode this wave by focusing on the distribution side of the business and building up Cub Foods. At the same time, however, Wal-Mart and Target both took advantage of these trends to add groceries to their stores, and used their large purchasing networks to drive down prices. 

SuperValu responded by purchasing chains such as Albertson’s and Jewel-Osco in order to spread their fixed distribution costs over more stores, hoping to reduce their average costs of operating closer to those of Wal-Mart. Unfortunately, this strategy hasn’t worked out. So what’s next?

Someone could purchase SuperValu and break it up. My suggestion: Target should buy SuperValu up, sell off the supermarket chains (Albertson’s, Jewel-Osco, etc.) and then take the best of SuperValu’s distribution businesses and integrated it into its own network.

The big question then is, what about Cub?  I can imagine two possibilities. One is to sell it along with the other chains. Two Cub stores in St. Cloud, for instance, are now Cash Wise stores owned by Coborn’s, Inc.

Cub Foods produce section
SuperValuThe big question then is, what about Cub?

The other is more speculative. How about a new store, say Target Local? That is, take Cub and turn it into a grocery-based Target, rather than a Target that happens to have a grocery store. Instead of school supplies, kitchen gadgets, and other non-grocery items that feel like afterthoughts in most grocery stores, Target Local would have the high-quality, low-price merchandise you find at Target but you can now get it at the grocery store.

Yes, I know, I made a similar suggestion about Best Buyand I haven’t changed my mind. My point then and now is that Target, and other Minnesota-based companies, should look at Best Buy and SuperValu as collections of important assets, especially human capital. There are thousands of people in Minnesota working for these firms who have successfully created new ways of selling electronics and distributing groceries over the past 30 years. It would be best for Minnesota’s economy if they stay here to help Target and other existing Minnesota companies grow and prosper and to build the next generation of Minnesota companies.

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Comments (13)

  1. Submitted by Arnie Hillmann on 08/03/2012 - 12:40 pm.

    Super Value just does not seem to get the price thing. Yesterday I bought English Muffins at Target for $2.19 and then had to stop at the Cub next door and noticed it was priced at $3.49. Chunk cheese $2.00 at Target. $3.29 at Cub. Granola at Target $2.10. $3.50 at Cub. Plus by using my Red Card at Target I get an additional 5% off. The media ads of Walmart vs.Cub are real! WAKE UP CUB. I like your stores much better.

  2. Submitted by Dennis Tester on 08/03/2012 - 01:34 pm.

    You’re overlooking

    the elephant in the room – labor costs.

    While both Walmart and Target are non-union, the higher prices at Cub stores can be attributed to their higher union labor costs. A senior meat cutter at Cub can make upwards of $100k a year, for example.

    But in addition, the bakery and meat cutters unions have work rules that drive up the costs while driving down quality, convincing many shoppers to go elsewhere for their meat and baked goods. This causes them also to make up the costs with higher prices on other grocery items.

    I happen to know, for example, that Cub meat cutters are penalized by the amount of trim they create when they prepare cuts of meat. To avoid this penalty, they leave more fat and gristle on the cut, making it unattractive to the shopper who is paying by the pound and who wants to pay for meat, not fat.

    We buy all our meat from Costco, which has the best, leanest meat in town. And they’re non-union, which means that Cub can’t hope to compete with them.

    And that’s the bottom line in both the Best Buy and Cub stories. Best Buy can’t compete in price with Walmart or Amazon, and Cub can’t compete in price with Walmart, Target or Costco. And in a bad economy, price is king.

    The End

    • Submitted by Tom Lynch on 08/04/2012 - 12:43 am.

      Idiocy

      More extremist race-to-the-bottom advice from the Far Right. If all grocery workers were paid minimum wage with no benefits, prices could really be lowered.

      Do Righties ever think about what’s best for the worker?

      • Submitted by Dennis Tester on 08/04/2012 - 08:20 am.

        what’s best for the worker

        is an employer who’s still in business. The unionists still haven’t learned that lesson.

  3. Submitted by matthew nagel on 08/03/2012 - 07:43 pm.

    RE: You’re overlooking

    A journeyman meat cutter in Local 653 makes $48,942.40 . They have had less than a dollar pay increase in the last 5 years. I believe the trimming standard you refer to is less than 1/8 inch, acceptable by any culinary standard. I do know for a fact, that at Cub, you can have any of your meat cut and trimmed any way you like at no extra cost because they HAVE meat cutters not just someone taking pre-packaged meat out of a box and putting it on the shelf. I would never buy my meat anywhere else. Price is King but a knowledgeable staff and quality customer service is PRICELESS.

  4. Submitted by Paul Udstrand on 08/04/2012 - 09:51 am.

    Some never get tired of being wrong

    Lund’s and Byerly’s have the same union.

    Lord save us from economists with business ideas. The problem with SV is that the grocery industry has changed dramatically, they’ve lost stores, and they”re ending up with a distribution system that’s too big. Target already has a distribution system and doesn’t need SV, and they already have grocery stores. The only reason they would buy SV is to put them out of business and decrease their competition.

    The Grocery industry has changed dramatically. Back in the 50s and 60s SV’s only real competition was Red Owl. Now you have Aldi’s, Rainbow, Trader Joe’s, Whole Foods, Target, Byerly’s/Lund’s, Coscto, Sam’s Club and a gazillion gas stations that sell milks and other sundry items people used to get in grocery stores. Even Walgreens has a small grocery section.

    In terms of the business model some if not all of the Super Value’s are actually franchises. The problem with that model is quality of the franchise owner can make or break you. Here in St. Louis Park we had small Super Value about 4 blocks away. It’d been there for over 30 years. Last year the owner (who had two SV franchises) shut this one down. He had a tough gig, less than a mile away a Costco opened up, and then a fancy shmancy Rainbow opened in the West End, and then a Walgreens opened across the street. However, as near as I can tell this owner made no effort to change his store and adjust to the competition. I don’t know if it was the limitations of his imagination or the franchise contract, but he did nothing. The store was modeled as a miniature full service grocery store, but without the full service- no bakery, deli, or pharmacy. Well, it had a very small bakery with an excellent old fashioned potato salad, but that was about it. What he needed to do was develop a niche. There are no good bakeries SLP, nor are they any good deli’s anymore. We lost the Lincoln Dell and Palm’s Bakery. I think this guy should have dumped his frozen food section and remodeled his store as a local bakery deli. It would take money to do that but that’s where SV would come in, they could do low interest loans to franchise owners.

    I think something like this would be just the ticket for instance in the Lyn-Lake area where the recent curfuffle over Trader Joes just took place. SV could specialize in designing niche grocery stores that meet local needs. They could’ve for instance got hold of Palm’s bakery and it’s recipe’s (Palm’s never wrote their recipe’s down so you’d have to work with them until you could duplicate them) and be able to offer unique bakery goods. Let franchise owners name their stores whatever they want instead of “Super Value” and you’ve got plan stan.

    Getting back to economists with business ideas, the thing that bugs me about Johnston’s business ideas is they’re always about selling the business instead of fixing it. What’s SV solution? Sell themselves to target. What’s Best Buys solution? Sell themselves to someone else ( I can’t remember who). These are stock market strategies, not business models, we need to get back to building and maintaining business in the country. We need to be asking “how can we fix this?” instead of “who can we sell the business to?”. This is the problem with our executive class, they don’t know how to run or fix anything, they only know how to buy and sell.

    • Submitted by Dennis Tester on 08/05/2012 - 09:06 am.

      “Lund’s and Byerly’s have the same union”

      Lund’s and Byerly’s are considered upscale grocers. Their market niche is higher quality and better customer service and understand that their more affluent customer base is willing to pay more to get it. They aren’t competing with Cub for price-conscious customers.

      The point being, companies like Lund’s and Byerly’s can pass the higher labor costs on to their customers in the form of higher grocery prices and get away with it. I was going to say, “but you already knew that” but on second thought, maybe not.

  5. Submitted by Richard Schulze on 08/04/2012 - 10:36 pm.

    What I see is a chain that for years has been on a downward spiral. Absorbing Albertsons in 2006 just increased this company’s burden of low-performing stores. The high-cost, low margin business is just eating away at this company, and its strategy is to find profitability in a low-cost grocery niche?

    The question is not if SuperValu can comeback , but rather will SuperValu be around as the same company in a year from now.

  6. Submitted by Bob Berditzman on 08/06/2012 - 06:44 am.

    It ain’t what you don’t know that gets you into trouble…

    …it’s what you know for sure that just ain’t so.

    What we know for sure, that IS so? 35.5 BILLION in sales over the past twelve months. 8 BILLION in gross profit. Debt reduction of 400 MILLION per year. Free cash flow of at least a BILLION annually.

    Is the grocery market changing? sure it is. And SVU has the resources to figure it out.

    • Submitted by Richard Schulze on 08/06/2012 - 07:00 pm.

      Umm. Low margin, negative free cash flow business, questionable management alignment, without a clear competitive advantage, and credit default swaps priced over 1300bps…

      I believe the company will hang on and survive and the stock may go back up, but it will be through some pain and suffering and possibly a couple years. SVU was screwed the moment they bought Albertson’s and took on a titanic amount of debt. The bright spots of their independent customers and save-a–lot are not enough to make this a “must own” stock. It is a stock that may reward the stout hearted turnaround investor, but I wouldn’t bet my life savings on it. Tread carefully!

  7. Submitted by Paul Udstrand on 08/06/2012 - 08:17 am.

    Dennis

    All you’re trying to do is blame everything on Unions all the time. You act as if labor costs are the only problem anyone ever has and the solution to all problems is to pay everyone except the executives lass money. Simply put, this nothing but resentment and class prejudice pretending to be economic theory and business acumen.

  8. Submitted by jody rooney on 08/06/2012 - 08:20 am.

    Sorry Mr. Udstrand Economists are not the executive class

    “This is the problem with our executive class, they don’t know how to run or fix anything, they only know how to buy and sell.”

    Mr. Johnson is an academic economist clearly not someone you can equate with the executive class. He may not have the best idea here but it really isn’t that different from what you suggested, diversify product line. He just suggested one method of doing that.

    Walmart and Target are effective places to shop because they reduce travel time for families. More or less the one stop shop. I also find them really awful places to be and you will rarely find me in one.

    The real new trend will start if and when Fleet Farm starts to sell groceries. Groceries and hardware how could you go wrong.

  9. Submitted by Paul Udstrand on 08/06/2012 - 10:21 am.

    Executives vs. economists

    Maybe my writing could’ve been better. Obviously Mr. Johnston is a professor not an executive. I was making separate criticisms, one of economists, and another of the Executive class.

    We are not recommending the same approach at all. Johnston’s solution is to sell the company in the hope that someone else can fix it. My approach is to fix the company. The difference is that one solution makes the the companies problems someone else’s problem, and the other assumes that a companies executives are expected to solve the companies problems. My over-all complaint is that making it someone else’s problem is the primary talent of the American executive class, meanwhile they get paid 4-5 times more than their counterparts around the world.

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