Roundy's exits Twin Cities, parcels out Rainbow Foods locations

The Twin Cities grocery market is about to get a major restocking as the owner of Rainbow Foods leaves town, a weak player in a crowded field.

Roundy's Inc. will sell the majority of its 27 Rainbow stores to a consortium of local supermarket companies led by Eden Prairie-based Supervalu, owner of Cub Foods.

Once the $65 million deal is completed later this year, 10 Rainbow stores will be rebranded as Cub, two will become Byerly's outlets and six will retain the Rainbow name under different ownership. Milwaukee-based Roundy's will continue to market its remaining nine Rainbow stores for now, but will close them if buyers can't be found.

The reordering of the local grocery market comes amid increasingly intense competition for traditional supermarket chains like Cub and Rainbow. Target, Wal-Mart and other lower-priced operators have eaten into their business, particularly since the recession of 2008.

"There literally is a food fight going on in the Twin Cities, and it will intensify," said Dave Brennan, retail industry expert at the University of St. Thomas.

Not only is Wal-Mart on a building spree locally, but Des Moines-based Hy-Vee — a Midwestern grocery powerhouse — announced earlier this year it will set up shop in the Twin Cities.

For local grocery shoppers, the Rainbow deal is unlikely to have any negative fallout, and may actually yield some benefits, analysts said. "Customers will have fewer, but better choices," Brennan said.

Shoppers will get more exposure to the upmarket Byerly's chain, which is owned by Edina-based Lund Food Holdings, a healthy and growing company. And while Cub has had its share of woes in recent years, it's fared better than Rainbow.

Cub offers a broader selection and has more up-to-date stores than Rainbow, said Brennan, describing Rainbow's position as "weak and eroding."

Indeed, Rainbow has historically been No. 2 in the Twin Cities, after Cub, but it slipped to fourth in recent years and has closed five Twin Cities stores in the past 16 months.

As recently as February, Roundy's executives said they were committed to staying in the Twin Cities. But Wednesday, Roundy's CEO Robert Mariano said in a statement that the economic downturn of the past few years, coupled with increased competition, "has made it difficult for Roundy's to keep the Rainbow banner competitive."

Analysts weren't surprised by the Rainbow sale, particularly given the chain's recent pullback in the Twin Cities.

"It was inevitable," said David Livingston, a Wisconsin-based supermarket consultant. As competition increased in the Twin Cities, Roundy's did little to invest further in Rainbow stores, Livingston said.

Instead, Roundy's has been working to protect its flank in Wisconsin and to push a new grocery concept in Chicago.

Roundy's owns the market-leading Pick 'n Save chain in Milwaukee, a traditional banner that, like Cub and Rainbow, has been under fire from lower-priced operators. Roundy's also has been expanding in Chicago, where it introduced Mariano's, a more upscale supermarket chain like Byerly's.

"The [Rainbow] transaction will allow us to better focus strategically on growing our Mariano's banner in the Chicago market and strengthening our business in our core Wisconsin markets," Mariano said in a statement.

Rainbow was launched in 1983 by veteran Twin Cities grocery executives Sid Applebaum and D.B. Reinhart, and the chain became a hit within a decade, taking share from Cub.

Fleming Foods, a Texas wholesaler, bought Rainbow in 1994. But Fleming eventually sank into bankruptcy and sold Rainbow to Roundy's in 2003.

The dollar terms of the Rainbow deal — $65 million plus the cost of store inventory — are small for both Roundy's and Supervalu. And Supervalu will pay only $35 million of the total purchase price.

Still, the deal bolsters Supervalu in its largest retail market, the Twin Cities. Since Supervalu sold its big grocery chains in the eastern and western United States last year, Cub has become its largest banner. After the close of the Rainbow deal, there will be 66 Cub Foods in the Twin Cities.

Supervalu gets more than new stores out of the deal. The grocery wholesaler — half of its revenue comes from food distribution — will supply all 18 Rainbow stores being sold. Supervalu will have 100 percent ownership of 11 of the 13 Rainbow pharmacies included in the deal.

"Supervalu is thrilled to participate in this consortium of retailers that is acquiring Rainbow stores," Supervalu CEO Sam Duncan said in a statement. The company declined to make an executive available for an interview.

For Lund Food Holdings, whose store count has been growing in recent years, the Rainbows it is buying in Eden Prairie and Woodbury fit well with its plans. "They are absolutely two areas of the Twin Cities we have been interested in expanding in for quite some time," said Lund spokesman Aaron Sorenson.

The company chose to operate the stores under its Byerly's brand because Byerly's outlets tend to be the same size as Rainbow stores, around 60,000 square feet. Supermarkets under the Lunds brand are closer to 40,000 square feet, Sorenson said.

Lund is buying a third Rainbow store, in Plymouth, one of the six supermarkets that will keep the Rainbow name.

St. Thomas' Brennan questioned holding on to the Rainbow moniker. The banner will have a diminished presence and won't be able to advertise as cost-effectively.

"I don't see [keeping the Rainbow name] as a sustainable strategy," he said.

Rainbow has its fans, of course, and they will miss the banner.

As a longtime Rainbow shopper, Michael Gunderson of Eagan said in an e-mail that he's very disappointed that his favorite store will be converted to a Cub. The Eagan Rainbow had good sales, and its employees were always friendly, he wrote.

"Rainbows were always merchandised and laid out nicely, Cub stores are stale and boring to me."

Mike Hughlett • 612-673-7003