Time short for Supervalu price cuts

Cutting prices has been the cornerstone of Craig Herkert's business plan since he took over at grocery giant Supervalu Inc. three years ago.

But Herkert has been playing catch-up, and not well enough to keep up with his lower-priced rivals. At Supervalu's chains coast to coast, prices still tend to lag not only discounters Wal-Mart and Target, but also traditional grocers such as Kroger and Safeway.

Pressure is building to deliver on what Herkert insists is "a good business plan."

"I tend not to be an individual or CEO who looks back too much and says, "what if, what if," Herkert said last week in an interview with the Star Tribune. "But we could have moved faster on the business plan we have."

Earlier this month, the Eden Prairie-based supermarket giant effectively acknowledged it hasn't moved quickly enough to halt a grim, years-long downward spiral in sales and market share. With the firm's stock around a 30-year low, Supervalu's board put the company up for sale, whole or in pieces.

At the same time, Herkert got the green light -- and more firepower -- to go full-tilt at price cutting. But analysts are skeptical, questioning whether it's too late.

Price wars in the supermarket business have only gotten fiercer in recent months. Investors have lost patience, and Herkert's board of directors isn't in a waiting mood, either.

This month, the board also suspended its dividend, which had been paid out for more than 60 years. And it hired Goldman Sachs and Greenhill Co. to explore "strategic" options to boost shareholder value -- i.e. asset sales.

Analysts say its highly unlikely the company will be sold as a whole, and that piecemeal sales aren't necessarily expected to occur soon. Herkert declined to comment on the strategic review, which is being led by Supervalu's nonexecutive chairman, Wayne Sales.

With Minnesota roots going back to 1924, Supervalu is one of the nation's largest supermarket operators with $36 billion in annual sales and 11 chains, including Cub Foods, the Twin Cities grocery market leader.

Supervalu's strengths include geographic diversity and its Save-A-Lot national discount grocery chain. But the firm has posted 17 consecutive quarters of declining same-store sales. And its stock, which peaked at $46 in mid-2007 and was around $16 when Herkert started as CEO, is currently at $2.25.

"It's tough for shareholders because [Herkert] keeps talking about the idea of 'we have a good business model,' but at the same time the dividend gets cut and the company gets put up for sale," said David Dietze, president of New Jersey-based Point View Wealth Management, a Supervalu shareholder.

A tough challenge

A former high-ranking Wal-Mart executive and Chicago-area native with a long history in the grocery business, Herkert, age 52, arrived at Supervalu in May 2009 with a mandate to turn around the lumbering giant.

Three years earlier, under former CEO Jeff Noddle, Supervalu shelled out $12 billion for Albertsons, a megadeal that transformed the company -- historically known more for its wholesale operations -- into a major food retailer.

But the deal saddled Supervalu with a mountain of debt just before the economy tanked, leaving inadequate resources to invest in stores and lower prices, analysts say.

Supervalu's prices, as tracked by industry analysts, have long been higher than key rivals'. During the first week of July, Supervalu's prices were 24.3 percent higher than Wal-Mart's, according to Citigroup stock analyst Deborah Weinswig, who regularly does price surveys.

But Kroger and Safeway are like Supervalu. They're unionized, full-service grocery chains, sporting bakeries and extensive meat and produce selections. Supervalu's goal is to get its prices in line with such traditional rivals, and narrow the gap with discounters like Wal-Mart and Target.

Discounters feature "everyday low pricing," while conventional chains are known for "high-low" pricing. With the latter, supermarkets generally have higher base prices than discount retailers, but they also run low-price promotions.

"Our promotional prices were generally wonderful," Herkert said. "But our base prices were too high, so in too many categories we worked ourselves into a situation where consumers were being trained by us -- this is our fault -- only to buy products when they were on promotion."

The strategy evolves

Supervalu was taking a swing at the price gap when Herkert joined the company in 2009, introducing its "Big Relief" price cuts in selected markets. "It didn't work the way we intended," Herkert said. "But it wasn't nearly as broad-based as what we are doing today."

Critical to the price-cutting effort were tough negotiations with Supervalu's vendors. The company had to essentially reduce the base prices it paid to suppliers, Herkert said.

Supervalu rolled out its new price cuts in produce sections nationwide, and throughout its Shoppers chain in the Baltimore-Washington area. It's focusing now on Jewel in Chicago, one of its largest chains and most important markets.

"What we are doing in Chicago is a radical repositioning of just about everything we sell," Herkert said. The company declined to disclose its average price reductions.

The Jewel repricing is expected to be done by Labor Day. The plan is for half of Supervalu's traditional stores to be priced "right" by the end of the firm's fiscal year in February, Herkert said, and the rest during the next fiscal year.

Supervalu will now be able to accelerate its price-cutting program due the suspension of its quarterly dividend coupled with a new $250 million round of operational cost cuts and a significant debt refinancing. Together, they'll give Supervalu more cash and more flexibility to move faster.

The "execution risks related to Supervalu's new pricing strategy at its supermarkets could result in a greater-than-expected fall in profitability if sales improvement does not materialize," Standard & Poor's said last week when it downgraded Supervalu's debt rating.

Moody's and Fitch have also downgraded Supervalu's debt rating.

The question for Supervalu now is, does it have time to make its price-cutting plan work? "It's a race against the clock," shareholder Dietze said.

Dietze said he's not confident that Supervalu can win, although Herkert says he is not giving in.

"I'm not one of those people who thinks we don't have time to do this," Herkert said.