By Jeff Bailey
Watching the stock of SuperValu (SVU) plunge last week, one was moved to ask, "What the hell does SuperValu do, anyway, beyond run a giant grocery distributorship?" Oh yeah, it bought retail grocery chains from Albertson's in 2006 for more than $10 billion, and one of those chains, Jewel, operates in my neighborhood in Chicago.
SVU data by YCharts
But is it? Whole Foods (WFM) operates grocery stores, at the high end, quite profitably.
WFM Revenue TTM data by YCharts
And, in my experience at least, the old-fashioned grocery chains have better locations than does Whole Foods; they got there first. And add to that, in Chicago and some other large metropolitan markets, Wal-Mart has been slowed in penetrating the market by labor and political opposition, leaving the old-line grocery chains with captive consumers. Maybe it's not so hopeless.
One reads the Supervalu 10-K for insight. The post-acquisition performance has been horrible. The past four years have all showed a decline in same store sales, ranging from 1.2% to 6%. Big losses in three of those years, a lot of it due to writing down the value of the acquired supermarkets. $6 billion or so in debt. Virtually no shareholders equity. Ugh. The stock's plunge may have been overdue.
SVU data by YCharts
Supervalu brought in a Wal-Mart guy, Craig Herkert, in 2009, as CEO. He was formerly president and CEO of the Americas for Wal-Mart, in other words he was the guy who had been crushing Supervalu and other traditional grocery chains. But was he the right guy for Supervalu? Supervalu and Kroger (KR) and Safeway (SWY) aren't likely to match Wal-Mart's prices because their costs are higher. Look at the difference in operating margins:
SVU Operating Margin TTM data by YCharts
Herkert might be a genius, but putting the Wal-Mart to Supervalu doesn't appear to be the answer.
So, mulling Supervalu's decline, one reflects on personal experience at a Supervalu-owned Jewel store in the city of Chicago, where Jewel enjoys a commanding market share and has the very best locations locked up: the store seems almost unmanaged. I didn't notice "our listless workers" among the business risks in the Supervalu 10-K, but the lawyers might consider adding it in next time.
Its checkers, drawn from the same labor pool that produces polite and helpful servers at McDonald's (MCD) and Starbucks (SBUX), often don't speak to customers at all, instead carrying on personal conversations with the co-worker bagging your groceries. No eye contact, either, often. Shelves holding some popular items (yogurt, for one) are often poorly stocked and missing what you're looking for. The manager, a fellow who looks beleaguered, is willing to be drawn into conversation on these failings, but his response runs along the lines of, "It's hard."
No kidding. Ask Jim Skinner, the recently retired CEO of McDonald's, if it was easy to turn around his chain's service and cleanliness problems in the early 2000s.
The supermarket category is indeed challenged, occupying that dreaded middle ground that department stores found themselves in, between discounters and luxury purveyors. Some in the middle, with notably strong service cultures, managed to flourish, however - Nordstrom (JWN) showing Macy's (M) how it's done.
M Profit Margin data by YCharts
Supervalu has been too stretched financially to invest hugely in remodeling its stores. But there's nothing keeping Herkert and the people below him from demanding of store managers and front-line employees that they do their jobs reasonably well. With the location advantages traditional chains have, they pretty much have to chase customers away to fail; seems that's what Supervalu has been doing in my neighborhood for years.
Jeff Bailey is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.