BY DAVID NICKLAUS  | Posted: Friday, July 13, 2012 12:15 am
http://www.stltoday.com 

Everybody has to eat, but that doesn't mean selling food is an easy way to make a buck.

In the Walmart era, in fact, it's one of the most competitive industries around. Supervalu, parent of the Shop 'n Save and Save-A-Lot chains here, is the latest supermarket operator to admit just how brutal the competition is.

Supervalu didn't quite wave the white flag on Wednesday, but it did suspend its dividend, announce a $250 million cost-cutting initiative and authorize a review of “strategic alternatives,” which could include selling part or all of the company.

Investors' reaction was swift and negative: Supervalu shares lost 49 percent of their value Thursday, and analysts weren't hopeful about a quick turnaround. Ken Goldman, a JPMorgan analyst, wrote that “the outlook for Supervalu remains more uncertain than ever.”

And that's saying a lot. Supervalu was already a basket case, having lost money in three of the past four years.

Scott Mushkin, an analyst at Jefferies & Co. in New York, traces Supervalu's problems to its acquisition of Albertson's in 2006, a deal that doubled the company's size.

“They paid an awful lot,” Mushkin said. “Albertson's had a lot of issues. They were not run particularly well, they were not priced appropriately, and they had not put enough money into the stores. Supervalu got a lot of good market share, but they had an asset that needed a lot of work.”

The Great Recession didn't help. Many cash-strapped shoppers started buying food at chains like Walmart or Dollar General instead of a traditional supermarket.

Supervalu needs to cut prices to compete, and that's part of what Wednesday's announcements were about. By cutting costs, eliminating the dividend and refinancing debt, the grocer is making itself leaner, and it says that will be reflected in prices on the shelf.

Price-cutting may not be enough, however, and that's where the strategic alternatives come in.

Mushkin says he believes that “everything is on the table,” but that Supervalu is more likely to sell pieces of itself than to sell the whole company. He'd like to see the company jettison its east and west coast operations and shrink to a Midwestern core that would include St. Louis.

Save-A-Lot, a “hard discount” division that sells mostly private-label brands, may not be part of that core. “It could be spun out or sold pretty easily,” Mushkin said. “I think that's definitely one of the things they'll look at.”

Burt Flickinger, managing director of Strategic Resource Group in New York, also thinks it would make sense for Supervalu to sell some of its regional chains. He said Save-A-Lot has been viewed as “the crown jewel” of the company, but that it may now be expendable.

Can a shrunken Supervalu hold its own against the Walmart juggernaut?

Flickinger says it can compete if it updates its stores to emphasize organic produce, bigger deli and seafood sections and the like. Unfortunately, though, Supervalu is cutting its capital budget by as much as $225 million this year, so its ability to do such renovations may be limited.

The combination of good stores, good customer service and competitive prices works for other chains. Mushkin cites Kroger and Publix as two large chains that know how to make a good profit in the grocery business.

Supervalu hasn't figured it out yet. If this week's drastic moves don't turn things around, the chain's managers may not get another chance.