As Supervalu slims down, Cub Foods fights on

As Brian Audette toured Cub Foods' Stillwater store, the supermarket chain's president often used words like "variety" and "fresh."

To describe a display of golden Opal apples. To point out clams, mussels and fish fillets on ice. To rhapsodize about doughnuts baked at the store and available in 40 iterations.

It's this full-serve approach across the store, coupled with what Audette calls "value," that Cub hopes will help turn the tide in the Twin Cities grocery wars. Cub's market leadership has eroded over the years as low-price leaders Target and Wal-Mart gained ground.

With the recent retooling of Cub's corporate parent, Eden Prairie-based Supervalu Inc., Audette and his co-workers at Cub have reason for optimism. Struggling Supervalu shed its four largest — and in some cases, most troublesome — conventional chains, leaving five smaller ones. The firm can focus more resources on Cub, now its largest traditional chain.

Supervalu "is a smaller company, but we are a healthy company and we are frankly moving to a more decentralized model," said Audette, a 22-year Supervalu veteran. "We can really put together a very specific plan to go to market for Cub."

Still, analysts point out that the fundamental problem facing Stillwater-based Cub, its local rival Rainbow Foods and most conventional grocers nationwide has not changed. They're stuck in the middle.

Low-price competitors are only growing, as Wal-Mart builds new supercenters and retailers from dollar stores to drugstores roll out more grocery offerings. On the market's higher end — where top-flight produce and meat offerings matter most — traditional Twin Cities heavyweights Lunds and Byerly's have held their own, while Whole Foods' local presence is growing.

Still, Livingston noted that Cub's long presence in the Twin Cities works in its favor. "Loyalty is one of the things they have going for them."

John Dean, a Twin Cities supermarket consultant, said Cub has continued investing in its properties — remodeling and upgrading them over the years. "If you look at the stores they have, they are pretty much in good shape," Dean said.

That hasn't always been the case at some of the chains Supervalu sold, which analysts say suffered from underinvestment.

Cub marked Supervalu's first major foray directly into retail grocery. Supervalu, a food wholesaler since the 1920s, bought Hornbacher's supermarkets in Fargo-Moorhead in 1975 and five years later picked up Cub and its five Twin Cities stores.

Hornbacher's stayed small. But Cub grew to 140 outlets in 12 states, before pulling back mostly to its home turf in Minnesota, where it now has 67 stores.

Now, Supervalu will once again derive almost half of its sales from wholesale, with its discount national chain Save-A-Lot making up 25 percent of sales and its traditional regional chains, including Cub, making up the rest. While Supervalu doesn't break out financial data for Cub, it's the firm's largest conventional chain by sales and has been consistently profitable, Audette said.

Not that this is easy. "Making money in Minneapolis is challenging," said Jim Hertel, a managing partner at supermarket consultant Willard Bishop. "It's a very fragmented [grocery] marketplace."

Still, Supervalu has retained its leading Twin Cities market position, as measured by some analysts. In a September report, Janney Capital Markets said Cub had a 22.2 percent share, down from almost 26 percent two years earlier. Credit Suisse, in an October report, pegged Cub at a 21 percent share, while Target and Rainbow tied for second with 12 percent.

Since January, Rainbow has closed or announced the closing of three Twin Cities stores, something Cub has avoided locally. Meanwhile, Minneapolis-based Target has now rolled out its PFresh expanded food concept in all but one of its 31 local general merchandise stores, in addition to its 24 SuperTargets, which include full-scale grocery stores. PFresh stores do not include a full supermarket, but offer items in 90 percent of grocery categories.

Wal-Mart, whose Twin Cities market share is closing in on its rivals by some measures, is in the midst of a superstore surge. The Arkansas-based behemoth in 2012 opened three supercenters, which sport full-scale grocery stores, bringing its local total to 14. And two more are slated for 2013 and 2014.

Market research across the country shows that Wal-Mart sports the lowest prices, often followed by Target, with conventional grocery stores charging more. "The bottom line is that they can't sell groceries as cheap as Wal-Mart and Target, and that is all there is to it," Livingston said.

Part of the reason, Livingston and other grocery industry analysts say, is that conventional supermarkets like Cub and Rainbow are unionized. So, they tend to offer higher average pay and benefits. "It isn't that [union grocery] workers are getting rich," Dean said. "They've reached the livable wage stage."

Supervalu has been the supermarket industry's laggard when it comes to low prices, particularly compared with Wal-Mart and Target.

Citigroup stock analyst Deborah Weinswig, in her most recent supermarket price survey, found that Albertsons stores in Los Angeles and Seattle — which Supervalu recently divested — cost 28 percent more on average than Wal-Marts in the same market during April's first week.

But Shoppers, the Washington, D.C.-area chain still owned by Supervalu, had prices that were 16 percent higher on average than Wal-Mart, the Citigroup report says. That lower gap with Wal-Mart supports former Supervalu CEO Wayne Sales' contention that Supervalu's remaining chains don't require as much price cutting as the ones it shed to be competitive, Weinswig wrote.

That experience includes a broad selection of fresh produce and meats, myriad prepared deli foods and baked goods, in-store pharmacies and, in many locations, adjacent liquor stores, he said. But Livingston noted that key competitors such as Lunds and Byerly's have many similar offerings.

Audette said Supervalu under the leadership of new CEO Sam Duncan, who started in February, is more decentralized than before the Cerberus sale, which should help Cub react quicker to consumer demands. Marketing, promotions and other decisions previously made at Supervalu headquarters will be made at Cub's Stillwater headquarters, he said.

"The whole philosophy is a decentralized organization with decisions made in the market, closest to the customer."

Mike Hughlett • 612-673-7003