A Lot for a Little

Hard discount model helps Save-A-Lot thrive.

By
Angel Abcede, Senior Editor/Content Development Coordinator

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Imagine grocery shopping and having to pull the bag of chips you want from an open shipping box. Or looking in vain for the deli counter. Or paying 10 cents for a plastic grocery bag and bagging everything yourself.

Hardly something a customer used to the everyday amenities of a neighborhood grocery would entertain—except for the 20% to 40% savings at checkout. And the time saved by not having to trek through a larger supermarket or, for that matter, a Walmart.

But the successful, pared-down history of Save-A-Lot grocery stores provides a glimpse into “hard discount” retailing and how a middle-box chain— bankrolled by one of the country’s largest (but struggling) grocery conglomerates—successfully rides the continuing merger of price, quality and convenience.

“Everyone is getting into the convenience market, with the biggest driver being that the kind of ‘trip missions’ people are making is evolving,” says Craig Johnson, president of Customer Growth Partners, a retail trends consulting and research firm based in New Canaan, Conn. The weekly “stock-up” that mothers had time to do in the past is evaporating, Johnson says, because so often today, she’s the main breadwinner. “That’s why the share of trip missions is moving to the convenience trip or ‘top off’ vs. the stock-up,” he says.

Single-mom households are the bread-and-butter demographic of St. Louis-based Save-A-Lot, a chain that practically defined hard-discount retailing. Its reduced-labor, private-label business model thrives in recessionary times, cashing in by taking vacant storefronts in low-income neighborhoods and opening brightly lit stores with warehouse-inspired displays of packaged goods, meats and produce at “shockingly low” prices.

Such discount models have been viewed as antidotes to so-called “food deserts,” or areas underserved by traditional grocery retailers because of economic distress or small populations. (See cover story on p. 46.)

That same formula has now become a cornerstone of recovery for its struggling parent, Minneapolis-based Supervalu, an aggregator of food retail and distribution businesses that include chains such as Albertsons, Jewel-Osco and Cub Foods. The company raked in $37.5 billion last year but also had to cut jobs, close stores and sell off parts of its portfolio.

Craig Herkert, CEO of Supervalu, has specifically named Save-A-Lot as a major prong in its expansion and overall turnaround efforts. “Looking ahead, fiscal ’12 will be a year of transition for Supervalu as we continue our journey to become ‘America’s Neighborhood Grocer,’ ” Herkert said in a spring investor call.

“We need to be locally relevant and focus first on satisfying the needs of our primary customers, those who are closest to our stores,” he continued. “To do so, we must be sensitive to their unique cultural needs, shopping habits and economic circumstances. Clearly, our pricing must not give them a reason to take their dollars elsewhere.” SuperValu’s “aggressive support” reflects Save-A-Lot’s national expansion plans:

Doubling its store count to a projected 2,400 in 2015. The chain is up to 1,282 stores, with plans for 160 this year. Expanding its supply-chain system of 15 distribution centers, with another being built and yet another in the works. An even more aggressive discount push, with the introduction of a less-than $1 line called Save-A-Lot Today. (At press time, Herkert announced the replacement of Bill Shaner, who had led the Save-A-Lot subsidiary since 2006, with another former Walmart executive, Santiago Roces. Supervalu had no comment beyond a written statement of Roces’ appointment.)

What’s at stake is not so much a market of new demand, but rather one that’s shifting, says Johnson of Customer Growth Partners. “There are not twice as many heads of lettuce, tomatoes, meats or ground beef being sold,” he says. “It’s that there’s less [being bought] in a stock-up trip mission and more in a smaller basket.”

Discount DNA

The idea for Save-A-Lot started with a grocery wholesaler named Bill Moran, who saw a way for small grocers to compete with emerging megastores by carrying a limited assortment but at a value price, says Michael Stout, director of licensed business development for Save-A-Lot.

Moran opened that first store in 1977 in Cahokia, Ill., and led the company for almost 30 years, retiring in 2006. With its roots in the St. Louis area, the company grew organically into surrounding states and has a high concentration of stores in the mid-Atlantic region as well as the upper Midwest. In 1988, a St. Louis-based food wholesaler and retailer called Wet- terau Inc. bought Save-A-Lot, which was then bought by Supervalu in 1993.

The basic mantra is simple: Carry the most frequently purchased items in the most popular sizes—a model that Stout admits resembles that of Redbox DVD rental kiosks.

“When you go into a typical supermarket, you may see six or seven sizes of mustard,” he says. “We’ll carry two.” The differences continue. (See sidebar, right.) Whereas a traditional grocery store will have 30,000 to 50,000 SKUs, Save-A-Lot will have 2,000. The typical size of a store is also smaller, with traditional stores averaging 47,000 square feet and Save-A-Lot 15,000.

 Low-income households are the target demographic, with median incomes being $40,000 or less. Food-stamp recipients or people on some form of government assistance make up more than 50% of the chain’s clientele, Stout says. It also puts Save-A-Lot stores in just about every neighborhood scenario, be it urban, suburban or rural setting, with smaller towns typically ranging from 20,000 to 35,000 residents. A community mentality allows Save-A-Lot to survive without local or national advertising, yet again driving savings to the bottom line.

But succeeding in economically disadvantaged areas, and in some cases where other grocers have come and gone, means a further embrace of the discount model.

Initial capital investments are much lower; according to Stout, retailers wanting to build a traditional 30,000-squarefoot store will spend about $5 million. A Save-A-Lot store, at about 15,000 square feet, comes in at $822,000. He says Save- A-Lot stores do not require significant storage space because the model of quick-turn items means less inventory.

A typical grocery, says Stout, turns its inventory 12 times a year. His average is 27.

More Cutting 

Addressing labor has been yet another way Save-A-Lot has been able to take costs out of operations. Stores typically operate with a skeletal staff. For instance, there are no delis; therefore, no one’s needed behind the meat counter (although for cultural purposes, stores based in largely Spanish-speaking markets have fielded service personnel in the meat area).

Some store particulars, such as customers bagging their own groceries, have been reworked. Many of the items are shelf-ready, meaning that employees never have to remove merchandise from the box they came in. They simply cut open a perforated portion of the box and then slide it onto the shelf. Some of the boxes are even designed so that the portion remaining (that may obscure the products inside) continues the graphics of the packaged items.

So while the average supermarket may have 15 to 20 employees during a shift, Stout says Save-A-Lot will have five to seven. “We use strong operational efficiencies to drop labor down,” he says. The boxed shelving is a predominant look throughout the Save-A-Lot store, but significant presentations with vibrant signage for produce, meat, dairy and baked goods keep the aesthetics similar to a traditional grocery store.

Another way Save-A-Lot maintains that look and feel while also driving costs down is with private-label products: Proprietary items account for 70% of the store, while traditional grocers typically stock 30% private label. But far from the stereotypical “generic” goods, Stout says the company’s products are of high quality and packaged to underscore that perception.

Even national brands get cheaper by employing the limited-assortment model. “By having our exclusive brands, we consolidate entire categories into single items,” Stout says. “It gives us strong buying power and gets our prices down, which we pass on to our customers.”

Science of Discounting

With expansion of its hard-discount model a top priority for the company, much of the research and planning falls to internal teams. Stout described departments within both Save-A-Lot and Supervalu that help design stores and teams that evaluate properties and conduct market analysis to determine proper site location.

“We map out the trade area and project the first year of sales, figuring out a break-even amount that the location has to do to succeed,” he says. “It won’t help us to close a store within six months of opening. [In fact,] we turn down more locations than we accept.”

Another aspect of operations Save-ALot must take into account is safety, especially opening stores in neighborhoods that are economically challenged. In addition to what Stout calls “proper security technology,” which includes cameras and video equipment, some stores operate with security guards present. “It’s not a huge factor,” he says. “We know how to operate in these types of neighborhoods and feel we’re bringing a much-needed [service] to these communities.”

Beat or Join?

Competitively, Stout says its largest direct competitor is Aldi, based in Essen, Germany. The company has a format that mirrors Save-A-Lot and has found success here in the United States. Beyond that, Stout believes efforts from big-box retailers such as Walmart and even dollar stores are no match on many levels.

With Walmart, price is not an issue, and convenience plays to Save-A-Lot’s advantage. Stout does say he intends to watch the development of Walmart’s smaller-format locations, but believes Save-A-Lot’s business model is tough to beat. “Long term, I don’t think they’ll be satisfied with the numbers,” he says. “The efficiencies we have in our stores are sig- nificant.” (For more about Walmart’s newest retail model, watch for the July issue of CSP.)

As for dollar stores, he says the selection and presentation of perishables such as meat and produce will not match Save-A-Lot, in part because of synergies with its parent company. “[Dollar stores] have become more competitive with us,” he says. “But they can’t do the job we do.” As for c-stores, “I don’t see direct competition,” Stout says. Traditional items in his stores or regular grocers differ from those in a c-store, and so do the reasons people go into a c-store over a supermarket, he says. While many believe that the channels continue to blur, others agree with Stout. “If you take fuel out of the mix, they’re definitely different sectors of the retail market,” says Jim Fisher, founder and CEO of IMST Corp., Houston. “You do not go to the supermarket or convenience store for the same product at that time for the same price point.”

Fisher says grocery stores that have understood the distinction feel confident about putting a convenience store with fuel on their parking lots. “Add fuel and they become a competitor, especially if they have a loyalty [tie],” he says.

Stout of Save-A-Lot says much of their growth today lies in people with retail experience becoming licensees. To date, 70% of the chain is run by independent operators. He says the company has even extended an incentive program that started last year whereby new or existing licensees can receive $200,000 for each new store.

Looking forward, Stout sees Save-ALot growing in the Southeast, specifically through the Carolinas, Georgia and into Florida. Then in the Northeast, the company has had success in Pennsylvania and plans to expand into New Jersey, New York and up into Maine. “With [146,000] c-stores in the U.S., we see it reaching a point of saturation,” Stout says, appealing to retailers interested in becoming licensees. “We believe with Save-A-Lot, there’s another avenue for growth.”  

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