Who is buying Supervalu?

The ailing grocer Supervalu (NYSE: SVU) is selling off its assets to please the class of parasites known as “activist investors.”

Supervalu has sold eight of its distribution centers to an undisclosed company for $483 million, Reuters reported.  Supervalu claims it will lease the centers back after entering agreements with the buyer.

There is no guarantee that another deep-pocked organization such as Amazon (NASDAQ: AMZN) will not simply outbid the buyer. Amazon needs distribution centers for its growing grocery business and Supervalu has them.

Is Supervalu Teaming up with Amazon?

Even if Supervalu keeps operating the distribution centers its new customer might be Amazon or Instacart.

A strong possibility is that Supervalu will get out of brick and mortar supermarkets and concentrate on selling groceries to delivery services. Its’ network of distribution centers is well-positioned for that eventuality.

Grocery items are stacked multiple layers high at the Supervalu’s grocery distribution center Wednesday, Jan. 23, 2013, in Hopkins, MN. Supervalu has 1.7 million square feet of distribution space.] (DAVID JOLES/STARTRIBUNE) [email protected] Until 2006, almost half of Supervalu’s business came from wholesaling, the company’s original reason for being in back in the 1920s. Its purchase of Albertson’s turned into more of a supermarket retail company, with wholesaling less than 25 percent of its business. Now, with the recent unwinding of that Albertsons deal, Supervalu is what it was back in 2006 — more of a wholesaler.

One of the centers is in Commerce, California; an LA suburb, which would fit in well with Amazon’s rollout of its Prime Now grocery delivery services in greater Los Angeles, Biz Journals reported. The Joliet, Illinois center is in Chicagoland, and the Stockton, California, center is close to the Bay Area.

The Harrisburg, Pennsylvania, center is well-situated to serve New Jersey, Philadelphia, Washington, D.C., Baltimore, and the Big Apple. A Pompano Beach, Florida, center is located just north of Miami and Fort Lauderdale.

Supervalu can use the cash it gets from selling the centers and the brick and mortar stores to lease more distribution centers to serve other urban areas. A really smart move will be to buy centers in the New York, Boston, Phoenix, Dallas-Fort Worth, Houston, and Seattle areas.

Supervalu is getting out of Brick and Mortar Supermarkets

Supervalu is looking for its East Coast assets and the Shop n’ Save supermarkets in Saint Louis.

The most likely buyer for Shop n’ Save is Kroger (NYSE: KR) but Amazon; which owns Whole Foods, is a dark-horse purchaser. There is no word on whether Supervalu will sell the Cub Foods grocery stores in its hometown of Minneapolis-Saint Paul.

Kroger is slowly consolidating the grocery market in the Midwest; it bought Roundys,’ and took over the supermarket business in Wisconsin a couple of years back. Buying Shop n’ Save and Cub Foods would get Kroger into all the major metro areas in the Midwest. Kroger has already absorbed some of Supervalu’s Farm Fresh Markets in the mid-Atlantic region.

Amazon can use Cub Foods; or Shop n’ Save, to tap the middle-class and working-class grocery markets. The Everything Store is already well-positioned in the upper-class segment with Whole Foods.

Lidl ups its Game

Other potential buyers for Supervalu’s markets include Lidl and Aldi, both of which are dramatically expanding their grocery footprint in the United States. Lidl has teamed up with Target (NYSE: TGT) by offering delivery service through Shipt, a Target subsidiary in Northern Virginia.

The German-owned Lidl hops to reach around 360,000 households in the Washington DC suburbs, Supermarket News reported. Buying up traditional supermarkets and turning them into neighborhood fulfillment centers for grocery delivery would be a very clever play for Lidl right now.

Lidl’s archrival, Aldi is offering grocery delivery through Instacart in Chicagoland. Instacart is also working with Kroger, which is upgrading its delivery and fulfillment technology with the help of Britain’s Ocado Group PLC (LON: OCDO). One has to wonder if Ocado; which is 6% owned by Kroger, is now the owner of Supervalu’s distribution centers?

Ocado has plans to open robotic fulfillment centers for grocers all over the world. The first of those centers in Andover, Hampshire, England is already up and running. Ocado wants to use swarms of cloud-operated robots to fill grocery orders.

Is Supervalu Making Money?

The surprising aspect of all this is that Supervalu is making money. Stockgrow gave Supervalu a gross profit of $63 million, revenues of $2.415 billion, an operating income of $94 million and a bet income of $33 million for 1st Quarter 2018.

There was also an operating cash flow of $233 million and a free cash flow of $191 million for the same period. The trouble Supervalu has is keeping the money, it only reported $41 million in cash and equivalents on February 24, 2018.

It is easy to see why Supervalu is selling the grocery stores and moving into distribution. Making money in the supermarket business is easy, but keeping the cash is tough.

Supervalu’s Financials explain Bezos’ grocery push

Supervalu’s financials explain why Jeff Bezos is so interested in the grocery business. Grocers like Supervalu have a very strong cash flow, and Bezos loves cash.

Amazon had $16.676 billion in cash in equivalents and $24.963 billion in cash and short-term investments on March 31, 2018, according to Stockrow. The extraordinary thing was the Everything Store accumulated that cash with a negative free cash flow of -$4.518 billion and an operating cash flow of -$1.791 billion on March 31, 2018.

Bezos to enter more high cash flow businesses to offset the other costs at Amazon. That included total liabilities of $48.045 billion and total debts of $24.64 billion on 31 March 2018. Adding high cash flow products like groceries to Amazon’s inventory can offset losses elsewhere.

Will Amazon become America’s Grocer?

One big advantage to the grocery business is that everybody has to eat. Food is one merchandise category that everybody has to spend money on, and most people will spend slightly more on. If he can become America’s grocer, Jeff Bezos can double or triple Amazon’s size and become larger than Walmart at some point.

Amazon is well on its way to achieving that goal its revenues reached $177.866 billion at the end of 2017. Walmart’s (NYSE: WMT) revenues hit $500.343 billion; or half a trillion dollars, for the first time on 1 January 2018.

It is entirely possible for Amazon to grow to Walmart size. Amazon’s year to year revenue growth rate was 30.8% in 4th Quarter 2017. It would take several years of such growth to reach Walmart size, and for Walmart to stop growing. Walmart’s revenues grew at a rate of 2.98% during 1st Quarter 2018, which was more than three times the .78% growth rate in 1st Quarter 2017.

Walmart partially achieved its incredible size by becoming America’s largest grocer. Something that Bezos, a fan and student of Walmart understands. Kroger is America’s largest standalone grocer’ it reported $122.662 billion in revenues on February 3, 2018. Since Kroger’s revenues grew at a rate of 6.35% during 1st Quarter 2018, there is a possibility that chain might grow to Walmart size at some point as well.

Is Supervalu a Value Investment?

Some observers will wonder if Supervalu can be a value investment in a fragmented and disrupted grocery market. Perhaps, Supervalu’s price was low; it was trading at $18.21 a share on 25 May 2018.

If Supervalu can transform itself into a distributor it can be a value investment. Berkshire Hathaway (NYSE: BRK.B) owns the McLane Company one of the largest provider of supply chain services to American retailers. McLane generated $50 billion in revenues during 2017.

Supervalu might become as great a value at McLane if it can successfully position to distribution. At that point, Berkshire Hathaway might buy Supervalu. Therefore, Supervalu is a good speculative value investment right now and a stock to watch, because of its low price and position in a dramatically changing industry.