Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Grocery Wars

Will SuperValu Survive and Should Amazon buy it?

No company better illustrates the challenges and opportunities in the grocery business better than SuperValu (NYSE: SVU). The Minneapolis-based discounter and supermarket-operator is struggling to survive despite growing revenues.

SuperValu’s revenues grew from $3.8 billion in September 2017 to $3.938 billion in December 2018. Yet its earnings are minimal SuperValu reported a net income of $26 million and an operating income $39 million for 3rd Quarter 2017. The company achieved a good gross profit margin of 10.39% but made little money.

That gave SuperValu Inc, a share price of $15.59 on March 16, 2018. The company also struggled with a negative free cash flow of -$275 million for 3rd Quarter 2017, and cash and short-term invests of $46 million on 2 December 2017.

Will Amazon Make Money at Whole Foods?

SuperValu’s struggles call Amazon’s (NASDAQ: AMZN) purchase of boutique grocer Whole Foods into question. SuperValue operates separate very successful supermarket brands, a couple of which are number one or two in major metropolitan areas and it struggles to make money.

SuperValu’s highest-profile asset is Cub Foods the large grocer in the Twin Cities of Minneapolis and St. Paul. SuperValu also has a major presence in Norfolk, Virginia, Roanoke, the District of Columbia, and St. Louis. SuperValu also provides a variety of services to independent grocers including private-label products, grocery supply chain, merchandising, and distribution.

Yet it is still struggling to survive despite growing revenues. Like Whole Foods, SuperValu has good locations, well-respected brands, and growing revenues, yet it is struggling to make money. One has to wonder, how Amazon is supposed to make money in supermarkets if Supervalu cannot.

Should Amazon have bought Supervalu instead of Whole Foods?

An interesting question here is should Amazon have bought Supervalu instead of Whole Foods? After all, SuperValu is a discounter like Amazon, and it services a general mass market rather than a select upper-class clientele.

SuperValu’s stable of private label grocery brands might have been a better fit for Amazon than Whole Foods’ line up. Grub Street reported that Whole Foods’ suppliers are in revolt against Amazon. That provides an opening for Kroger (NYSE: KR) or Walmart (NYSE: WMT) to poach some of Whole Foods’ suppliers.

An advantage that SuperValu would have brought to Amazon is a lineup of products directed at average middle and working-class customers the bulk of the consumer base. Another is a lot experience in the supermarket and grocery sphere and established stores in large metropolitan markets.

Why Amazon needs SuperValu

Another attribute at SuperValu is lack of direct exposure to Kroger. SuperValu operates stores in two major markets where no Kroger brands are present St. Louis and Minneapolis-St. Paul. Those markets would provide Amazon with an actual opening to crack the middle-class grocery market.

One use for the Cub Foods and Shop n’ Save locations would be as pickup points for Amazon orders. Another would be to help Amazon enter the pharmacy and brick and mortar general merchandise spheres.

Beyond that SuperValu would be incredibly cheap it had a Market Cap of $598.79 million on 16 March 2018. Rolling SuperValu into Whole Foods might make a lot of sense.

Buying SuperValu would have made a lot more sense for Amazon than the Whole Foods purchase. That is unless Amazon was really after Whole Foods’ real estate and not its grocery operations. If that’s the case buying a traditional grocer like SuperValu and combining it with Whole Foods would make a lot of sense.

Some of SuperValu’s assists are for sale, the company is planning to sell most of its Farm Fresh Food & Pharmacy stores in Virginia and North Carolina, The Minneapolis Star Tribune reported on 15 March 2018. Kroger (NYSE: KR) will buy 18 of the stores, and Food Lion three. Around 10 of the Farm Fresh locations will be folded into Kroger’s Harris Teeter Subsidiary.

Would Amazon Buy Safeway?

Another potential target for Amazon would be Safeway/Albertsons which is currently controlled by the Cerberus Capital Management – Private Equity Fund. Cerberus which has been unable to take Safeway public as planned; might welcome a sale to Amazon.

Interestingly enough, I have seen Amazon lockers in Safeway stores in Denver which raises the possibility. Since Safeway owns 2,200 supermarkets in 33 states it would give Amazon a huge presence in the grocery market. Safeway’s current footprint includes 1,300 Safeway stores, 273 Vons stores, 107 Randall’s and Tom Thumb Stores and 28 Carrs stores in Alaska.

Albertsons also controls the Albertsons, Acme, Pavillons, Jewell Osco, Shaws, Super Saver, United Supermarkets, Star, Amigos, and Market Street supermarket brands. It currently operates in 19 states and the District of Columbia.

One huge advantage Safeway/Albertsons would bring to Amazon is a huge physical footprint. Another is a lot of practical experience with the grocery business. Buying both SuperValu and Albertsons/Safeway and rolling them into one organization would make sense for Amazon.

A  benefit from that acquisition would be to let Albertsons or Safeway run the supermarket operations at Whole Foods. Another would be to make Whole Foods brands available throughout the Albertsons/Safeway ecosystem as well as Amazon.

Offering meals from the Safeway deli; or fresh foods from the supermarkets, through Amazon would make a lot of sense. Even Amazon does not buy Safeway/Albertsons or SuperValu it should form a partnership with them. Since Amazon is considering similar deals with French grocers it would be a logical next step.

There is one certainty here, a closer relationship between Amazon and traditional grocers is imminent. The question that needs to be answered is whether it will be partnerships or acquisitions or a combination of both. Expect Amazon to become a major player in the grocery business in the near future.