Moving Up the Down Escalator

Few retailers have received more press recently than Supervalu, which is reviewing its strategic options after struggling for profit and sales growth for several years.

While the Eden Prairie, Minn.-based company is a diversified business with about $35 billion in annual sales and still commands the top position in several markets, its future will require more than the price-cutting strategy it has launched recently, experts say. Many industry observers expect Supervalu to sell all or parts of the company, which include Albertsons, Cub, Jewel-Osco, Save-A-Lot and Shop 'N Save among others. A variety of players, including Cerberus Capital Management and KKR, reportedly are interested in buying pieces. But few experts are speculating about what will become of the rest of it.

Supervalu took on too much debt to buy the Albertsons banner in 2006, setting the company up for a tough time when the economy turned, experts say. "It was once again one of those things if they had a crystal ball, it wouldn't have happened," says Garrick Brown, director of research for Cassidy Turley, a commercial real estate services firm.

Supervalu is hardly alone in confronting a multitude of possibilities today but no easy answers. Many of the nation's conventional supermarkets know they need to make changes as they meet growing competition from banners and channels that didn't exist years ago. A volatile commodity market hasn't helped, as prices for many food products continue to rise faster than some consumers' paychecks. With a slow-growing economy becoming the new normal, retailers and CPG manufacturers whose sales and margins have been lagging expectations are looking for ways to turn around their operations.

One Step Forward, Two Back

But for Supervalu and others, it's like climbing a down escalator, where double the effort is required to make any gains.

Often, retailers' underlying capital structures aren't allowing them to make the necessary changes. "It's not like it's a mystery. You can look at the cost structures and understand what the issue is," says Josh Benn, global head of retail and consumer investment banking at Duff & Phelps in New York. "When you have a tough consumer top-line environment, you have to rationalize costs to remain competitive."

Compounding the price wars some retailers are resorting to are real estate woes due to poor site selection or changing demographics that put the retailer at a competitive disadvantage. "Over time, cost structures put in place make these businesses uncompetitive," Benn says, noting that many retailers are locked into long-term leases at above current market rates. "For an overleveraged business, it's a tough bet. You need to work to optimize landlord relations and [your] real estate portfolio," Benn says.

Slow economies don't allow room for error, so experts expect the number of mergers and acquisitions to rise as companies look for short cuts to growing their operations or streamlining them. But mergers often precipitate declines during the acculturation process, as the identity of the acquired entity gets swallowed up. "Dominick's really got demolished" after Safeway acquired the banner in 1998, Benn says. Dominick's was the leading supermarket in the Chicago area with 130 locations and a market share of about 28 percent when Safeway bought it, while the banner's share of the Chicago market was about 9 percent with just 76 locations in 2012, Crain's Chicago Business reported.

Following the merger, Chicago shoppers didn't like the changes Safeway made to Dominick's, including altering store layouts, closing stores, and swapping Dominick's high-quality prepared foods with the Safeway Select house brand, Forbes said. When Safeway's troubled acquisitions of Randalls and Genuardi's also are factored in, the company wrote down $3.0 billion in charges, representing 75 percent of the $4 billion it spent on the three acquisitions, according to a report to shareholders by the Illinois State Board of Investment in 2004. The report attributed Safeway's problems in part to pervasive conflicts of interest on Safeway's board that precluded the board's ability to make sound, objective decisions. It pointed out that eight of the company's nine directors had "derived financial benefit from business relationships with Safeway."

Often, top management is blind to problems that can lead to decline, believing the situation will improve by adding locations or acquisitions. In the book, "How the Mighty Fail," Jim Collins suggests corporate decline is largely self-inflicted as leaders emphasize growth at any cost and don't heed the warning signs of trouble. Tesco might have avoided big problems at Fresh & Easy if it had tweaked a few locations before expanding to 200 stores, experts say. "They hadn't completely fine-tuned the concept when they started opening stores," Brown says.

Capital Constraints

Growing too quickly can lead to a crisis, as resources get stretched beyond the company's ability to fulfill expectations and debt incurred during the expansion cripples its ability to invest in solutions. Most analysts say that's been the case at Supervalu, which paid about $12.4 billion for Albertsons in June 2006 and hasn't been able to realize the potential it expected.

Proactive communication with employees is especially important to turning around a business and keeping it on the right path. That's why some companies, such as Costco and Crate & Barrel, train employees and managers on "how to have conversations that move the business forward," says Halley Bock, CEO and president of Fierce, a leadership development and training company in Seattle, Wash.

"We live in a very transparent world so there's no hiding, no ducking for cover. We're all having to get out there," Bock says. Today's challenging retail environment requires leaders to invite opposing perspectives, she says. Leaders need to be asking employees, "What do you see? How can we be more efficient? What is it the customer wants from us?"

Crate & Barrel in particular has been out in front in encouraging dialogue among employees and managers. The practice has contributed to the company's high retention rate, Bock says, and it likely helps the company come up with solutions. "So often we look at the expert as being outside our walls," she says. "I would take it very internal because the answers are in the room."

Management is naive to think employers don't notice signs of decline. "It's only a matter of time before an organization is going to feel so much pain in terms of turnover and bad strategy they will be forced into that change eventually," Bock says.

Customers can notice the lack of energy in a store when it is on a losing trajectory. With the nation's middle class declining in prosperity, "it just goes to stand to reason that the middle-of-the-road grocers are going to feel that pinch that the middle-class does," says Christopher Studach, creative director at King Retail Solutions in Eugene, Ore. The consulting firm has received more calls from retailers interested in remaking themselves recently. "They know the middle ground is no-man's land and they want to do something about it."

Where viable, many banners should strengthen their brand image by emphasizing quality and service instead of price, Studach says. But going beyond product selection to more significant changes can be difficult to implement, partly because many organizations are resistant to change. "To communicate that differential to the customer is easy for us. The hard part is, internally does this company have what it takes to do those things?...You need to be fearless and have a vision and stick to it; then go after it and don't look back," Studach says.

Making Changes

Whatever course a company chooses should signal that improvement is afoot. "You need to reposition the story so you have a mix that is resonating with consumers. You either focus on price or you focus on quality," Benn says.

But often management simply gets caught up in the day-to-day operations and doesn't adjust the strategy quickly enough. Other times, leaders might feel the company doesn't have the financial means to make the change. But in most cases, "it's not about the numbers. It's about what you're able to do with employees," says Dave Bagley, principal at MorrisAnderson, a financial and operations advisory turnaround firm in Chicago.

Many companies grew complacent after the booming economy of 2006 and 2007, and management stopped looking outward for new ideas, Bagley says. Once a company recognizes it's in a state of decline, it needs a vision for the future and the time to implement it, he says.

Retailers should invest in a qualitative analysis to objectively determine their current situation, including customer perceptions. "We do a retail image audit. We come in from a completely clear vantage point and spend time examining every aspect, every brand touch point," including the store's physical space, Studach says.

Once the opportunities and challenges are identified, develop a strategy for the future. Encourage employees to come forward with ideas because they have a first-hand look at the current operations as well as what customers might respond to.

Bock encourages companies to hold all-company staff meetings, where they announce changes in leadership and strategy. But management needs to support it by sticking with the plan.

Don't expect miraculous results overnight. It can take a full year before real progress is made, Bock says.

The sooner the company acts to turn around a declining situation, the better, Studach says, because negative impressions can linger. "There could be a point of no return," he says. "It depends on the wherewithal of the company to be able to re-image themselves."

Freelance business journalist Ann Meyer serves as senior editor of Retail Leader magazine. She is also editor of SmallBizChicago.com