Taking Stock

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With Farm Fresh Sale, Supervalu Moving Closer To Goal Of Becoming Primarily A Wholesaler

“Over the past two years, we’ve been working diligently and rapidly to transform our business to become the wholesale supplier of choice for grocery retailers across the United States. In 2016, we sold Save-A-Lot and its network of approximately 1,350 retail locations. Last year, we acquired Unified Grocers and Associated Grocers of Florida, which when combined with substantial organic growth, added more than $5 billion in run rate sales to bring our core wholesale business to nearly $13 billion.”

Those were the comments of Supervalu chief executive Mark Gross on March 14 after his company announced the sale of 21 stores and subsequent withdrawal of Farm Fresh Supermarkets from the Tidewater region of Virginia. After the sale of Save-A-Lot 15 months ago, Supervalu began tackling an even tougher mission – dismantling most or all of its 215 store corporately-owned network.

Five different banners in unaligned markets, with stores as large as 75,000 square feet and as small as 30,000 square feet; some regional chains are unionized, some are not. Throw in the fact that most of the stores have not received any capital investment in more than a decade and operate in highly competitive and overstored markets, finding buyers for these often-second-rate units was going to be challenging from the outset, especially when considering how few active buyers exist today in the entire industry.

In announcing, the long-expected news (a prospectus about Farm Fresh was issued last year), Gross also noted: “Exiting the Farm Fresh banner will enable us to allocate greater resources and energy toward the strategic growth of our wholesale business. We also continue to aggressively pursue other important initiatives, including the monetization of real estate through sale leaseback transactions and cost reduction across the company. We are confident our efforts are driving growth and enhancing our competitive position. This decision was not taken lightly given the impact on our employees and the communities we serve, but we strongly believe this decision is in the best long-term financial and strategic interest of our business. Our leadership team and board of directors remain committed to taking proactive steps to transform our business and drive stockholder value.”

Here are the nuts and bolts of the sale: Supervalu entered into three separate definitive agreements to sell 21 of its 38 Farm Fresh Food & Pharmacy stores for approximately $43 million in cash to two different retailers that operate three different banners: Kroger/Harris Teeter and Food Lion.

Of the 21 stores that are included in the agreement, 10 stores are being sold to Harris Teeter, including six in-store pharmacies and three fuel centers; eight stores are being sold to Kroger’s Mid-Atlantic division, including eight in-store pharmacies and four fuel centers; and three stores are being sold to Food Lion, including three in-store pharmacies.

Supervalu is also continuing discussions and exploring potential transactions to sell the remaining Farm Fresh stores to current and prospective wholesale customers and certain Farm Fresh employees.

“We are thankful for the tremendous service our employees have delivered at Farm Fresh through the years, and are grateful for the opportunities we’ve had to share in the lives and special events of our customers and employees across the Hampton Roads, Richmond, Williamsburg, and Elizabeth City (NC) communities,” said Anne Dament, executive VP of retail, marketing and private brands. “We are working with the buyers to ensure a smooth transition and we expect them to offer positions to many Farm Fresh employees. In addition, we plan to offer eligible employees severance and other job transition support.”

With regards to Farm Fresh pharmacies not included in these transactions, Supervalu has entered into agreements to transfer pharmacy prescription files to other pharmacies in the area. Prescription files from 10 pharmacies will be transferred to Rite Aid and four to CVS Pharmacy.

What Supervalu reaped from the deal wasn’t surprising when all factors are considered. It sold slightly more than half of the stores that were available. Because of the nature of the buyers, who all operate their own distribution centers, there will be no contingent supply agreement accompanying this transaction.

Since negotiations are continuing to sell the remaining 17 stores, there is a chance a handful could be sold to independent or ethnic operators who could agree to be supplied from Supervalu’s Mechanicsville, VA warehouse.

You can logically argue that the 3,300 Farm Fresh employees who are impacted by this decision deserved a better fate. They did. It wasn’t that long ago that the wisdom and leadership begun by the late Gene Walters and carried on successfully by Ron Dennis helped make Farm Fresh one of the best regional supermarket chains in the country. But, sadly that now seems like ancient history.

Mark Gross is on a highly-focused mission to turn around Supervalu. Improvements are already apparent – the culture (helped by previous CEO Sam Duncan) is now solid, and wholesale growth (measuring comps, new customers and acquisitions) has increased significantly. But along the path towards ultimate success, there are always tough choices to make.

Farm Fresh is the most difficult decision Gross has had to make in his two years at the helm. Remember, the first cut is the deepest.