Supply chain key in meeting merger synergies

When Supervalu took ownership of the properties it acquired from Albertsons, it went from a 50-50 retail-distribution revenue split to having an overwhelming retail focus. Yet, it is the distribution business that ultimately will determine if the new, larger organization will succeed.

In running its own retail stores, a franchise operation and servicing thousands of other independent customers, Supervalu has developed expertise in meeting the needs of various retail business models and store formats. Supervalu’s supply chain organization, which now includes 36 distribution centers, serves as the company’s backbone by offering efficiencies of scale at the same time it adapts output to meet a range of retailer needs.

Now that experience is being put to a critical test as the company works to meet its publicly stated goal of achieving the synergies of the deal while also maintaining the unique character of each of its several banners.

From an organizational standpoint, the company maintained presidents at each retail banner as advocates for those attributes that make them successful in the markets they serve. Supervalu doesn’t call the acquired banners premier for nothing. Such names as Shaw’s and Jewel-Osco, not to mention Sav-on and Osco, have won loyalty among a large proportion of customers in their home markets. Yet, Albertsons itself was never able to integrate the American Stores operations it acquired some years ago into an effective retail organization, which precipitated its break-up.

Supervalu faces a similar challenge. But it also enjoys the unique advantage of a vast toolbox of distribution solution—first assembled to facilitate its work with independent supermarkets and later corporately owned and licensed stores—that it can leverage in its bid to integrate the Albertsons banners.

“Supervalu has grown up with a legacy of supply chain,” said Janel Haugarth, Supervalu executive vice president and president and chief operating officer of supply chain services. Haugarth has spent more than 30 years with the company and has witnessed its evolution firsthand. “We at Supervalu look at the supply chain as an enabler of success. We will provide products in the most efficient, productive, reliable way at the right time and right place to a group that we look at as our customers.

“In the old Supervalu world, our corporate retail stores were our customers,” Haugarth continued. “They could choose another supplier any day of the week. We recognized that, and everything we did was based on serving them better than anyone else could. That’s the same kind of philosophy we are now bringing to the Albertsons distribution centers, and they find it a very good fit to their ways and values.”

Supervalu has adopted a regional distribution approach to its general merchandise and health and beauty care operations. Regional hubs across the United States serve full-line facilities in major markets. One of the first projects the company took on after the Albertsons transaction was realigning its regional GM/HBC network in the Midwest, and today, most of these products are handled out of facilities in Illinois. Other hubs are in Alabama, Idaho and Pennsylvania.

Meanwhile, the company is upgrading its Brea, Calif., facility with a technology solution for dynamic picking, which will allow Supervalu to transfer some regional product from Idaho to Southern California. Although Supervalu does not say what vendor is providing the technology or the competitors in the industry who are using similar systems, the company touts the move as a strategic advantage.

“It’s proven technology that can only enhance our operation,” Haugarth said. “We are excited about the possibilities.”

The supply function is a central consideration in everything Supervalu does, Haugarth said, and as part of expanding the retail business, the company has become even more dedicated to building on its distribution advantages all the way from planning to the store checkout.

“We continue to maintain an open dialogue between supply chain and procurement and retailer to look at the whole landscape” Haugarth said. “Everything we do we look at: ‘does this make sense from a supply chain perspective toward the goal of providing product at the lowest cost through the supply channel?’ It translates into lower inventory, higher productivity and actually higher service levels at retail because not only do we look at how the costs can be driven, but a lot of times we’ll go direct to store or we’ll go cross dock.”

Ultimately, supply chain has been a big driver of the Albertsons’ integration and is certainly the foundation upon which Supervalu is reconfiguring itself as a retailer. Analysts discussing Supervalu’s prospects frequently cite the eventual attainment of synergies, many involving supply chain, as one of the positive factors in their appraisals. Joseph Agnese, a Standard & Poors analyst, noted recently, “We see significant benefits from synergies over the next three years.”

The retail side now may be the bigger sales engine—in the first quarter, retail generated $10.4 billion in revenue versus $2.9 billion for the supply side of the business—but it is the experience that the company has in distribution and the flexibility it has developed in dealing with different businesses that will determine the ultimate success of the new, bigger Supervalu.

“You can’t be successful at retail just because you have a great supply chain, but it certainly is a great enabler, allowing you to be successful at retail. And we think our strong supply chain is a differentiation point with other large retailers,” Haugarth concluded.