The CEO of Supervalu Inc has insisted that struggling US retailer’s third-quarter results are “not indicative of our earning potential” after the company posted losses of US$202m.
Craig Herkert’s comments came yesterday (11 January) after the retailer lowered its full-year financial guidance as its third quarter losses almost doubled.
Herkert said on the chain’s third-quarter earnings call that the retailer had invested poorly in promotions and price, which led to everyday prices that were out of line with the rest of the market. He pointed to a series of “ineffective price promotions” in categories like carbonated beverages, soups and frozen foods, which he said “did not drive incremental traffic”.
He added that the number of items sold on promotion was 50 basis points higher than last year, but that they “failed to drive profitable margin dollars”.
Supervalu has now started to improve its price position, moving away from what Herkert described in some cases as “insult pricing”, to get its regular prices back, he said, “in line with where consumers expect it to be” while remaining a “promotional merchant”.
Herkert said that in many cases, the retailer had previously priced its everyday retail products out of line with the market. Customers, he said, were cherry-picking products on promotion and then doing the rest of their shopping elsewhere.
“It’s not good enough to simply have great cover items and then the customer comes in and sees that our regular shelf prices on some items is outrageously priced three weeks out of four. It’s great on the fourth week, but if in three weeks out of four it’s out of line with where the market is, she’s simply going to take and split her basket and go somewhere else,” he said.
Herkert said that Supervalu has engaged a retail consulting firm which brings a “deep offering of proven tools that can be implemented with only modest modifications”. The chain has also begun to implement “advanced promotional analytics and planning tools” to help it gain a stronger insight into the impact of its weekly ads on both sales and margins, which Herkert hopes give it a better return on promotional investments.
These moves are part of a broader transformation programme the retailer began in December, which Herkert said will “touch every aspect of our business”, from procurement to merchandising, to customer engagement and administrative costs.
Supervalu CFO Sherry Smith said that cost cutting is a precursor to price investments, and that the company will exceed its goal of removing US$160m of costs by the end of the year, now expecting to permanently remove some US$175m.
Smith said the retailer is generating the most savings around staffing, facilities and procurement in goods not for resale.
As part of these cost-cutting initiatives, Supervalu is cutting 350 jobs between now and the end of May, in addition to the 300 corporate positions already eliminated earlier this year. Herkert said the moves together represent “approximately 10% of our total corporate headcount” and “will allow us to right-size our workforce for today’s business needs”.
The company said that its negative 4.9% identical-store sales for the quarter “came well in under plan”, with the largest “headwind” coming from its stores in the north-east of the US, which pulled down identical-store sales by more than 150 basis points during the quarter.
Herkert attributed the poor results to “strong price competition” experienced by its Shaw’s, Acme and Shoppers banners. During the fourth quarter, Smith plans to close some 29 outlets, largely across these underperforming banners.
In its next financial year, the retailer plans to remain focused on developing its Save-A-Lot discount banner, which Herkert highlighted as showing improvement over the quarter, with flat identical store sales.
Smith said Supervalu’s capex budget would total around $700m and would be spent “accelerating store openings” in its Save-A-Lot banner, with spending to be evenly split between corporate and licensed stores, as well as a new distribution centre in North Carolina and on maintaining its current store portfolio.
While Supervalu looks to turn around the business in the long term, shares in the company were down 11.6% following the announcement to $7.59 a share at 09:23 ET today.