Albertsons Aims To Turn the Dining Room LIghts Back On

Jim Smits has been touring restaurant kitchens and developing recipes, but he has no aspirations to be a chef.

Smits is a 20-year veteran of the grocery business, the last 18 months of it as group VP-fresh foods merchandising at Albertsons. Now he’s bringing some restaurant smarts to Albertsons’ aisles as part of its effort to turn the dining room lights back on.

Albertsons is six months into a cross-departmental Meal Deals program that shows the grocer’s determination to capture more meal occasions from casual and quick-service restaurants.

“In a nice restaurant, it’s easy to have great eating experience. But to replicate it at home, you have to go to four or five spots in the store to get the ingredients,” Smits says. “We put it all in one location, and tied in an offer to make it a value.”

That strategy of cross-fertilization is likely to expand under Supervalu, which closed its $17.4 billion purchase of Albertsons on June 2. Supervalu has already put Albertsons’ veterans in key management roles at the merged company, and will tap Albertsons’ regional strength to complement Supervalu’s now-national scope of about $44 billion in revenues and nearly 2,500 stores (second only to Kroger Co.’s 2,510 supermarkets).

Supervalu has set up three retailing divisions, divided by geographic regions, and established a single merchandising and marketing division to serve the three units (see “Who’s Who,” p. 22).

The industry is watching to see how the new Supervalu will mesh two very different marketing strategies. Supervalu — one of the country’s biggest wholesalers — stresses low-cost procurement and squeezes efficiency from its distribution network, so its own Cub Foods and Save-A-Lot stores are price-focused. Albertsons opts for value-added service, driven in part by “category catalyst” manufacturers who bring brand-marketing smarts to category management.

Meal Deals has grown from that platform. A refrigerated display at the front of each store offers shoppers a full meal at a significant discount: Shoppers buy the featured meat item, then get a Fresh Express salad and a side dish for free. Produce marketer Fresh Express brought the program to Albertsons, funded the coolers for 1,700 stores, and coordinates up to four brand partners for a new menu every two weeks with its promotion agency, CoActive Marketing Group.

Meal Deals participants have seen dollar sales jump nearly 30% over year ago, and an average 40% over baseline sales. Even the slowest Meal Deal offer pulled a 20% lift — and that’s with the entrée shelved in freezer cases across the store.

The work is proving its worth. Albertsons has filled its calendar through 2007, and brands are asking to play, or even just be shelved near Meal Deal displays. The big question now is: Will price-conscious Supervalu adopt Albertsons’ value-added approach to marketing for its own stores? Supervalu won’t say, but observers think Albertsons will stay on its current track, and gradually influence Supervalu’s culture.

“Albertsons’ overall strategy is to become the easiest provider of food,” Smits says. Marketing balances price promotion with margin-friendly initiatives as the chain develops new ways to approach shoppers with value-added offers.

Then there’s the restaurant factor. “Other parts of the food world have gotten better, and the grocery industry hasn’t moved as quickly,” Smits says. “Look at what people eat at home in contrast to what they eat out: Palates have become more sophisticated as people eat out more.” Meal Deal recipes build shoppers’ repertoire. “People get into a rut with five to seven recipes,” Smits says. “We want to give them new ideas; good P-O-P helps them see the completed meal.”

The program insulates Fresh Express from price competition by spurring incremental sales. Plus, “if we can show it successfully drives incremental meals at home, rather than restaurants, that’s good for our business,” says Fresh Express VP-customer team leader Brent Carr.

Albertsons’ first coup was getting department heads to collaborate on a cross-store campaign. (Department heads typically compete for sales, because all items are credited by department at checkout; that pushes departments to wrestle for their own share of the basket.) Smits, who oversees Albertsons’ produce, meats, deli and bakery departments, stood up in a February summit among Albertsons staffers and top brands — including Coca-Cola, ConAgra, Hormel, Kraft, PepsiCo, Sara Lee, Tyson and Unilever — and said, “‘This is an initiative we’ll get behind,’” recalls Carr. “When he gave that kind of endorsement, they all tried to find a way to say yes.”

“We told them what it would do for incremental volume and invited them to join,” Smits says. “Most opted in; now we have people waiting to get in.”

That kind of cooperation “means they’re playing at a higher level. Someone there is making decisions good for Albertsons, not just good for one category,” says Cannondale Associates partner Ken Harris. “It has always been Albertsons’ goal to act as one organization; that’s why it’s one of the best companies pulling these programs together.”

Another is Texas grocer HEB, Smits’ alma mater and his mentor’s, Duncan MacNaughton, now Supervalu’s executive VP-merchandising and marketing. The two are credited with breaking down Albertsons’ department silos to launch Meal Deals. The heads of produce, meat, deli and bakery, and the marketing and merchandising leaders, work six months out to coordinate corporate-wide Meal Deals with departments’ own promotional calendars.

The Meal Deals calendar is set through February 2007 for 1,700 stores, mostly in the Northeast and West under the Shaw’s, Acme, Jewel and Albertsons banners.

Fresh Express tied in with “no-brainer” partners (Tyson, Hormel, Kraft’s DiGiorno) in its fall 2005 test in Boise and Salt Lake City, Carr says. That drew other brands’ attention, and Fresh Express has built out the shelves around its coolers for piggyback brands that “want to be with the band,” says Carr, including General Mills’ Betty Crocker Warm Delights, Nestlé water, and, recently, wine. “It’s gratifying to see the number of companies that want to play along,” says CoActive senior VP-sales promotion Rod Taylor.

Recipe for success

Meal Deals looks deceptively simple: Shoppers pick up featured items in and near the front-aisle cooler, then redeem a tear-pad coupon at checkout. But the coordination of partners, their contributions to redemption, display funding and menu planning is intricate work.

Albertsons comes up with themes, then plans menus and a list of top brands that would fit each menu; then Fresh Express and CoActive call on brands to sign them up. “You have to think like a cook, not just a grocer,” Taylor says. There are seasonal considerations: Is it cocooning time? Weight-loss time? Brands must be No. 1 or 2 in their categories and fit the menu. “We’d rather take money from the [general] display fund and offer a meal that people really want to buy” than shoehorn in a willing but inappropriate brand, Taylor says.

Each offer carries about $4 in discounts (free salad and side) for an average $10 meat purchase. All the brands fund redemption; Fresh Express pays up to 50% of its selling price, and others pay up to 30% for each Meal Deals coupon redeemed. The brands also pay a fixed cost for P-O-P; Albertsons covers the cost of display space and circular ads. Albertsons is gradually folding in private-label goods, with ancillary tie-ins planned for third quarter. “Private-label participation and display funding are a sea change” in cross-merchandising, Taylor says. “They realize that manufacturers can’t carry the program by themselves.”

Brands with ancillary tie-ins pay a nominal fee for P-O-P; those dollars go into a general “display fund” that covers gaps in redemption when participants’ fees don’t cover the full discount to shoppers. Stores pay a participation fee.

ROI has been striking, with sales of $4.90 for every $1 spent on redemption, P-O-P and ad support. Out-of-stocks and produce shrink are down, and product introductions are strong. “We’ve seen phenomenal growth with huge follow-up sales [of new products],” Smits says.

Coupon redemption is lower than Albertsons would like, but incremental sales are strong — an advantage to brands that get the sales bump without the liability of covering redemption. The team is considering ways to run Meal Deals through Albertsons’ Preferred Savings Card rather than coupons, and plans to analyze total basket ring for Meal Deal shoppers.

Albertsons’ reporting structure fosters collaboration. Smits oversees all perishables; his counterpart, group VP-center store Nick Kormeluk, oversees all center-store departments. They each get their department-level VPs on board, then pilot a program to prove its merit. “Duncan’s approach is, ‘Customers see us as one store; how can we give them one shopping experience?’” Smits says. “He brought in merchandising people who look at it from the customer’s perspective.”

Take Shawn Peery, corporate category manager for produce. Peery champions Meal Deals internally and with brands, serves as point person for vendors, and “does most of the heavy lifting,” Smits says. Peery’s success with this, his first corporate event, earned him a promotion from regional category manager.

Albertsons’ fledgling category catalyst program for manufacturers (think category captains, but broader) also helped created the infrastructure to support Meal Deals. Fresh Express began as category catalyst for bagged salads, but now helps with merchandising and innovation for all value-added produce. “We have the analytical ability and store coverage to handle work beyond our segment,” Carr says.

Some marketers think retailers should pay for that kind of additional help; others believe that kind of service to retailers benefits the brand in the long run. “We increased the presence of our own category by managing the entire display case,” Carr says.

Fresh Express and CoActive pitched a similar program to Albertsons a few years ago featuring its spokeswoman, actress Patricia Heaton from Everybody Loves Raymond. The marketing brass pooh-poohed it back then; Fresh Express presented last year to Smits, who bit. “It gave us a champion, with meat and produce both reporting to Jim,” Carr says.

Smits’ last three years at HEB were with its high-profile Central Market — heavy on fresh and prepared foods and top-notch value-added service (including catering and a cooking school). There, Smits learned “the difference between knowing great grocery and being a food person who’s cognizant of the total food background and pays more attention to the neighbors,” including restaurants. The other aphorism he brings to Albertsons: “It’s easy to think about a customer; it’s tough to think like one. It’s easy to work on the urgent; it’s tough to work on the important — and that’s the customer.”

Like HEB, Alberstons embraces innovation: “When you can prove it works, you get phenomenal support,” Smits says. At a large company, it’s crucial to do “robust planning, and your communication must be buttoned up. Elsewhere in the industry you see programs du jour. It’s better to be consistent, methodically working to where you want to go.”

Where does Albertsons go from here?

Supervalu won’t talk about its plans, but observers expect the merged company to adopt some of Albertsons’ thinking, but not all. “Supervalu bought them because they see good things to be mined for the future,” Harris says. “Albertsons is doing a lot of things well, but may be more viable long-term under Supervalu.”

Supervalu is unlikely to ditch Albertsons’ value-added approach, but also won’t adopt it more widely because Supervalu’s own retail operations are doing well, Harris adds. “Supervalu sees Albertsons as a good business to be run somewhat independently; their two platforms can coexist,” he says.

“From Supervalu comes the willingness to let local chains act autonomously rather that be a conglomerate with national presence,” says Peter Breen, editorial director of the In-store Marketing Institute.

The category catalyst model is likely to expand under Smits and MacNaughton as the latter takes on a larger corporate role.

“Duncan is one of the best in the business,” Harris says. “The fact that he stayed, and that they value him enough to keep him, are two important points in Albertsons’ favor.”

Meanwhile, Supervalu tweaks its portfolio with more natural-foods (read: value-added) formats. Supervalu is selling 26 Cub Foods stores, mostly in Chicago, to Cerberus Capital Management, which also bought 661 Albertsons stores that Supervalu didn’t purchase. Supervalu also plans to open 50 Sunflower Market natural-foods stores by 2011; its prototype opened in Indianapolis in December, with 8,000 to 12,000 natural and organic products, including Supervalu’s W. Newell & Co. specialty produce brand, and its private-label Nature’s Best brand. (That 200-item line is also available to Supervalu’s own traditional stores and the 2,200 independent grocers that Supervalu serves as a wholesaler.)

The Albertsons banner, meanwhile, gets whittled down as private equity firm Cerberus closes 100 under-performing stores across Arizona, California, Colorado, Florida and Texas by early August. New York-based Cerberus and its investment partners formed Albertsons LLC, which will run the remaining stores and upgrade their perishables, service and cleanliness.

That, too, should brighten up the dining room.

SUPERVALU BANNERS

Acme
Albertsons
bigg’s
Bristol Farms
Cub Foods
Farm Fresh Food & Pharmacy
Hornbacher’s
Jewel-Osco
Save-A-Lot
Scott’s
Shaw’s/Star Market
Shop ‘n Save
Shoppers Food & Pharmacy
Sunflower Market

WHO’S WHO AT THE NEW SUPERVALU

Duncan Mac Naughton:

Now executive VP-merchandising and marketing, running the new corporate-wide marketing and merchandising division. Was executive VP-Merchandising at Albertsons.

Pete Van Helden:

Now senior VP-president of Retail West, overseeing the Albertsons brand operations in southern California, Nevada and the current Intermountain West division. Was Albertsons’ president-CEO of California Food.

John Hooley:

Now executive VP-president of Retail East, overseeing operations of Acme, bigg’s, Farm Fresh, Scott’s, Shaw’s and Shoppers. Was Supervalu’s president and CEO of Cub Foods.

Kevin Tripp:

Now executive VP-president of Retail Midwest, overseeing operations of Cub Foods, Hornbacher’s, Jewel and Shop ‘n Save, as well as company-wide pharmacy operations. Was Albertsons’ executive VP-Drug Operations and president of Albertsons’ Drug Store division.

Mike Jackson:

Now Supervalu president-COO overseeing Save-A-Lot, supply chain services and the corporate Enterprise Office. Was president of Supervalu’s Distribution Food Cos. division.