Merger expected to boost Metro

Grocer's acquisition by Supervalu to add clout, analysts say

`The fit was excellent'

Minn. buyer praised for its `expertise, flair' in retailing

June 27, 1999|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

With a new and more powerful owner, Metro Food Markets will become an even more formidable competitor in the region's grocery wars.

Grocery retailing experts agreed that the 18-store Metro chain can only benefit from the deal that would allow Supervalu Inc., the largest supermarket distributor in the United States, to acquire Richfood Holdings Inc., a Richmond, Va.-based wholesaler and Metro's owner, for $1.5 billion in cash, stock and assumed debt.

Supervalu is expected to allow Metro to continue operating autonomously, addressing its own market. But consumers can probably expect some savings and new products.

"Most wholesalers are not particularly great retailers; they might operate retailers because they want the wholesale volume, but Supervalu really has expertise and flair in retailing," said Gary M. Giblen, managing director of Banc of America Montgomery in New York. "It'll improve the offerings of stores for customers."

Supervalu, based in Minneapolis, announced the deal this month, and plans to fold Richfood's wholesale operation into its national network. The merger will give Supervalu a major food retailing presence in the mid-Atlantic region, boosting the company's annual retail sales 35 percent, to $7 billion.

Besides Metro, Richfood also owns Shoppers Food Warehouse, the third-largest grocery chain in the Washington market, and Farm Fresh, the No. 2 chain in Virginia's Hampton Roads area.

Analysts also expect the merger to give Supervalu the warehousing ability it needs for subsidiary Save-A-Lot, a 772-store limited assortment retail chain in 33 states, to expand into the Baltimore-Washington region. The small, no-frills stores, including 142 corporately owned and 630 licensees, stock only one size and one brand of most frequently purchased items, with prices on the private-label brands as much as 40 percent below national brands.

"This was a situation in a year of consolidations where it made sense to shareholders for Richfood to look for a partner, and the fit was excellent for Supervalu," said Jeff Metzger, publisher of the Columbia-based trade journal Food World.

Richfood, which reported June 16 that net earnings rose 5.5 percent to $73 million, or $1.53 a share, for the fiscal year that ended May 1, has had success with Metro, which features a large assortment of fresh produce and prepared foods, and Shoppers, a Lanham-based discount retail chain.

Metro is expanding aggressively, with five stores under construction and others planned for Ellicott City and Mondawmin Mall in Baltimore.

"I really wouldn't expect to see any changes except that Supervalu has more capital to spend on store growth," John E. Stokely, chief executive officer and president of Richfood, said last week. "Richfood's philosophy has always been to let these chains run autonomously so they can market goods and services uniquely to the market they serve. That's the intention to continue that."

Supervalu's growth after the merger into the 10th-largest supermarket chain in the United States will allow Metro to build more stores and expand the geographical reach, said John Ryder, president of the Catonsville-based Metro chain.

"They've expressed a strong desire to expand Metro, a greater expansion than what we've experienced," Ryder said. "Supervalu has a wealth of knowledge in running different formats. With the current consolidation going on in our industry, the more we share the better we get. The consumer benefits too, through better ideas, new store layouts, new products."

Because of Supervalu's national reach and the buying power that comes with it, "Metro will be a tougher competitor, assuming Supervalu says, `We're committed to Metro,' then they have the capital to put their money where their mouth is," said Kenneth M. Gassman, a retail analyst with Davenport & Co. in Richmond.

At least initially, the increased competition might turn into a price war, because stores with similar formats have little else with which to distinguish themselves, Gassman said. Metro's rivals, including Baltimore-Washington market leader Giant Food Inc., a division of Dutch retailer Royal Ahold NV, Safeway Inc., and A & P, formally known as the Great Atlantic & Pacific Tea Co., are fighting hard to maintain and expand market share, by moving into new markets and building bigger-format stores with expanded specialty departments.

"You'd like to believe the customer will wind up with lower prices, and initially there will be lower prices, but will all the savings be passed to the consumer?" Gassman said. "Not a chance. The real world doesn't work that way."

The consumer can expect some savings, however, Giblen said.

"The smartest operators tend to pass [savings] through," he said. "If they continually achieve savings internally and pass it on, it will generate high sales, and high sales makes the company more efficient from a cost structure."

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