Spartan Stores, Inc. (SPTN): Can This Supermarket Retailer Stop the Supercenter Juggernaut?

I was on the lookout for market leaders in niche markets and I came across Spartan Stores, Inc. (NASDAQ:SPTN), the largest regional supermarket chain and distributor in Michigan. While Spartan Stores, Inc. (NASDAQ:SPTN) faces stiff competition from supercenters, it is meeting the challenge head-on with its new value store format, focusing on budget conscious shoppers.

Furthermore, it is also witnessing growth in its wholesale distribution business outside of Michigan. Spartan Stores, Inc. (NASDAQ:SPTN) is valued at a discount to its peers, and will be an ideal contrarian pick for those who believe that local supermarket chains can stop the supercenter juggernaut.

New value store format could be a game-changer

Good locations and a wide variety of products at affordable prices are now taken for granted by shoppers. Spartan Stores, Inc. (NASDAQ:SPTN) opened its first value store, Valu Land, in the first quarter of fiscal 2013, and currently has seven stores with three more in the pipeline. Valu Land was set up to exploit budget shoppers’ dissatisfaction with dollar discount stores in terms of the quality of fresh food and the variety of products in general.

The tagline of the new store format “Quality Food, Low Prices!” sums up what Valu Land is all about in a nutshell. Valu Land provides a decent selection of about 6,000 stock-keeping units (SKUs), including a focus on produce and fresh meat, complemented by a mix of private and national brands and an “Everyday Low Price” pricing strategy. A Kellogg School of Management study showed that households were more likely to remain loyal to supermarkets that provide quality meat and produce.

Distribution segment gaining traction

Spartan Stores, Inc. (NASDAQ:SPTN) derives about 44% of its revenue from its distribution segment. Investors tend to be skeptical when niche market leaders expand outside of their home market. Moreover, in the case of supermarket retailers, relationships between supermarket retailers and wholesalers tend to be sticky. Spartan Stores managed to secure a distribution agreement with Chief Super Market, an Ohio-based supermarket chain in January and began shipping in March.

This is line with its plans to win new wholesale clients in areas bordering its home base Michigan, such as Ohio and Indiana. The fact that Spartan Stores managed to ‘steal’ the client from grocer SUPERVALU, will go a long way in convincing critics that it has the ability to convince other supermarket retailers in Ohio and Indiana to switch wholesalers.

Peer comparison

Spartan Stores, Inc. (NASDAQ:SPTN)’ peers include Wal-Mart Stores, Inc. (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST)

Wal-Mart Stores, Inc. (NYSE:WMT) ‘s pricing strategy and expansion efforts have been a constant threat to supermarket retailers like Spartan Stores. Spartan Stores’ value store format is a step in the right direction, with some positive comments from customers at its pilot store opening. In addition to everyday low prices, Wal-Mart Stores, Inc. (NYSE:WMT) has in place several strategies to cement its position as the top retailer.