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.
One of the strategies is that of store localization, where allocation of shelf space and assortments are tailored to the needs of the community. For example, some products are stocked up in advance of certain community specific events. In addition, Wal-Mart also stated its commitment to domestic sourcing at the start of the year, which leads to benefits such as transportation cost savings and shorter lead times.
Not content with being the largest wholesale club operator and the second largest retailer in the U.S, Costco launched its Pharmacy-Benefit Manager Program at the start of the year, stepping into the turf of companies such as Express Scripts. As more companies and their employees sign for this program to save money on prescription drugs, it will also drive more traffic to its warehouses and provide cross-selling opportunities.
This initiative by Costco Wholesale Corporation (NASDAQ:COST) and Spartan Stores’ expansion into the value store format shows that lines are blurring in the area of retail. Companies will be well-advised to define their market space wider and not be reactive.
Spartan Stores is valued at a discount to its peers with a forward P/E and a PEG of 12 and 1.3, respectively. Comparatively, Wal-Mart and Costco Wholesale Corporation (NASDAQ:COST) trade at 1.6 and 1.8 times PEG, respectively.
Conclusion
I don’t live in Michigan and I can’t speak for the people living there in terms of their shopping choices. But, I am a firm believer that the most profitable investment opportunities reside with the contrarian minority. I am cautiously optimistic that Spartan Stores, Inc. (NASDAQ:SPTN) will be able to gain both market share and mind share with its new value store format. In addition, its growth in the distribution segment will allow it to increase its penetration of its higher margin private brands.
The article Can This Supermarket Retailer Stop the Supercenter Juggernaut? originally appeared on Fool.com and is written by Mark Lin.
Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale. Mark is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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