United Natural Foods goes grocery shopping, buys struggling Supervalu for $2.9 billion

Updated: 3:56 p.m. | Posted: 7:34 a.m.

United Natural Foods is acquiring Eden Prairie-based Supervalu for about $2.9 billion, a deal that probably means Cub Foods stores in Minnesota will get new owners.

Supervalu has been struggling for years. The company has sold most of its stores around the country and is primarily a wholesale food distributor now.

Supervalu says it has been upgrading Cub Foods stores and cutting prices, especially in response to challenges from Hy-Vee. Supervalu CEO Mark Gross said Cub is still the market leader in the Twin Cities.

"It's got a great future, Gross said. "Whoever is the owner of these stores, I think will do well."

United Natural CEO Steven Spinner will lead the combined entity.

"Through this transaction, we are bringing together the largest distributor of natural organic products in the U.S. and Canada and the largest publicly traded good wholesaler in these markets to create North America's premier wholesale distributor," he said.

United Natural said it plans to sell Supervalu's retail operations over time in a "thoughtful and economic manner." Those holdings include dozens of Cub Foods stores in Minnesota, well as Hornbacher's stores in Minnesota and North Dakota.

Bloomberg Industries analyst Jennifer Bartashus says the deal is about combining the two companies' food distribution businesses to create a broader offering of goods for grocers.

"United Natural has been very focused on the organic and natural segment," she said. "And Supervalu has been more focused on the traditional center of the grocery store segment. So, the two of those companies combined can really offer a complete package to their respective customer bases."

She said that about a third of United Natural's revenue has come from sales to Whole Foods.

Supervalu undertook a massive nationwide expansion a little over a decade ago, gobbling up other chains. But it racked up big losses and debt and sold about 1,000 stores. It now has about 200 stores, including about 50 company-owned Cub Foods stores in Minnesota. Some other Cub stores in the state are operated by franchisees.

In its latest quarter, Supervalu reported a net loss of $27 million on sales of nearly $4.8 billion.

Supermarket industry research analyst David Livingston says Supervalu was unable to compete with retail rivals.

"Supervalu is financial distress and they have been for years," he said. "They're in a highly competitive market. they're weighted down by some struggling retail stores. They're weighted down by debt. And from what I've seen they're still operating in a world that's from 20 years ago."

One big problem for Cub Foods is that it's been a traditional middle-of-the-road grocer in an industry where players have increasingly focused on low prices or gone upscale. The rap on Cub has been that it doesn't distinguish itself on price or service.

Livingston says Kroger or Albertsons might buys the Cub Foods stores. He expects Hy-Vee might buy a few.

"I really doubt Hy-Vee would take over a significant number of stores because they don't like to inherit all the problems that go along with it, like unions," he said. "I'm sure that Hy-Vee would rather just build their own stores."

Supervalu shares were up about 65 percent Thursday afternoon to $32. The stock had been down 22 percent in the past year.