By Tom Webb
Pioneer Press

Supervalu said it plans to add 1,200 deep-discount grocery stores in the next five years as the Eden Prairie-based supermarket giant battles discounters like Aldi and Wal-Mart.

The new stores will operate under the Save-A-Lot name, a no-frills grocer with limited assortment, generic products and bargain prices. If the name isn't familiar, that's because there are no Save-A-Lot stores in Supervalu's home base.

But that might change.

Company officials said Tuesday they intend to break with tradition and locate new deep-discount stores even in cities with company-owned supermarkets. In the Twin Cities, Supervalu's Cub Foods chain dominates the local grocery market.

The Save-A-Lot expansion "would include many smaller markets, some rural areas and, importantly, it would be growing some of the markets where we have existing retail stores, which is something that's a bit new for us," said Craig Herkert, Supervalu's president and chief executive.

The change comes at a difficult moment for Supervalu, which continues to struggle in the teeth of a recession and fierce competition from discounters. Reflecting the hardship, Supervalu on Tuesday cut its dividend in half and lowered its earnings outlook.

The company announced Tuesday that second-quarter earnings fell 42 percent, with sales down 7.5 percent. Same-store sales dropped 4.8 percent — the sixth straight quarter of decline.

Supervalu's 2006 mega-deal for the Albertson's grocery empire transformed the company into a true national player, giving it some 2,500 grocery stores and $43 billion in annual sales.

But the deal came at a high price: a huge debt load that is spooking investors.

Initially, the expanded Supervalu focused on its mid-market chains, like Jewel-Osco in Chicago, Acme in Philadelphia and Albertson's in Southern California. But just five months into Herkert's reign, he's stressing the extreme-discount format that he called its "highest-returning asset."

"We do know there is a broad opportunity in this country, given the demographics of the United States," Herkert said.

Supervalu already has nearly 1,200 Save-A-Lot stores, most of them franchised operations. The plan is to double that number within five years.

Herkert said the company will think differently about store sites. Using the Chicago market as an example, Herkert said a Jewel-Osco might be the best choice for one neighborhood, a Save-A-Lot in another.

By tapping both, "we think there's an opportunity for a much more significant presence than we've had historically," Herkert said.

Until now, Supervalu has avoided mixing store types in the same market, fearing one would steal sales from the other. But that was before big inroads from Germany-based Aldi, coupled with aggressive expansion of discounters like Wal-Mart and Target.

Herkert said Supervalu would embrace a third expansion path as well. In cases where a small, local grocer has real strength in the market, "I envision Supervalu partnering with them to find new locations to support them in their growth plans," Herkert said.

The plan didn't seem to wow Wall Street. Standard & Poor's Equity Research lowered its rating on Supervalu from "hold" to "sell" Tuesday, saying the risks are high given the intense competition in the grocery industry. Shares rose 27 cents Tuesday to $17.20.