Roundy's sells Rainbow Foods stores in Twin Cities

Milwaukee-based Roundy's, one of the biggest players in the Twin Cities grocery business, is leaving the market. The owner of Rainbow grocery stores is selling 18 stores in the Twin Cities to Supervalu, Lund Food Holdings and other local buyers.

Ten of the stores will become Cub Foods locations. Six other operations will remain Rainbow stores under new ownership, Cub Foods' owner Supervalu said in a statement Wednesday. Byerly's,owned by Lund Food Holdings, will take control of Rainbow stores in Eden Prairie and Woodbury.

Map: Stores Roundy's is selling

• Red markers = future Cub Foods stores
• Yellow markers = future Byerly's stores
• Blue markers = Rainbow stores under new ownership
• Green markers = Rainbow stores that may close

Roundy's is selling the 18 stores for about $65 million plus proceeds from the sale of inventory, Supervalu said, adding it will also take over some employee pensions related to the stores it's buying.

Nine other Rainbow stores are still up for sale and will close if no buyers emerge.

After shedding its Rainbow stores in the Twin Cities, Roundy's will focus on developing its Wisconsin and Chicago stores.

Grocery industry consultant David Livingston, who has worked with various parties that have shown interest in the Rainbow locations, said the chain's stores have been on the block for about seven years.

"This has been in the plans for quite a long time," he said. "We knew Rainbow would have to be split up among numerous retailers. It couldn't be sold as a chain. That would be too difficult, being the number three player in a big unionized market. So, the best thing for them to do was to sell to local operators and have it split up."

Livingston said Rainbow has been losing ground fast in the Twin Cities.

"Cub is still the market share leader and Rainbow has historically been number two," he said. "But I think they've been bypassed by Target. And Walmart is moving up the ladder."

Milwaukee-based Roundy's entered the Twin Cities with high expectations in 2003.

However, "The economic downturn over the last few years, coupled with an increased competitive footprint in the Minneapolis/St. Paul Market, has made it difficult for Roundy's to keep the Rainbow banner competitive," Roundy's chief executive Robert Mariano said in a statement.

The Rainbow sale is just the next big change in an industry that has been churning nationwide. In the grocery business lately, the growth has been among two groups. Higher-priced players like Whole Foods, Lunds, Byerly's and others focus on service and quality while big players such as Target, Walmart and Costco emphasize low prices.

That leaves middle market grocers such as Rainbow and Cub in a difficult position.

"Across the U.S. retail sector, things are moving upstream to the more premium higher-end or very focused on value at the lower end," said Sandra Skrovan, research director for Planet Retail, a research and consulting firm. "So, middle is not a good place to be."

The trick for Cub is to find a middle way to thrive. But analysts say the deal to buy the Rainbow stories will make that easier to do.

"Cub Foods is a market leader in the Twin Cities area," said Jennifer Bartashus, a Bloomberg Industries analyst who follows the grocery business. "And they're there for a reason. People enjoy the stores. They have good customer service. And the larger the chain, the more that they can then leverage their size to be able to offer better deals to customers and stay oriented on customer service and things like that."

After the deal closes, there will be 66 Cub stores in the Twin Cities.

Cub has been eyeing the Rainbow store locations in Chaska, Eagan, Minneapolis, Lakeville, St. Paul, Oakdale, Plymouth, Roseville and St. Louis Park.

"We're always looking for the right opportunity and the right time," said Jeff Swanson, a spokesman for Cub Foods and its parent company, Supervalu. "And these stores are in important communities. They serve an important need to customers."

Early last year, Eden Prairie-based Supervalu sold about 900 grocery stores, as it embarked on an effort to turn around its fortunes. The company has focused on its some 190 remaining traditional grocery stores and about 1,300 smaller stores in 40 or so states focused on private-label brands.

For the fiscal year that ended in February, Supervalu earned $182 million on sales of $17.2 billion, compared with a loss of $1.5 billion in the prior year with sales of about $17.1 billion.

In addition to the stores in Woodbury and Eden Prairie, Lund Food Holdings is picking up the Rainbow in Plymouth and will keep the store under that banner.

After the transaction closes, Lund Holdings will operate 27 stores in the Twin Cities, including a downtown St. Paul location that opens this month.

Roundy's expects the deal will close by the end of September.

By the end of the trading day on Wall Street, it was clear which company got the better deal in the eyes of investors. Supervalu's shares closed up one percent; Roundy's fell nearly three percent.