United States-Supermarket war.

UNITED STATES-SUPERMARKER WAR.

Jewel-Osco’s owner is spending tens of millions of dollars to spiff up stores and defend its turf from Wal-Mart Stores Inc.

Supervalu Inc. will spend as much as $125 million in the next year to remodel 25 local Jewel stores, analysts estimate. Including those remodeled over the past year, about a third of Supervalu’s 186 Jewel stores will have gotten a face-lift and expanded offerings by the time the effort concludes.

Jewel is betting that new, shiny displays and bigger meat, produce and deli departments will stem the loss of customers to Wal-Mart, which offers groceries for as much as 15% less.

"Supermarkets can’t compete with Wal-Mart on price, so their only alternative is to try to improve the ambiance and selection," says Mitch Corwin, an analyst in Chicago with Morningstar Inc. "Jewel is clearly playing defensive against Wal-Mart."

At stake is domination of the $12-billion local grocery market, one of the largest in the country. With its dominant position, Jewel is one of Supervalu’s strongest and most profitable brands.

But Jewel’s share of Chicago-area grocery sales dropped to 20% in 2008 from almost 23% the year before, according to Florida-based market research firm Chain Store Guide.

Arkansas-based Wal-Mart’s share rose to 7.7% from 4.6% in the same period. Over the past two years, the retail giant has more than doubled its local stores with groceries to 18 and plans to open six more this year.

Despite a 29% cut in its capital budget this year, Minnesota-based Supervalu is spending $2 million to $5 million per Chicago store renovation, analysts estimate. Among its Wal-Mart-inspired upgrades are easier-to-read signs, an earth-tone color scheme and better lighting to spotlight products.

Supervalu execs told analysts in conference calls that, companywide, remodeled stores boost sales by an average of 6% to 8%, but the company won’t disclose individual store sales.

"Jewel needs to protect its existing business, and they need a good-looking store to compete with Wal-Mart’s lower prices," says John Melaniphy of retail consulting firm Melaniphy & Associates in Chicago.

Dominick’s, the No. 2 local grocer and Jewel’s longtime rival, has remodeled about half of its 80 stores in the past two years. It plans to complete upgrades on another dozen or so stores this year, a spokeswoman says.

Discounters Aldi and Family Dollar and smaller grocers such as Meijer and Roundy’s have added stores here recently, too.

"Grocers need to get ready for a level of competitiveness that we have never seen before in Chicago," says Jim Hertel, a grocery consultant at Barrington-based Willard Bishop. "Grocers are going to need to continue to invest heavily here to meet the increasing competition."

Supervalu CEO Jeff Noddle told analysts last month there will be "a heavy emphasis" on remodeling Chicago stores.

After purchasing Jewel and its previous parent, Albertsons, in 2006, Supervalu focused more on remodeling its other chains, including Shaw’s in the Northeast.

Supervalu officials decline to comment on specifics of the remodeling. "To date, we have received outstanding customer feedback from this new store design," a company statement says.