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Randalls' Rumors Renew

October 18, 2005

By George Anderson

Since Safeway took over Randalls in Houston back in 1999, the chain has gone from holding a 20 percent share of market to 10.8 percent.

That performance, or lack thereof, has the Houston Chronicle and others speculating what Safeway will do with the chain as it gets ready for an earnings conference call today.

At the very least, many in Houston are expecting the parent company to announce store closings. According to an unnamed realty source that spoke with the Chronicle, written notices are being sent to landlords that Safeway intends to close locations.

A company spokesperson refused comment.

Mark Hamstra, retail editor at Supermarket News, said, "It's widely thought in the industry that Safeway didn't manage its acquisition of Randalls well at first, and since it's such a competitive field, it's very difficult to play catch-up once you've fallen behind."

Argus Research analyst Erin Ashley Smith said Safeway and others are having to carefully scrutinize performance and determine what steps are needed to improve bottom line performance and shareholder value.

"I think all of the grocery stores are looking at what they own and, in order to succeed, they are going to try to pull out of markets where they are not performing well," she said.

Moderator's Comment: What does Randalls need to do to reclaim its status within the Houston grocery market? What are its strengths and weaknesses? - George Anderson - Moderator

Discussion Questions:

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Instant Poll:

What does Randalls need to do to reclaim its status within the Houston grocery market?

Comments:

Once a retailer's market share declines 45%, can it be turned around by the same owners? Name one example in the past 50 years. I can't think of any. The only examples I know are retailers that were bought by other firms who completely changed the brand identity and store content.

Mark Lilien, Consultant, Retail Technology Group

Safeway was run out of Houston before by Randalls and Kroger. Their encore performance with Randalls was a similar failure. Seems the local consumers were not impressed with the marketing and labor decisions made by accountants in California.

All the potential buyers of these stores have done their due diligence and everyone has seen the numbers. We visited all the stores only to find rattletrap equipment, scaled back perishable departments, and front-end registers removed. Normal routine maintenance has been eliminated.

We did see some positive things. Fuel sales appeared to be doing well. Both fuel and pharmacy are taking up a big chunk of sales with grocery declining. Starbucks had opened some franchises inside the stores. Randalls has some excellent real estate in the River Oaks, Galleria and Tanglewood areas (George Bush I and Joel Osteen's neighborhoods).

With the closing of stores, Randalls will fall off the market share radar. The remaining stores will be absorbed by HEB, Kroger, Fiesta, Food City, etc. Despite the exit of Albertsons and Super K, the competition is just too tough. Even Super Target seems to be getting better. Safeway needs to have softballs thrown to them and Houston is a hardball market.

Dallas and Austin are not much easier. Seems Albertsons and Safeway are playing a game of chicken to see who is going to exit first.

David Livingston, Principal, DJL Research

This topic's question reminds me of an old song, "It Seems To Me I've Heard That Song Before." How many leading local retail food chains have sold to larger out-of-town chains only to see their SOM slide or diminish. "Let me count the ways ..."

Randalls can come back strong only if it can become the original Randalls again. That's not very likely with a stepparent that is trying to reclaim Randalls youth with patch work.

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Gene Hoffman, President/CEO, Corporate Strategies International

Randalls is beyond repair at this point. Sales have fallen to about $5.00 per sq ft per week as of late last year. Reports show that the only store that has had any meaningful improvement was the new downtown store among all the condo growth. Sales are probably worse now. Excluding fuel, I estimate they have declined about 17% in a two year period. These are Winn-Dixie-eque levels and no chain can stay open indefinitely at these low levels. Kroger, HEB, Wal-Mart and Fiesta have made sport of them since Safeway took over. Safeway is no match for HEB and Wal-Mart just the way Winn Dixie is no match for Publix and Wal-Mart. There is no point in discussing what Randalls should do at this point, other than sell stores that are salvageable. Right now, it looks like Randalls' strength is its real estate in the Galleria area on the west side. Currently, HEB has a Central Market and not much else. HEB would love to have access to the real estate in this area. I visited these stores for clients earlier this year when it was "rumored" they were for sale. Safeway appears to not have put a dime back into these stores and their physical condition continues to deteriorate. This tells me they have no intention of sticking around.

David Livingston, Principal, DJL Research

Assuming David's #s are correct, or even proximate, "too late" is probably the answer to the question posed; so let's turn our attention to the autopsy: Was it the Dominick's formula - take a popular upscale chain, cut service and selection, and then substitute house brands for popular name ones ?

It's hard to imagine what Safeway's long term strategy is. Years ago, they closed about 40% of their stores here in Oakland with the claim that the neighborhoods weren't upscale enough to be profitable - comforting, no doubt, to their competitors who stayed behind and expanded - yet no one would mistake Safeway for an upscale chain (a sofa-sized cheese display in a 60K s.f. store does not upscale make ). So presumably they will resign themselves to the vanishing middle: squeezed by the Publix/Harris-Teeter/Whole Foods/et al. on the top, and the Wal-Mart/FoodMax/etc on the bottom.

'notcom'

Randalls (and the Tom Thumb banner in the Dallas market) were always more upscale grocers than Safeway. Safeway closed their stores and left Texas 20 years ago and the image that remained in many people's minds were of stores that were not well maintained, high prices and less than top quality products.

When Safeway bought Randalls to re-enter Texas, there were major mistakes made right out of the gate. Little to no investment was made in maintaining the physical conditions of the stores and the introduction of Safeway private label "cheapened" the brand image in the local market. Quality suffered in meat and produce departments and assortments were changed to match the "Safeway" mix.

Tom Thumb would not let you carry your groceries to the car prior to the purchase by Randalls and, ultimately, by Safeway. Over the past few years, you've been lucky if you weren't bagging your own. Wal-Mart Supercenters are ubiquitous in Texas. Between WM and HEB, Albertsons has already left 2 markets and may end up exiting Dallas as well. The only national Food Chain holding its own is Kroger. The competition from Fiesta in Houston and Hispanic oriented chains in Dallas is adding pressure as well.

Once you've given up half of your market share in markets that are over-stored to begin with, you have a long road to travel to get it back. Does Safeway have the time and the money to invest to take that long term proposition and see it through? Given that there is no guarantee of success, I doubt it. I'm guessing they will "retrench" and continue to decline.

Running a "Texas" or a "Chicago" market from California does not appear to have been a good plan. Paying good money to then drive those chains down does not seem to be a good return for investors, employees, or the community.

'DVZ'

Safeway's plan for Texas as described in a press release that went out with the company's earning announcement yesterday: "Safeway plans to revitalize the Texas division through a strategy which includes the closure of 26 under-performing stores, a focused Lifestyle remodel program and the introduction of proprietary products. Safeway incurred a $54.7 million pre-tax impairment charge ($0.08 per diluted share) on these stores in the third quarter of 2005 and expects to incur a charge of approximately $59 million, pre-tax ($0.08 per diluted share) for store exit activities in the fourth quarter of 2005. The impact of closing these stores is expected to be cash neutral in 2005."

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George Anderson, Editor-in-Chief/Associate Publisher, RetailWire LLC

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