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[14 comments]

Safeway in sale talks

February 21, 2014

Safeway could be under new management in the near future. The second-largest supermarket chain in the U.S. said on Wednesday it is engaged in talks that could lead to the sale of the company.

In its announcement, Safeway stressed that the company has not yet reached a deal and could not assure discussions would lead to a sale. Management also said they would not comment on the discussions.

It's thought that one or more buyout firms are the most likely candidates to acquire Safeway. Cerberus Capital Management, which owns Albertsons, has been most prominently mentioned among possible suitors for parts or all of the company.

Safeway's fourth quarter same-store sales were up 1.6 percent, although the increase was largely wiped out by a large decline in fuel sales.

"We are pleased with the progress we made in 2013," said Robert Edwards, president and chief executive officer of Safeway, in a statement. "Strategies to grow sales and improve operating profit dollars have begun to produce results. In 2013, we generated our best volume growth since 2006, and we had our best identical-store sales growth in the last five years."

FINANCIALS:     [NYSE:SWY] [ ]

Discussion Questions:

What do you think are the most likely scenarios for the sale of Safeway? Which one would be most beneficial for the long-term health of the company?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Do you think Safeway will be in a stronger or weaker competitive position if the company were sold?

Comments:

Safeway's sales per square foot are just too low for a top quality chain to take over. I see it being bought by a private equity group. Leveraged and milked, expenses slashed, sold off in pieces, and most likely a drop in sales. Will look very Albertsons or Winn-Dixie-esque in a few years.

David Livingston, Principal, DJL Research

Cerberus has quite frankly surprised me a bit with their apparent success with expanding Albertsons while either maintaining or actually growing sales. I was doubtful they would be able to pull that off. IF they are the phantom suitor for Safeway, they will be tested once again with the vagaries of acquisition such as consolidation of resources, and blending of programs and initiatives for synergy.

However, much of Safeway's recent success has been accredited to their emerging "Just for You" CRM program. If Cerberus (or any other acquirer) is smart, they will do all they need to do to retain those that are driving that program and perhaps even expand the program among their stores. This would be in stark contrast to their recent decision to shut down Albertsons' card program in favor of a more simplistic Hi-Lo play.

As with all acquisitions, it will be interesting to see who wins and who loses as it unfolds.

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Mark Heckman, Principal, Mark Heckman Consulting

A likely suitor would be an organization that wants a physical presence in the West. For the future, the stores need to build on what they have done to improve sales and distinguish themselves from the competition.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Hard to see it going to one company in its current shape.

Smells like a private equity play, hard to imagine a white knight scenario.

I'm afraid there aren't too many scenarios that are actually beneficial to the company. To the balance sheet? Sure! To the employees? Not so much.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

Since Cerberus bought out Albertsons, there have been a lot of cosmetic changes in the stores, but their price points are still not competitive with Kroger or big box retailers (or even with Safeway). If they purchase Safeway and take this same route, the biggest winners will be their competitors. As nice as it is to walk into a "spit-shined" store, consumers will gravitate to retailers that give them the greatest value for their hard-earned cash.

As someone who calls on Safeway stores, I can tell you that they could benefit from increasing efficiency and consistency. Out of all the chains I deal with, they have the greatest disparity from store to store in terms of local management. Some stores are pristine and tightly run while others suffer from product shorts, haphazardly stocked shelves and sloppy displays. If new owners could bring more coherency to the Safeway brand while keeping their prices competitive, Safeway could thrive.

I'm still curious to see if the newly refurbished Albertsons will shift their focus to revamping their prices.

'RetailRetell'

When a company's arteries start showing signs of becoming slightly diseased, it usually is only a matter of time until it must change its business style, merge, or fade away. It has become the law of the supermarket jungle.

Perhaps Safeway, like so many of other food chains, is so affected today. If so, there probably isn't any long-term health or prosperity for such a company in its present form. That's when the savvy financial dudes come in to work on resusitating its assets.

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Gene Hoffman, President/CEO, Corporate Strategies International

The graveyard for supermarket chains once prosperous is growing. No matter what any of us think, outside of the niche, high-end stores, PRICE IS KING, and you can not overlook that fact. Safeway has higher labor, and location costs, plus huge retirement expenses to take care of, so how can they compete with the Aldis, and other stores around them?

Yes I understand service and signature items, along with other great ideas, but value is squarely on the minds of consumers from now till as far as I can think into the future. Someone will put in an offer for Safeway, and maybe they can reorganize how they do business, which could grow the company moving forward.

Changes need to be made, and I wish them well.

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Safeway has benefited greatly from a tailwind of traditional competitor closings. But that hasn't been nearly strong enough to overcome the onslaught of Whole Foods, Trader Joe's, Walmart, Target PFresh, clubs, etc. Doesn't that tell the story completely -- that traditional grocery is just not what the consumer wants anymore? Certainly a sale to Cerberus, whose very name evokes images of death, won't put Safeway on a path to retailing greatness.

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Jonathan Marek, Senior Vice President, Applied Predictive Technologies

Clearly the "health of the company" would be compromised or eliminated by any of the most likely scenarios - the sad reality is that SWY has been managed for years with an eye to Wall Street and big stockholders rather than an eye to customers and retail excellence. Its prices are famously out of whack and it has failed in every competitive market other than the West Coast which is markedly different in lacking a strong superstore presence or a strong dollar store presence, not to mention a limited number of truly top-notch operators in the conventional grocery space. Cerberus has not shown so far they can raise brand quality in a supermarket though I agree they have done a fabulous job of keeping the lights on.

Please tell me someone who knows retail and wants a successful company transformation steps in and takes this over!? Such a waste to break it up in the investor chop-shop.

'RetailSeer'

I was working in management in 1998 when KKR took over Safeway, if this works out maybe Robert Edwards will buy the Oakland A's!

'WestCoast'

What, pray tell, would new ownership/management accomplish that the current can't? If Safeway's problem is low volume (outside of their Far West core) then perhaps they should surrender to the inevitable and just become a Far West (only) chain. If there isn't enough volume/buying power with that geographic restriction, then I think they'll end up a division of Kroger. But enough about food, let's gets get back to "WestCoast's" idea for the new "Safeway Field" @ Jack London Square....

'notcom'

Safeway has cleaned up its balance sheet by selling underperforming stores/divisions and closing down their Chicago division. For a number of years Safeway's sales increases were credited for its Lifestyle merchandising approach. The more likely scenario is these sales increases were from it store remodeling efforts, which were badly needed after the KKR ownership.

The remodeling is coming to an end so now what does Safeway do for growth? They gave their shareholders the gift card business which with smartphones will likely be reduced to the equivalent of traveler's checks. Their efforts of acquiring other chains have been a dismal failure. Most of what they bought has been sold or closed.

Safeway went through an LBO with KKR and cleaned up their operations. A second acquisition will be difficult to pay for as the easy savings have already been taken. Shortly, supermarkets will account for less than half the at-home food sales, so the pie is getting smaller. The likely scenario will be a financial buyer who will use the cash flow to pay back borrowed money and reward the buyer.

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W. Frank Dell II, CMC, President, Dellmart & Company

This announcement is new but the rumor is old.

In September, Jana Partners became an activist investor. In October, word leaked out that Safeway had retained Goldman Sachs. Debt deals in the billions are now in favor again after a long hangover from the financial crisis.

Speaking of old news, RetailWire asked about the attractiveness of Safeway as an acquisition target two years ago.

My favorite comment: Jamie Tenser opined that increasing size no longer increases profit. Scale economies and buying power are offset by operational complexity and the distance between HQ and customers.

Scenarios involving transactions are good for the traders but not for the long-term health of supermarkets.

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Dan Frechtling, Vice President, Global Product Management, hibu, PLC

The most likely scenario is buyout from a private equity firm that will drive efficiency with results likely as portrayed from prior comments. Outside chance that a non-US firm would look to purchase and drive US expansion, thinking it would be a great target for Loblaws and could benefit from the management approach and product/merchandise assortment. From a medium- to long-term perspective, purchase by a non-US firm would likely be a better scenario for customers and employees. For stockholders, the first scenario will likely win.

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Verlin Youd, Principal, VPY LLC

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