Safeway Looks to Less Contentious Future
By George Anderson
Safeway’s management heads into the company’s May 25 annual shareholders’ meeting with a greater sense of calm, if not downright optimism, than it has had in recent years.
The company has settled many of its contentious labor issues, the notable exception of Chicago remaining, completed store remodels and launched its $100 million “Ingredients for Life” advertising campaign to let consumers in key markets know about the new Safeway.
Safeway spokesman Brian Dowling told the East Bay Business Times, “We have made solid progress on several important fronts. There are strong indications our strategies are working.”
The company has been pleased with the consumer response to its new Lifestyle format stores that have taken a more upscale approach with interior design and product offerings.
Safeway posted a 12 percent increase in total sales for its first quarter compared to the same period last year.
Neil Stern, partner in McMillan-Doolittle, said, “The first quarter was definitely a good one, but it’s a bit too early to declare victory. We will see how (Safeway’s) strategy plays out and how they fare in their more difficult markets, like Chicago and Texas. And though Wal-Mart may not be in all of their markets any time soon, it is not going away, either.”
Moderator’s Comment: What is your analysis of the current state of Safeway? What challenges and opportunities do you see for the company’s immediate
future? –
George Anderson – Moderator
As for the present situation, Safeway is still Safeway; the rest is still rhetoric.
As to their future opportunities and challenges, ask the top strategists at Wal-Mart and Costco. Or perhaps some unique competitive retail partnership such as Kroger and Tesco will emerge in Safeway Land. (No, good friends…as Sergeant Schultz of “Hogan’s Heros” used to say, “I know nothing.”)
I am at a disadvantage as I have only seen Dominick’s in Chicago recently. We normally shop at Jewel, Whole Foods and Costco and were surprised to learn that our neighbor likes shopping at Dominick’s. We asked why and she replied, because they are never busy and she can get in and out so fast. So, we went there yesterday to see for ourselves and she was right. No lines at the checkouts. We felt like we had the store to ourselves. I don’t see this as an advantage that Safeway would want to exploit, however.
Groceries are not softlines and Safeway does not have “designer name” foods to sell.
You can pretty up the stores and spend the rest of the $100MM telling people they should like shopping there, but Texas and Chicago are on life support and up for sale (again and still). Safeway has the highest prices in the country (sometimes higher than convenience stores) and they are going to get killed when the 99,000 SF Wal-Marts dot the landscape in California and the rest of the West Coast. People will pay a little more for ambiance, convenience, and assortment, but only a little, for most people.
If your appeal is to the upscale, high disposable income segment of the market, you are carving out a mighty thin niche for a grocery chain. Differentiating yourself from Wal-Mart and other low price operators is important and necessary but it still doesn’t mean your prices can be 40% higher.
I feel the same as a few comments above. When I get to a Dominick’s, I feel like I am walking into the drab and dull 1970’s supermarket that you always see in the TV commercials….”Price check in aisle five, Al.”
I think the comments panning Safeway are selling the chain short when the bottom’s already come and gone.
For a leading indicator, compare the price of Safeway’s shares vs. some of the other publicly traded retailers, including the darlings mentioned on this thread. Over the last quarter, Safeway’s stock is up, it outperformed the broad market, and its share performance surpassed that of Costco, Whole Foods, Wal-Mart, etc. etc. by large margins.
Actually, some of those other companies’ shares are down for the period: the gap in valuations between the highly touted and widely panned retailers is closing.
I understand some commentators’ respect for Wal-Mart, but I have to point out that, over many intermediate to long term time frames, Wal-Mart’s stock has been lagging the overall market and a lot of its sector peers, too. Sorry, Rollback Smiley, now it’s your turn to get rolled.
I can’t attribute Safeway’s performance to financial wizardry or backstage buying magic since Safeway’s gross margin declined in the first quarter. The stock’s up because the same store sales rose a lot, even after carving out the gasoline sales. That’s true for the stores that weren’t affected by the So. Cal. strike, too.
Diversionary note: Safeway and Costco are THE places to buy gas now.
Stock performance is not an indicator of how well the company is run. Given the choice of picking a company in it for the long haul, I don’t know of anyone who would prefer Safeway over Costco or Wal-Mart.
Let’s not forget Meijer gas stations…..
The mid to long-term prognosis for Safeway and its new “Lifestyle” format and positioning is, I am afraid, at best mediocre. Safeway rolled out its “Lifestyle” format in the San Francisco Bay Area—its home-base—some time ago.
In some areas and city store locations it certainly is an improvement over what they had previously—but a simple improvement isn’t enough. In terms of the positioning it intends to create—“Lifestyle/Upscale”— at best one can say it is “Upscale Light.” For example, here in the Bay Area the “Upscale/Lifestyle” brand is done with exception by Whole Foods, Andronico’s (a 10 store retailer), Mollie Stones (an 8-store independent) and dozens upon dozens of independents. Even Sacramento-based Raley’s Superstores has the “Upscale/Lifestyle” proposition down over where Safeway currently is—and appears to be headed. Keep in mind that I am speaking of Safeway’s backyard—the San Francisco Bay Area. “If you can’t do it here, you can’t do it there” (in other retailing regions) comes to mind as a catch phrase.
For Safeway to pull off their “Lifestyle/Upscale” effort—the steak not just the sizzle—they are going to have to market to the “neighborhoods” rather than a region. They tried this with a major effort years ago—spending lots of money in the process—only to return to a more centralized approach after only a short, half-hearted effort. I recall touring the Dominick’s stores before and after Safeway acquired the then family-owned chain. Before, the stores were unique, targeted to the community—individual in style and merchandise selection. Safeway spent tons of money changing them to a more homogenized look and merchandise selection, the results being …well, you know the results. I still remember the strange look on a customer’s face as she saw all the “Safeway Select” brands in her “Dominick’s” store—the one she had been shopping at for decades.
So, summing up: If Safeway is to make it with the “lifestyle” format—as I hope it does—then the chain will have to do some serious strategic thinking. They need to bring in some new blood–creative people with a more diverse background. They need to focus more on the neighborhood and find a way to empower their local marketing people and store-level folks. Perhaps take a page out of the Whole Foods handbook and hire a store-level marketing coordinator in key stores. Empower that person to create special events and such as Whole Foods does with much success.
Safeway has some marvelous assets—in the Bay Area its real estate locations are hard to beat. Vons in Southern California–once the dominant retailer in that region–is ripe for a recovery if done right. Dominick’s was once an example of what “upscale” retailing is all about; the same with Randalls. Here is hoping that Safeway goes to school on the best practices out there, and creates a success story for its customers, employees, stockholders and the industry.
One of the big three grocers…Kroger, Safeway, and Albertsons..won’t be with us as we know them ten years from now. My guess is that the dropout will be Safeway. Thirty years ago, A&P was America’s top grocery chain with about 1200 stores. Inbreeding and efforts to force feed the consumer their private label did them in. Today, A&P is a company that no one in the grocery business takes seriously.
How does Steve Burd keep his job as CEO? Safeway has been hammered on virtually every front during his tenure. The unions detest him, employees are disenchanted and the acquisitions he’s made have turned from gold to dross in front of our eyes. I think you’re going to see Safeway forced to merge with a more fleet of foot retailer like Wild Oats, Whole Foods or Trader Joe’s if they are to have any hope at all of surviving.
As for their “Ingredients for Life” campaign, this isn’t even a good smoke and mirrors effort. What’s the next campaign, “new lower prices”?
The relevance of the share performance is that it is a forward looking indicator of what the future reality will be based upon all the information available to the market at the time.
I’ll take the bet on Safeway vs. Wal-Mart since Wal-Mart’s costs are materially lowered by a Chinese exchange rate that is patently distortionary and unsustainable. Safeway is far less exposed to the risk of a Yuan revaluation.
I’ll take the bet on Costco, too, because when a body of opinion shows a 17:1 consensus that Safeway isn’t actually improving, the majority is likely to be wrong.
It’s lonely at the bottom 😉
Safeway is in retreat in all the markets others than their core West coast areas – Texas, Pennsylvania and Chicago are nothing less than disasters, highlighting their lack of skill at acquiring, integrating, or learning anything outside the greater California marketplace. They desperately need to withdraw from those distracting failures and defend their core turf.
I am not convinced that the Lifestyle branding campaign is the full answer – they remain a high-margin, promotionally driven, buy side operator, and that will not serve them well when WMT pricing changes the dynamics of profitability. The Ingredients for Life campaign, like many branding campaigns, is dependent on a successful consumer experience to give it meaning. Having a good deli sandwich is not a particularly deep value proposition. They still have a lot of work to do.
George noted the Chicago sore spot for Safeway already, and casual observation doesn’t indicate that it is getting any better. (As in, the only time I’ve been in a Dominick’s store in the past three years is to do store checks…) The big question I’m struggling with is this — Why should we expect Safeway to succeed with an “upscale” strategy in the Lifestyle stores when they couldn’t even maintain that position in the Chicago market with Dominick’s? Labor issues and customer disgruntlement can certainly be debilitating, but are they enough to take a great franchise down without management missteps? (Maybe we will get the answer by watching what happens to Manchester United under Mr. Glaser’s ownership, eh Bernice?)
As an Austinite, I have watched the demise of Randall’s in terms of customer service, out-of-stock positions, and product lines/brands disappearing from their shelves (often replaced by their house brand–e.g., Boars Head meats and cheeses out; house brand in.) As a customer satisfaction researcher (they are not a client), I cannot stand by and watch these things happening without alerting management. I’ve learned that they are powerless. They either say it’s a decision by Safeway or a problem with an outside supplier. They admit that it does them no good to complain to upper management (at Safeway). Instead, they hand ME a feedback card and encourage ME to complain. (“They’re more likely to listen to a customer.”!) I’ve done just that and received a call from Safeway headquarters. Her response was no better. (I had to explain what Arrowroot was and, 2 years later, they still do not carry it…)
Why do I shop there at all? In Lakeway, they are the only market within 7 miles. If/when HEB moves in, I’ll never darken their doors again.
Hopefully, Safeway has identified the ingredients that will enhance its life. The recent ad campaign seems like a veneer to me, but I haven’t seen the results of a store makeover in my neighborhood yet, so I’ll reserve judgment, despite my general skepticism.
Many retailers dream of moving upscale, to a land where margins are fat and price is no object. Wood floors (a la QFC) and new polo shirts for the staff may help Safeway get there. If this company wants to play at this level of the market, it has to also accept what it is not – and relinquish the price-oriented center store shopper. If Safeway wants to become more exclusive, it may also have to become a bit smaller.
I don’t believe that Safeway will be successful with their new program. They don’t understand “upscale” stores and they don’t seem to know their consumer. Associate morale is low, especially at Vons, their Southern California chain. Perishables in the produce, meat and deli are of poor quality and yet they are asking their customers to pay way too much. That’s the only way they can satisfy their stockholders…raise gross margins. Customers are smarter than that and seem to be shopping elsewhere. Sales for Vons weren’t included in their first quarter because of the strike and the Vons numbers are certainly poor. They are selling stores quietly and seem to be in real trouble in Southern California. Even the new marketing program hasn’t improved customer counts at Vons. Not that Safeway would agree with that comment but all you have to do is visit a Vons to see the lack of customers and business…. rotten perishables are a sign of lousy quality to start with and no turns, and that’s all you see in Vons… They will give you “service” and take you right to the rotten perishables… but who wants to pay $2.49 lb for rotten green bell peppers, when Henry’s down the street sells them for 25 cents each and they aren’t rotten. My plea to Safeway is to PLEASE SELL VONS TO A REAL GROCER –I bet Stater Bros. has the money, especially if they banked any of the big bucks they made during the Southern California strike.
Somehow, I’m still amazed how many main stream grocery chains and drug store chains execs don’t get it! In an environment of progressively smart, competitive shoppers, how can they still live with the 50% margin mindsets? For the same brands, or same categories, discount chains such as Wal-Mart, Costco and many Asian (doing major American brands) are consistently at least 25% lower in retail. Maybe they still think that consumers are still stupid; the Joe-six-pack who never reads; just a couch potato; no newspaper; no news on TV…and try to get away with their outrageous pricing. For the remodeling at Safeway, there is just so much you can dress up an ugly person! However, if that ugly person is really nice, warm and considerate, people will look over the appearance—like Wal-Mart and Costco.
All these major chains still think not only can they make money from high margins, they can also make a lot of money from charging the vendors. Come on, it’s time to wake up.
I do business in Safeway also and the dollar volume is low, for the many stores they have. I sell the same item to Wal-Mart and the dollar volume is about 10 times higher. (Same applies to Costco.) If retailers continue to think that consumers are stupid and they can charge vendors for large slottings every year, their days are numbered.
Perhaps one has to do what Kmart is doing… get rid of the corrupt culture. Get rid of the non-progressive minds in the corporate structure. Otherwise, all the grocery chains and drug store chains are heading for self destruction!
Safeway’s Dominick’s division should check out the new Meijer store that opened yesterday across the street from its Bloomingdale, IL location. Bright graphics, tile floors, brightly lensed fluorescent lighting, excellent service, and great prices are sure to put the drab vanilla boxed Dominick’s out of business within a few months. Doesn’t Safeway have a clue that they can’t build stores that look like dollar stores and compete with discounters that look 10 times better? Dominick’s will never be the way it once was under Bob Mariano and Louis Germano with bright stores, simple graphics, customer service and fair prices. In Chicago, why shop at the Dominick’s deli and buy Safeway Primo Taglio Meat for 11.99 a pound when you can go to Bobaks, the Polish supermarket, and buy brand name beef for $3.99 a pound? Don’t they have a clue at Safeway?
Ironically, in 2004-5, I’ve spent more at Safeway than I have in years–but only because my local store opened a gas station, and it’s consistently cheaper (and busier) than the Shell down the road. I’m an outsider–I don’t work for them, and I don’t supply them–but I’m a savvy enough consumer to see a Montgomery Ward strategy when I see one. Remember them? Remember how they remodeled all their stores to emphasize hard goods (“Electric Avenue”), thinking they could compete with Best Buy?
Safeway can no more compete with Whole Foods and other high-quality, smartly-managed chains than GM can compete with Toyota, or United with Southwest. Despite the upscale image-building they’re attempting, Safeway is still trying to be all things to all people–they don’t want to lose the lower middle class shopper, because that’s all they really have going for them (and that’s only in places where WMT hasn’t opened Supers). Their well-heeled shoppers are already addicted to Whole Foods, Bristol Farms, AJ’s, Central Market, etc., and won’t be coming back.
To save Safeway, it will be necessary to kill Safeway as it’s currently configured, not dress up its stores to look like “Whole Foods Lite.” Any current optimism is based on short-term thinking. Safeway is fundamentally stuck in the 20th century–at about 1970 or so.
Sales up 12% over a year ago? Compared to what? Sales during a strike period? If so, you’d better hope (if you are with Safeway) that sales are up 12% at a minimum. Wouldn’t it be realistic to believe they are still down significantly over the same period two years ago? Show me that comparison and then we’ll see if there is anything to be gleeful about.
It’s really more than a ship to turn around. The road of changing strategy is littered with the disasters of others. They have proven with their trek into Dominick’s that they aren’t real pros at understanding demographics or their own company’s ability to be successful in new or broad markets.
They have done some things well – I’ll give them that. However, so did Winn-Dixie for that matter. Being in the middle is a losing endeavor these days. Consumers are clear – they want a reason. Absent of a reason, they will choose almost anything but you. Changing is difficult without a complete shift in management and moving decisions down to nearly the lowest levels. To accomplish change at the pace necessary, they need to move quickly. A ship their size is not designed for that. Having confidence in Mr. Burd after the wake of disaster left behind by his leadership that led to the strike is difficult. In that light, it’s hard to imagine the underlings will easily follow on that basis alone. Instead of a new strategy, it may be time for new leadership.
I’m bored with Safeway’s canned answers. Personally, I think they are well on their way to being another Winn-Dixie. Comments like “solid progress,” “strong indications our strategies are working,” and “pleased with the consumer response” are the types of statements every company makes regardless of what is really happening. I suppose it’s easy to say sales are up 12% because… wasn’t there a big strike the year before? In the markets, where they have been quietly putting their stores up for sale, I’m seeing negative comps in same store sales. Employee morale could not be worse, especially in the companies Safeway has acquired over the past few years.
Most retailers just don’t get it! Sure, they are in the drivers seat right now, but that is because the CPG’s aren’t much smarter than the retailers. Safeway has great potential and the strategy sounds right but are they really talking to, and understanding, the consumers? I have my doubts. Clearly there are many consumer fragments out there and they are looking at a new and better value equation that works for different targets. Now that they set the course – they need to stay the course and talk to their customers and make “tweaks” as they go to really give it a shot. This is a good idea. Now let’s see if they can keep it on course.
The new Ingredients for Life program seems to create the comfort of “better than” that Target, for example, has been great at for so long. The Signature programs are a great first step, but the commitment to this strategy needs to be applied throughout the supply chain so those innovative manufacturers can bring products to the customer through Safeway, so that the edge and differentiation from Wal-Mart can be created…. This will be an obvious change in culture.