Safeway 'Reinventing' Strategy

The comments about labor costs came one day after Safeway and the other major unionized grocery chains struck a deal with the San Francisco Bay Area United Food and Commercial Workers Union to extend until Jan. 15 a series of labor agreements that were set to expire Thursday.

Safeway plans to spend approximately $1.4 billion on the new store openings and remodelings in 2005, which will boost the company's overall square footage by about 1% and will represent one of the "fundamental building blocks" for growth that were described by Steve Burd, the company's president, chairman and CEO, in Thursday's conference call.

"We are going through a very fundamental change in this business," Burd said. "We've used the term reinventing the business, which is not a phrase that we use lightly." The changes involved the quality of products Safeway offers, how they are merchandised and presented to consumers, and "the shopping environment itself," according to Burd. Although Safeway does not label its stores as "lifestyle" stores per se, Burd said, "We're designing and remodeling our stores to fit with all of the lifestyle changes that are occurring in the consumer marketplace."

Safeway's branding program has focused primarily on perishables, according to Burd, who said the company believes it "can brand the shopping experience much as a consumer goods packaged company brands a product" both by carrying the best quality perishables and by continuing to develop proprietary products. The company has already made dramatic improvements in the quality of its perishables and the perceptions of those products in the eyes of consumers, he said.

Although traditional promotional methods may build sales faster, Burd said, "a more fundamental change like we're doing" is a surer and more sustainable path to higher sales. "We made substantial progress in differentiating our offering in 2004, and we plan to step up those efforts in 2005," Burd said.

The Safeway CEO commented that the company has made progress in "narrowing the price gap" against grocery discounters, although it faces formidable competition from the dramatic rise of non-union competitors who pay far lower wages and far fewer benefits while union operations like Safeway face skyrocketing health care costs in their labor forces.

Thursday's conference, aimed at analysts and institutional investors, estimated that Safeway will earn $1.50 to $1.60 per share in 2005, excluding the expensing of stock options, which could cost about 9 cents per share for the year. Safeway operates 1,815 stores in the United States and Canada and posted sales of $35.6 billion in 2003.