Safeway Validates Strategy

Burd told the audience that the 1,800-store chain achieved "the kind of sequential improvement" that it expected by doing better each quarter of 2005 than it did the previous quarter. Among other reasons, he cited the company's restructuring of labor contracts and its focus on reducing operating and administrative expenses, but he credited the chain's long-range strategy as the biggest factor in its improved performance last year.

One part of that strategy is to remodel the company's stores in its Lifestyle format, which Safeway is implementing in a store remodeling program and also in all of its new locations. The format features a decor designed to be more inviting, with subdued lighting, an emphasis on high-quality fresh products and in many cases a large selection of natural and organic foods. Many Lifestyle stores also feature full-service meat counters, bakeries and floral design centers, as well as sushi and olive bars.

"The Lifestyle stores are an integral part of our strategy, and they are where we are spending most of our capital," Burd said. He called the Lifestyle format "the best remodels we have ever done" in the history of the company. For 2006, the company expects to remodel about 280 stores into the Lifestyle format and also to open about 20 to 25 new locations in the format.

In response to a question about how Safeway has managed to improve its financial performance in an industry where cutthroat competition is wreaking havoc on some chains, Burd commented that the company's strategy "is really focused on taking market share from people who are in the supermarket channel."

Burd explained that, when Safeway conceived of its strategy several years ago as a response to intensifying competition in the grocery business, it decided that it needed to retool its strategy. But the company realized that it couldn't win back market share from all types of players in the supermarket industry.

"We developed a strategy that focused not on taking back business from these new players like super-low-price competitors," Burd said. Instead, he said Safeway's strategy is "going after the conventional supermarket business" but with a new approach that is designed to win business from other conventional supermarket chains.

"When we win, somebody has to lose, because it's a zero-sum game. It's all about taking market share with a differentiated strategy," Burd said. Safeway plans to spend approximately $1.6 billion in capital expenditures in 2006 to complete the 20 to 25 new stores and the 280 remodeling jobs.

Among Safeway's new stores is a 77,000-sf location in Boulder, CO. Burd cautioned that the store, very large by Safeway standards, "should not be interpreted as our new prototype remodel." Safeway uses the Boulder store "as a test site for some concepts that we believe we can put into a number of our remodels as we move around the country." He said the Boulder location is "an example of how the Lifestyle store can be tailored to the demographics of a particular trade area."