Safeway Accelerates New-Store Investment

PLEASANTON, Calif. — Safeway here plans to become more aggressive in opening new stores now that its lifestyle remodeling effort is nearly complete, Steve Burd, chairman, president and chief executive officer, said here last week. The chain also hopes to build on the sales momentum it established in 2010 by increasing purchases among its most loyal customers, despite inflationary price increases, he

PLEASANTON, Calif. — Safeway [4] here plans to become more aggressive in opening new stores now that its lifestyle remodeling effort is nearly complete, Steve Burd, chairman, president and chief executive officer, said here last week.

The chain also hopes to build on the sales momentum it established in 2010 by increasing purchases among its most loyal customers, despite inflationary price increases, he said.

“After two years of deflation, we're beginning to see inflation as a positive,” Burd told analysts at the company's annual investors conference. “Costs are going up slowly, and we are confident we can pass those on.”

Burd said he expects inflation this year to be at least 1%, “though it could easily reach 2% by year's end, and I don't rule out 3%. But our guidance assumes 1% inflation.”

Given the chain's positive sales momentum over the last four quarters — moving from negative 1.3% identical-store sales in the first quarter to positive 0.2% in the fourth, including positive IDs of 1.2% in the last eight weeks of the quarter — “and with all we're working on with new brands and loyalty programs, that momentum should continue,” Burd said.

Safeway expects IDs, excluding fuel, to fall within the range of 1% to 1.5% this year, compared with a negative 2% for fiscal 2010, he noted.

However, Wall Street analysts expressed skepticism about Safeway's chances of passing through inflationary increases and being able to achieve its sales goals.

“The company's ability to pass through inflation remains questionable,” Karen Short, an analyst with BMO Capital Markets, New York, said. Given that deflation in 2010 was 1.5% and Safeway's IDs were negative, “we're not enthused by the 2011 guidance.

“Despite early optimism on the consumer's ability to absorb price increases, we remain cautious, especially if gas prices remain consistently in the $4 range,” she explained.

What Wal-Mart does will also have a big impact on conventional grocers in 2011, said Mark Wiltamuth, an analyst with Morgan Stanley, New York,. “Given the traffic and sales problems it dealt with last summer, Wal-Mart may think twice about raising prices in 2011 — and if Wal-Mart doesn't raise its prices, we don't think conventional grocers will be able to either.”

$1 BILLION CAP-EX

Burd told analysts Safeway expects to open 26 new stores this year — the highest number in the last four years, he noted — and to complete 30 remodels, at a cost of $1 billion. That compares with $800 million spent in 2010 to open 14 new stores and remodel 60, which brought the number of lifestyle stores up to 85% of the store base.

Besides boosting the number of new-store openings, Safeway intends to invest more money in information technology and to continue developing shopping centers, Burd added.

As for growing sales, Burd said the focus will be on “getting more loyalty from our best customers,” who represent 20% of all shoppers and account for 70% of sales and who visit a store between two and four times a week.

Safeway will attempt to boost sales among those customers in five ways, Burd said:

  • Through operational excellence, including top-quality perishables and services and an industry-leading in-stock position.

  • Through use of technology, including the “Just for U” online marketing program Safeway is testing in Northern California and Chicago, which offers shoppers personalized pricing based on their shopping history; easy-to access coupons that can be downloaded onto their loyalty cards; and club specials, with additional enhancements to come, Burd promised, as the program is rolled out chainwide later this year.

  • Through a focus on private-label brands, which continue to outpace the growth of national brands at Safeway, Burd noted. One of the chain's newest brands, Snack Artists, garnered 35% repeat business in its first 12 weeks, he said, “and we expect repeat business to move into the range of 50% to 65%”. The chain's new Open Nature line is doing $1 million a week only eight weeks after its introduction, with more SKUs to come, he said.

    Diane Dietz, executive vice president and chief marketing officer, said the proprietary brands Safeway launched over the last six years account for 26% of total chain sales, and of 800 separate categories, Safeway's private brands are No. 1 or No. 2 in 300 categories.

  • Through expansion into other businesses, which has included fuel, pharmacy, organics, Starbucks kiosks, in-store vaccinations and various general merchandise categories over the last 10 years. “Over the next five years, we expect to achieve increases of $1.2 billion to $1.5 billion, which is what we achieved in the last 10 years with those various categories, excluding fuel,” Burd said.