Safeway Plans to Test New Format in 2008

Safeway said last week it plans to introduce three new growth vehicles to drive earnings in 2008, including experimenting with a new store format. Steve Burd, chairman, president and chief executive officer, did not specify what the new format will be, but published reports last week said Safeway was seeking up to five relatively small locations measuring about 20,000 square feet

PLEASANTON, Calif. — Safeway said last week it plans to introduce three new growth vehicles to drive earnings in 2008, including experimenting with a new store format.

Steve Burd, chairman, president and chief executive officer, did not specify what the new format will be, but published reports last week said Safeway was seeking up to five relatively small locations — measuring about 20,000 square feet — in the San Jose, Calif., area.

“We've looked at at least three formats over the last two years and discarded two, with one still active,” Burd said at the annual Safeway investor conference here, “and we will experiment with that format. But it is an experiment, not a launch.”

However, speaking about future uses for free cash flow, he implied the new format could be rolled out further if it is successful. “If the new format works, it will take cash flow. But we won't do it unless it works.”

The other two growth vehicles will be efforts to sell two of the chain's proprietary product lines through other venues and to leverage its health care knowledge. The company also told analysts it was expanding its food-service offerings using products tested at its Citrine New World Bistro restaurant.

Mike Minasi, president of Safeway's marketing department, said the chain has already developed a distribution partnership with Sysco in Northern California to distribute both private-label lines to the food-service channel, and it is also selling O Organics though retail outlets in Asia and South America.

According to Burd, the O Organics line accounted for sales at Safeway of $164 million in its first year, and it should do more than $300 million this year, he said, while Eating Right, which Safeway introduced a year ago, is on track to equal or exceed the performance of O Organics.

“If those products were sold outside of Safeway channels, they would generate $3 billion to $5 billion a year,” Burd said.

The other growth vehicle Safeway plans to launch is a health care services venture, based on knowledge it has accumulated after several years of reducing costs among non-union employees by encouraging them to alter individual behavior, Burd said.

“Two of the three vehicles should make money in 2008,” Burd said — though he did not specify which two — “and they could contribute as much as 10% to 12% of earnings per share over five years.”

He said Safeway's core supermarkets will contribute 55% to 70% of earnings growth over the next five years, and Blackhawk, its third-party gift-card business, will account for 25% to 30%.


According to Burd, Safeway is on track to complete the bulk of its lifestyle store remodels by 2009, with 1,024 stores upgraded by the end of the current fiscal year and 250-255 remodels and 20-25 new lifestyle stores scheduled for next year, at a total cost of $1.7 billion to $1.75 billion.

Burd revealed — for the first time, he said — that remodeled stores achieve identical-store sales “north of 10%” during the first year, “and if we operated stores that had ID sales equal to what lifestyle stores do in the fourth year after conversion, we would walk very proudly.”

Burd said he believes Wall Street investors have undervalued Safeway's earnings potential for several years rather than recognizing that the chain has produced consistent earnings above 12% for all but three strike-affected years in the last 15 years.

“We've been winning with innovations for 15 years, and we expect to win for five more years, and probably five years after that,” he said.

Burd defined innovation as “the combination of satisfying customer needs, which are forever changing, at the same time you're producing great returns for shareholders. To be an innovator, you must do both, and no one has satisfied that definition better than Safeway over the years.”

In remarks at a dinner the night before Burd's formal presentation, analysts said Safeway indicated it plans to offer up to 75 new home meal replacement products that originated at its Citrine Bistro restaurant.

They said the company also plans to expand its pharmacy services, including immunizations, bone density exams, cholesterol screening and travel medicine services, with 100 square feet of dedicated space for pharmacists to perform various functions.

Separately, Safeway employees in Northern California are voting this week onnew contracts that include wage increases of $1.80 an hour over the four-year term of the agreement for journeyman clerks and $2.05 an hour for general merchandise and bakery clerks. The agreement, which would succeed one that expired Dec. 1, covers 25,000 workers in four Northern California locals at 300 Safeways; the union previously settled with Raley's Food & Drug, Sacramento, Calif., and Save Market Supermarkets, Modesto, Calif., but took longer to negotiate terms with Safeway.

At the end of the contract journeyman clerks will be earning $21.13 an hour, while general merchandise and bakery clerks will be earning $15.78. A union spokesman said the benefits package for Safeway is identical to the contract Raley's and Save Mart workers signed, including a shorter time in the beginners' insurance plan and accelerated coverage for dependent children.