Safeway plans to balance its future on “a three-legged stool.”
That’s how Steve Burd, chairman and chief executive officer, is describing the trio of loyalty-building programs the chain anticipates will serve as its long-term growth engine: Just for U, the digital platform it rolled out chainwide earlier this year; Rewards Points, a fuel-discount program it just expanded to more than 900 additional locations; and a wellness initiative it expects to introduce before the end of the year.
“To me, Just for U is our marketing platform for the next decade,” Burd said during a conference call last month.
“Think of Just for U as a communications vehicle [that] goes beyond making offers for basic items in the store aisles. At some point it might be communicating what’s going on in wellness or what’s going on with the fuel program.
“All three [programs] will be operating at full throttle by the end of next year — a mature Just for U; an established fuel loyalty network; and a very robust wellness initiative. We think it’s the way we can build sales for several years.”
With all three initiatives in place, Burd added, “there may come a time when it could be difficult to say whether it is the fuel program or the wellness program or Just for U that’s building loyalty for us.”
Attesting to the positive impact of Just for U, Burd said identical-store sales, which were up 0.1% in Safeway’s third quarter, were up 1.4% for the first four weeks of the fourth quarter in its nine U.S. divisions, all of which have Just for U in place, compared with 1% for the chain overall, including Canada, where the program is not available.
“I think we can attribute all the market-share gains in the U.S. to the Just for U platform,” Burd told analysts in a conference call last month. “Without Just for U, we would not be sitting here with positive share change across all outlets, nor with 40 basis points of volume improvement inside the U.S. channel.”
According to one industry observer, “Safeway sees Kroger raising its earnings projections on strong sales growth, and it wants to be able to be in that position. The broadening of Just for U to incorporate fuel discounts and pharmacy programs should help Safeway get to that position.”
Looking at each leg individually:
• Just for U is a digital marketing program that delivers personalized offers to consumers through a variety of vehicles, including mobile devices.
• Rewards Points enables customers to accumulate points at the stores to qualify for lower prices at more than 1,300 gas stations.
• The long-awaited wellness initiative is a program Safeway has been talking about for years, though several industry observers acknowledged they are not sure exactly what it will encompass. One analyst said it will likely involve a cohesive marketing effort encompassing the chain’s pharmacies, over-the-counter drug products, healthy eating and healthy lifestyles.
Industry observers are split on the long-term potential of Just for U and Safeway’s other programs.
Among the more upbeat observers, Chuck Cerankosky, an analyst with Northcoast Research, Cleveland, told SN, “Just for U has the potential to accelerate growth because it allows Safeway to focus promotional dollars on its most loyal customers rather than spreading the money out to encompass everyone who walks through the door.
“And the expanded fuel program will make it easier for customers to get rewards at more locations and presumably get them back into the stores more often to shop more so they can earn more points,” he added,
He also said he believes the wellness initiative should enable Safeway “to capitalize on customer visits to its in-store pharmacies by combining the chain’s private-label over-the-counter products, healthy eating and healthy lifestyles into a cohesive marketing program.”
Colin Guheen, an analyst with Cowen and Co., New York, said he sees Safeway “building traction in the grocery business as it rolls out Just for U, [which should] reaccelerate volume growth.
“Just for U is a catalyst to drive near-term same-store sales by increasing trips and [encouraging] larger transactions through the program’s ability to customize individual offers, compared with mass promotional offers, with substantial future capabilities at checkout and in store.”
Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., said Just for U has already proven its value by helping boost Safeway’s sales, “and we anticipate ID sales trends should improve as Just for U continues to mature.”
According to Karen Short, managing director for BMO Capital Markets, New York, Just for U “is resonating with customers and could have a positive impact on volumes” — though so far, it appears to be driving larger purchases more than it is driving stronger traffic, she pointed out.
Other industry observers said they are not yet ready to make a judgment about Just for U.
Mark Wiltamuth, managing director for Morgan Stanley, New York, told SN, “Safeway will have to show me that Just for U works before I can determine its long-term value. It certainly is an interesting concept, but at the end of the day, if volume is negative and cash flow is eroding, Safeway will continue to struggle.”
He said he views Just for U as “a 2013 story, because it will take time to train consumers to use the system as part of their pre-shop routine.
“Some consumers will be willing to use the system, though many time-constrained consumers may not be so willing. We’ll have to wait and see how much volume uplift Safeway really gets before we can determine how successful the program will be.”
Wiltamuth said the fuel program Safeway offers “fills a hole. It’s proven successful for others operators that have similar programs in place, and broadening it to more locations, as Safeway has done in California, can only make it more appealing to consumers.”
Another observer said Safeway may be hurting its image at store level by concentrating on the digital marketing program so intently.
“A Safeway customer in San Francisco who uses Just for U said the system has become more difficult to use in its latest iteration,” the observer told SN. “In the past Safeway automatically listed the coupons it was making available to the shopper, but now you have to click and ask for the offers.
“And at store level Safeway has been changing the shelf signage so it lists only the regular price but not the club-card price, so prices in general look very high. The end result is, it’s harming Safeway’s image.”
Scott Mushkin, managing director for Jefferies & Co., New York, cite “the headwinds” Safeway faces as factors that could slow down the gains it anticipates from Just for U.
“We like Just for U — as a program and as a technology — and we think it’s a strategy that’s been positive for sales,” he said.
“But it’s not producing the results Safeway is looking for — and the addition of the fuel program and the wellness initiative will not make much difference — because of the headwinds Safeway is facing from elevated gas prices, particularly in California; a weak economic backdrop with little job growth; and the looming threat of competitive openings from Wal-Mart in several of its core markets, including Southern California, Chicago and the Pacific Northwest.”
Burd said he is not particularly concerned about competitive openings, including the accelerated rollout of Wal-Mart’s Neighborhood Markets.
“Years ago we essentially laid out the competitive impact of different vehicles compared to a conventional supermarket, and it’s still true today that a conventional supermarket has the most impact,” he told analysts.
He said Safeway had experienced a number of competitive openings this year, “and those are embedded in the 1.4% increase in ID sales in the U.S.
“What typically happens — and it doesn’t matter who the competition is — there’s a curiosity factor for people to go look at the new store. But it’s been our experience that the effect in the first week or two gets cut in half about four to six weeks out, and we think that with the three elements we’re going to market with to build loyalty and grow sales and market share that we shouldn’t experience any difficulty with new competition.”
Safeway originally introduced Just for U in its Northern California market (which includes Hawaii) in June 2011 and at Dominick’s in Chicago three months later; a slightly altered version was added at Vons, in Southern California, last March.
Since mid-June, Just for U has been upgraded and reintroduced in those three markets and was rolled out to the remaining U.S. divisions in Seattle, Portland, Denver, Phoenix, Texas and the East.
Safeway expanded its fuel loyalty program late last month to Vons and Pavilions customers in Southern and Central California by hooking up with over 900 fuel centers operated by Chevron and Texaco. The chain was already offering fuel discounts at 405 of its own fuel centers located on store parking lots scattered across several of its divisions in the U.S. and Canada.
Under the chain’s fuel rewards program, customers receive a 10-cent-per-gallon discount for every 100 points earned at a Safeway store — one point for each $1 spent on eligible grocery purchases; one point for every $1 spent on out-of-pocket costs at Safeway pharmacies; and two points for each $1 spent on qualifying gift-card purchases.
“So Just for U is about more than just selling bathroom tissue and cookies,” Burd pointed out. “It opens up possibilities on the fuel side that exist when you have a full complement of fuel.
“Keep in mind we will be unique in our ability to tailor fuel offers, so once we have a full complement of fuel, we can use Just for U to be very specific to customers; and just as we tailor everything else in the store, we can tailor fuel offers as a function of consumers’ response rates or their levels of interest.”
Asked by analysts for details on the wellness initiative, Burd said, “Wellness will be the biggest leg of the stool. We are getting close to launch, and I think I will save further information for then.”
According to Burd, investors should begin seeing the company’s efforts in designing the three-legged stool pay off soon.
“We always said you wouldn’t have to wait forever to see this — that you would see it in the second half of this year — and we think you are clearly seeing it in market-share gains and in a stabilized EBIT margin, and the next thing [we expect] will be a strong ID.
“That will happen when at least two of these initiatives are in full swing — and we will have all three working, though maybe not in full swing, in the fourth quarter.
“That’s the mission we started two-and-a-half to three years ago, and we see ourselves making very significant progress on that mission.”
Asked about the sustainability of the 1.4% ID sales increases in divisions with Just for U in place, Burd said, “We believe the numbers will grow because we have a wellness initiative yet to be launched. It will launch in one or two markets in the fourth quarter, but one market for sure. And fuel will continue to grow, and Just for U will continue to mature.
“With those three things working for us, things will get better than they are right now, certainly in the U.S.
“The expectation for Just for U is that, when we get to a decent level of maturity, we should be getting ID sales increases in the range of 2%.”
In what observers told SN was an apparent reference to Wal-Mart, Burd told analysts, “There are companies out there with identical-store sales of 2.3% that Wall Street thinks are masters of the universe.
“We’re not happy with the level of plus-0.1% IDs in the third quarter, but if you think about what we’ve been doing, it’s like turning an aircraft carrier 180 degrees. It takes a lot of effort and a lot of energy, and that’s what the launch costs for Just for U are all about; that’s what the preparation for fuel is about; and that’s what the two-and-a-half years of time and effort and building the wellness initiative are all about.
“So if you look forward, you should be quite optimistic about what this company can do in terms of market-share gains and operating income performance.”
Promoting the Program
Costs associated with the introduction of Just for U continued to be a factor in the chain’s financial results through the third quarter, Burd noted, though they will not be a factor going forward, he pointed out.
“There might be a bit of a misconception about how we’ve marketed Just for U,” he told investors. “We initially used a lot of store labor, plus some incentives on the gross margin side, to get registrations. But that has ended.
“We now have banners in the entrance of all our stores, which I think are fairly impactful, and we’ve developed alternative methods to continue to get registrations, and those methods are still delivering about 50,000 new registrants per week in the U.S.
“We do personal communications periodically, in some cases more than once a week, to people that are responsive. For example, we’ve done an email program that has registered 200,000 more users. And we mention it in our weekly inserts.
“We have not done radio spots specific to Just for U — we simply tag those. Nor have we done TV, though we will, once we get ourselves in a position to do it.
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“And there are so many other ways we can communicate to our shoppers and so many other ways we can interlink the three legs of the stool.”
Safeway said Just for U had 4.5 million registrants by early September — out of 9 million households who shop the chain each week — representing about 40% of total sales.
“We believe we are on track to have 5 million Just for U registrants by the end of the year,” Burd pointed out — an amount that would represent 45% of Safeway’s weekly sales.
“The upside for Just for U really lies ahead of us,” he said. “While we hope to cover 45% of our sales by the end of the year with registrations, I don’t think realistically you can get that number above 65%, and that’s fine.”
High Just for U Penetration
Just for U is off to a good start, according to an online survey conducted this past summer by BMO Capital Markets.
“Of 700 Safeway customers polled, 48% said they are using Just for U, and we believe the percentage will increase as the company continues to promote it,” said Short of BMO.
Of those using Just for U, 39% reported an improvement in Safeway’s prices and 21% noted an improvement in the customer experience, “and we believe these data points are a leading indicator for volume growth going forward,” she added.
Among the survey’s conclusions:
• Almost half of customers surveyed viewed Just for U favorably, Short said.
“The high penetration of customers using the program is impressive,” she noted, “given the relatively short time-frame the company has promoted it in the newer markets. Early skepticism that customers would be reluctant to change their behavior — like requiring them to select coupons online before they shop — proved incorrect.”
According to the survey, 58% of participants said they used the program at least three out of the last five times they shopped, and 33% of those surveyed said they used the program prior to each of their last five store visits.
“Customers are using Just for U because it is easy to use, the promotions are relevant and they believe it saves them money,” Short noted.
The survey said 86% of participants indicated Just for U was “easy” or “very easy” to operate; 91% said the promotions were “appropriate” or “very appropriate” for their households; 80% said they believe Just for U saved them money; and 80% said they would recommend the program to family or friends, with 15% saying they were not sure and 5% saying they would not recommend it.
• Just for U is lowering price perceptions at Safeway and improving the customer experience, Short explained.
“The survey shows there is a material improvement in customers’ price perceptions of Safeway,” she said.
For example, 34% of respondents said they believed prices were higher at Safeway prior to using Just for U — a number that fell to 22% after they used the program — while the number who said prices were “much higher” at Safeway before using the program fell from 11% to 6%.
The survey indicated 39% of respondents rated Safeway’s prices more attractive after Just for U was introduced — although 53% reported no change in their perceptions.
Asked how Just for U had affected their shopping experience at Safeway, 21% rated the experience “excellent” after using the program, compared with 12% before; however, 57% rated the experience as “good” after using the program, compared with 60% who rated it good before.
Overall, 21% of respondents said the shopping experience improved, while 73% noted no change.
• Just for U appears to be leading to improved traffic and share gains, which should drive more favorable volume trends, Short said.
“It appears Safeway is gaining share,” Short said, noting that 28% of respondents indicated they were shopping at Safeway more often after Just for U became available, and cutting back on trips to other supermarkets; 69% reported no change.
According to Burd, Just for U is about building volume.
The number of regular users is running at about 25% or 26% of registrants, or about 1.1 million to 1.2 million consumers, he told analysts last month.
The company said the incremental spend by regular users is exceeding internal estimates by 50%, while the incremental spend for non-regular users is about half that of a regular user.
“We were originally very focused on the regular user, “ Burd said, “but the non-regular incremental spend is actually equal to if not slightly greater than what we expected from regular spenders, and we no longer focus a lot on that separation.”
The percentage of people going from non-regular to regular continues to grow, he noted.
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Consumers who use the mobile application are 30% more likely to become regular users than those using the desktop app, Burd said. “Mobile users spend between 40% and 50% more than desktop users, which makes sense since we developed the site so people could access it in real time, and we all have down time and that’s when people often access the site.”
Safeway recently introduced an iPad application that is organized a little differently than the traditional mobile or desktop app, he noted. “The iPad application integrates your personal deals with coupons and separates things that you might buy, so the speed with which someone can go through that is much faster than if they use either the desktop or mobile application,” he explained.
“I’ve also asked our marketing team to specifically communicate with iPhone users who probably have iPads, to get them to think about converting to the iPad because that site is much easier and quicker to navigate, and the people I know who have iPads tend to take them everywhere, including from room to room when they are at home. The phone may not be very far behind, but it’s a much smaller screen.
“I think we can get increased regular usage by converting people from desktop to mobile, and we think we can get more maturity by converting from phone to tablet,” Burd said.
Sidebar: Safeway Seeks a Tech Edge With Just for U
Safeway is not the only chain personalizing its coupon offers, thought it may be the only one using 21st-century technology exclusively, analysts told SN.
“Just for U is pretty advanced stuff,” said Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va.
“Kroger is delivering personalized offers to consumers in analog form through the mail and Harris-Teeter is using email to deliver coupons, but Safeway is using digital technology, which is very impressive.
“Kroger’s been at it longer, so its program may be more robust, but Safeway is getting in the game of segmented marketing and promotions using electronic media and delivering coupons in a more mobile way, and that could lead others to follow in that direction.”
Chuck Cerankosky, managing director for Northcoast Research, Cleveland, said Kroger has been focused on the price-value relationship since 2003, when it formed a partnership with London-based research firm Dunhumby, “and with the economy recovering so slowly, it has continued to focus on its low-price image by offering personalized deals to its best customers, and its sales have been stronger than Safeway’s.
“Now Safeway is going through the process of rolling out Just for U and promoting it and hopefully building volume, and while it’s very possible it can get same-store sales more in line with Kroger’s, it’s going to be a gradual process.”
Mark Wiltamuth, managing director for Morgan Stanley, New York, said Kroger has a five- to six-year advantage over Safeway at personalizing coupon offers, and though most of its offers come through as paper coupons, “it won’t be a great leap for Kroger to convert to a digital program — it simply hasn’t made that leap yet.”
At Kroger’s investor conference last month, David Dillon, chairman and chief executive officer, demonstrated what customers can do using an iPhone — clicking on ad items to make a shopping list, including items with coupons. Although most coupons must be printed out, “eventually digital will overcome paper for those customers who want it,” Dillon said. “We’re going to give people that choice.”
Steve Burd, chairman and CEO at Safeway, told analysts he believes Just for U puts his company ahead of the competition.
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“In any given week, we might have 200 or more digital coupons — virtually every coupon in the market — and we have very tailored offers that would number 35 to 45 a week, compared with one competitor we’ve seen who has five offers that are personalized,” he said.
“I think it’s fair to say others will make an effort to do something similar, but I expect we would have a lead for a long time.
“What we have today is Just for U 2.0, and we have already established on the chalkboard Versions 3.0, 4.0 and 5.0 — and that doesn’t even count the more than one dozen changes to the site in the course of the last quarter. So it is a very dynamic site.
“And when I think about Versions 3.0, 4.0 and 5.0, I think about some pretty substantive changes we are making to the site on a constant basis. Those versions will be aimed at building basket size. They will also include some features we don’t have today that would increase usage among existing registrants and also attract new registrants.”
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