For the past 16 years, Steve Burd has been fighting a winning battle.
The chairman, president and chief executive officer of Safeway, Pleasanton, Calif., has managed to push open the door of the company's profitability against the resistance of economic downturns and amid pressure from a raft of competition.
“As a retailer operating in a thin-margin business, we have had to be very good at controlling costs, and it has forced us to be more innovative than I think we would have been in a high-margin business,” Burd told SN in an interview last week.
Burd's relentless effort to drive returns has steered the company through a series of industry-leading accomplishments, from a sharp focus on cost-cutting in his early days with the chain to current initiatives to expand the business through new growth vehicles.
Along the way he guided a series of acquisitions that gave the company a near-national footprint. From 1997-2001, Safeway added five regional chains to its portfolio — Vons in Southern California, Dominick's in Chicago, Carrs in Alaska, Randalls in Houston and Genuardi's in Pennsylvania — that tacked on $11 billion to the company's annual volume in that time.
Last year, the company tallied about $42.3 billion in sales from 1,738 supermarkets.
Burd, a consultant before he joined Safeway in 1992, quickly made his mark as a shrewd economizer who drove industry-leading margin gains. From 1993-1998, Safeway led the industry in terms of same-store sales growth, earnings growth, margin expansion and return on invested capital, analysts told SN.
In that time frame, the company expanded its EBITDA margins by 4%, while no other public company saw improvements of more than 2%. Although the company's profit growth has slowed, Burd had positioned the company to thrive in the long term.
“When he first came to Safeway and went from consultant to executive, a lot of the focus was on cost-cutting, and it was very beneficial for shareholders and the franchise,” said Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va. “A lot of the savings were invested back in the stores. The prices were brought in line with the industry, and Safeway hadn't had that as a focus.”
Burd's talent for cutting costs — “not just trimming 10% of the deadwood,” as Wolf explained, but finding more efficient ways to operate the stores and the company overall — has remained at the core of the company's strategies to this day.
As a result of Burd's firm convictions about how to operate more efficiently, he has risen to a leadership role on some key industry issues, particularly through his efforts to restructure labor costs.
As the nation's largest supermarket chains were inching toward a showdown with the United Food and Commercial Workers Union in Southern California in 2003, it was Steve Burd who became a front man for the industry — and the primary target of the union's wrath — as he refused to give in to worker demands and sought to create new contracts that would make traditional retailers like Safeway more competitive with nonunion operators like Wal-Mart Stores.
The result, after a 20-week strike against the chain, was a new contract for all of the “big three” operators in Southern California that allowed the chains to hire new employees at lower wages and slowed the rate of wage progression.
“He correctly saw there was a very large disparity in cost structure between unionized and nonunionized food retailers, and I give him a lot of credit for trying to address that proactively,” said Wolf.
Now Burd's focus has shifted to the health care aspect of employee costs, and he again has found a formula for driving costs out of the system.
Confronted with a $1 billion health care tab in 2005 and 10% annual increases in costs, Safeway tackled the problem with an incentive-based solution for its nonunion employees that put more control into the hands of individual workers.
“We knew if we could stop that $100 million increase, we could save a lot of money,” Burd said. “We basically looked to see how we could be innovative, and we surprised ourselves by being able to roll back costs 13% in that first year.”
The cost-cutting initiative has now evolved in multiple directions. In one, Burd has become a front man for the industry again, this time in efforts to revamp the national health care system as one of the founders of the Coalition to Advance Healthcare Reform, a group of more than 50 businesses formed last year. That group, which includes retailers and other companies, is seeking a market-based health care solution in which all Americans have access to health care.
“We started thinking it was a national problem,” Burd said. “I was concerned, as a free-market guy, that the government might try a single-payer solution to health care, and that was fundamentally a bad idea.”
As chairman of CAHR, he has spoken frequently on the topic in front a wide range of audiences to promote the concept that universal coverage can be achieved through a rigorous focus on costs.
“We believe you can finance subsidies to those who are poor and cannot otherwise afford health insurance by the cost savings in health care itself,” he said.
In a similar vein, the company recently joined a multi-company effort in which Safeway is partnering with CPG companies, to reduce obesity. At the Food Marketing Institute's Midwinter Conference last January, Burd and Indra Nooyi, chairman and CEO, PepsiCo, issued a call for food companies to take action on the obesity issue.
“If you can't control obesity, by definition you can't control costs, and if you can't control costs, then you can't insure everybody, so they are all connected,” Burd told SN.
From the effort to trim its own health care costs, Safeway also developed a new business, offering health care consulting services to other companies — not unlike its other entrepreneurial endeavors, including the Blackhawk Network gift-card division and the Lucerne private-label initiative.
In each of those examples, Safeway is leveraging assets it developed for its own use and seeking to drive new revenue and profit growth by offering them to others.
Burd said one of the keys to the success of Blackhawk, the most visible of Safeway's auxiliary offerings, has been the company's resident entrepreneur and the head of Blackhawk, Don Kingsborough.
“The magic of making that work is that we have married the skills and experience of someone who I would say is a world-class entrepreneur,” Burd said. “[Kingsborough] has created six companies over his career, and he's very good at it. I think what we have done is married that entrepreneurial drive with the focus and discipline that is often more resident in larger, more established companies like Safeway.
“That's not easy to do,” he added, although he pointed out that one of the keys to the success of the effort at Safeway is that he and Kingsborough have been personal friends for more than 20 years. “There's a relationship there that goes well beyond business,” Burd said.
Asked about what he thinks Safeway will look like 10 years from now, Burd said he believes such start-up businesses “will create very meaningful components of income, and probably quite serious parts of the earnings growth. Whatever we do, it will be logical, and it will be an effort to exploit a hidden asset of the company, and I think that will be the common thread.”
While Burd has fought to level the playing field with nontraditional operators, at the same time he has taken steps to differentiate the company from its rivals, both traditional and nontraditional.
In the mid-1990s, for example, the company embarked on an initiative to improve service levels at the stores using a vast network of mystery shoppers.
“We developed a measurement that we still apply today,” he explained. “We have literally hundreds of mystery shoppers around our organization. That's expensive to have, but comment cards and letters don't do justice to what we are trying to do. As a result of this initiative, if we have a service issue in any individual store, we know about it.”
The effort to differentiate also manifests itself in the company's lifestyle store remodeling initiative, in which Safeway is revamping its fleet of stores with expanded perishables and prepared foods and a new decor package. The massive remodeling program is expected to be “virtually completed” by next year, Burd recently told investors.
It is part of an overall effort at the chain to become more like a brand in the mind of consumers, Burd explained. That thinking also has led the company to tap the CPG world for branding expertise in its top marketing positions “and a few other key areas,” he said.
“We saw the opportunity to differentiate ourselves on a multitude of dimensions, and we continue to do that,” he told SN last week. “It's all about creating a meaningful difference that consumers would react positively to.”
Jonathan Ziegler, senior analyst with Dutton Associates, El Dorado Hills, Calif., said the lifestyle remodeling initiative has breathed new life into the stores.
“I think he has done a particularly good job taking a prosaic, somewhat routine retail format and turning it into something much more exciting,” he said. “I think he's sensitive to his customer and what they want.
“I think he made damned good acquisitions and built market share in major, important markets, and has done a great job at the store level with private brand and the fresh departments. He's really taken a store base that was behind, and brought it to the 21st century.”
Steve Burd
Chairman, president and CEO
Safeway
Burd's efforts to drive efficiency in the supermarket industry have propelled him to industry leadership roles in controlling labor costs and revamping health care. He has streamlined Safeway's cost structure and built up its top line through acquisitions and, more recently, a massive remodeling program and new business ventures.
