For many Americans, "going to Safeway" is synonymous with "going to the grocery store." Safeway is one of the nation's largest food retailers, with some 1,335 stores located mostly in the western, Midwestern, and mid-Atlantic regions of the US. It also operates regional supermarket companies, including The Vons Companies (primarily in Southern California), Carrs Safeway (Alaska's largest retailer), and Randall's Food Markets (Texas). Safeway owns grocery e-retailer GroceryWorks.com. Outside the US, Safeway owns 49% of Casa Ley, which operates about 195 food and variety stores in western Mexico. The company exited the Canadian market in 2013. Safeway has agreed to merge with Albertson's.
Change in Company Type
Safeway has agreed to be acquired Albertson's parent company, AB Acquisition, which is controlled by investment firm Cerberus Capital Management, for $40 per share, or $9 billion. The deal, which is expected to close in early 2015, will create a grocery company with more than 2,400 supermarkets, 27 distribution centers, and 20 manufacturing plants. Safeway's president and CEO, Robert Edwards, will be president and CEO of the combined company. As part of its pending merger, Safeway sold its Property Development Centers subsidiary (launched in 2008), which held some $830 million in real estate assets, in late 2014. Also as part of the deal, the two companies plan to sell a combined total of 168 stores in eight states.
Safeway divides its US grocery business into nine geographically-based divisions. With pharmacies inside more than three-quarters of its stores, Safeway is a leader in pharmacy sales among US grocery retailers. The company also sells gas at about 400 fuel stations adjacent to Safeway stores. Fuel and pharmacy sales together contributed 19% of the company's 2013 sales. Its bakery, dairy, and food processing operations span the US and Canada with 32 manufacturing plants, which supply Safeway stores with many of its private-label products.
The company has been streamlining operations as of late. In late 2013, Safeway exited the Chicago market when it shuttered underperforming chain Dominick's. It also sold its Canadian operations (which had been pulling in about 15% of total revenues) to Sobeys. The grocery operator took its lucrative third-party gift card subsidiary, Blackhawk Network (established in 2001), public in 2013 in an offering worth $230 million. Post IPO, Safeway remained the majority owner of Blackhawk. Safeway also sold its real estate development arm, which held a portfolio worth some $830 million, in late 2014.
Safeway operated 1,335 stores at year-end 2013. About a third of its supermarkets are in California. Other key markets include Alaska, Arizona, Colorado, Hawaii, Oregon, Texas, Washington, and the mid-Atlantic region. It also owns a 49% stake in Mexico's Casa Ley. (The company is exploring the idea of selling that stake.)
Sales and Marketing
Safeway's advertising and promotional expenses totaled $373 million in 2013, down from $416.7 million in 2012. To lure shoppers back from discounters, Safeway launched a $100 million marketing campaign that positions the grocery chain as a more stylish alternative to discount chains. The Ingredients for Life campaign focuses on about 1,500 Safeway, Vons, and Pavilions stores in the western US, as well as Maryland and Washington, DC.
With its heavy exposure to economically-strapped California, and continued weakness across many of its regional grocery divisions, Safeway has had a tough few years. Sales fell 18% to $36.1 billion in 2013 due to factors such as lower gasoline prices and the discontinuation of operations in Canada and Chicago. The divestment of 25 Genuardi's stores the previous year also took a toll on sales. However, net income grew a whopping 488% to $3.5 billion in 2013 (versus $596.5 million in 2012), primarily due to income from those divested operations in Canada and Chicago.
Cash flow from operations decreased 25% to $1.2 billion, as cash spent on receivables and payables rose.
Prior to its deal with Albertson's, Safeway made major changes to its business. In late 2013 it sold its stores in Canada, operated by Canada Safeway, to eager rival Sobeys, owned by Empire Company, in a $5.8 billion deal. The deal involved 213 stores, as well as 199 in-store pharmacies, 62 gas stations, 10 liquor stores, four distribution centers, and a dozen manufacturing facilities. Safeway also exited the Chicago market with the closure of its 72-store Dominick's chain there. The company took its Blackhawk giftcare subsidiary public in 2013 (but it still holds a majority stake in the firm). To gain approval for the pending merger, Safeway has been shedding assets including certain supermarkets and its property development division.
A key element of the supermarket operator's long-term marketing plan is the conversion of its store base to the Lifestyle format, which features expanded perishables departments, warm lighting, custom flooring, superior customer service, and other amenities designed to make grocery shopping an inviting experience, as opposed to a chore. Since 2006, Safeway has converted about 1,000 locations to the new format, representing a major expense for the company leading up to and during the deep recession. Indeed, by the end of 2012 88% of Safeway's stores were Lifestyle stores. (Eventually, the company expects to convert most of the remaining locations to the Lifestyle format.) Safeway is betting that when the economy finally improves shoppers will prefer its spruced-up Lifestyle stores to those of discounters.
To boost its bottom line, Safeway is looking beyond its low-growth core supermarket business. New non-core opportunities include a wellness program. Safeway is also cutting its losses at its most troubled chains, including Genuardi's on the East Coast and Dominick's in Chicago. To compete with discounters, Safeway has aggressively cut prices and improved and promoted its private-label products, which cost less than national brands.