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 1,400 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), Dominick's Finer Foods (Chicago), Carr-Gottstein Foods (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. It exited Canadian market in 2013 and 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 the fourth quarter of 2014, 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.
Safeway rings up 85% of its sales in the US, while the remainder originated in Canada. (Safeway exited the Canadian market in late 2013 with the sale of its Canadian division to Sobeys.) About a third of its supermarkets are in California. It also has stores in Alaska, and owns a minority stake in Mexico's Casa Ley.
Safeway divides its US grocery business into nine geographically-based divisions. (It exited the Philadelphia area with the sale of its Genuardi's stores in 2012.) 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 20% of the company's 2012 sales, up from 17% in 2010. 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.
Other Safeway subsidiaries include Property Development Centers LLC (launched in 2008). 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.
Sales & Marketing
Safeway's advertising and promotional expenses totaled $497 million in 2012, up from $491.3 million in 2011. 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 Canada, 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 couple of years. Sales grew just 1.3% to $44.2 billion in 2012 versus 2011, while net income increased 15% over the same period. An 8% rise in fuel sales and revenue from gift and prepaid cards drove sales growth, while pharmacy and perishable sales decreased. Sales of non-perishable items were essentially flat, up less than 1% year over year. The divestment of 25 Genuardi's stores in 2012 also took a toll on sales. Safeway's Canadian division, which outperformed the US during the deep recession, saw its sales decline by 0.5% in 2012 vs. 2011. Indeed, since 2008 Safeway's total sales have risen by just 0.2%.
The improvement in profitability in 2012 was due to the modest uptick in revenue and a $32 million gain from discontinued operations, including Genuardi's.
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. Sobeys is looking to position itself as the grocery leader in western Canada and better compete with the region's #1 Loblaw. 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. In October, Safeway announced it will also exit the Chicago market with the sale of its 72-store Dominick's chain there. The company took its Blackhawk giftcare subsidiary public offering in 2013.
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. In 2012 it tapped new leaders for its Vons and Dominick's divisions. To compete with discounters, Safeway has aggressively cut prices and improved and promoted its private-label products, which cost less than national brands.
Other major challenges facing Safeway include the retirement in May 2013 of its longtime Chairman and CEO Steve Burd, who is credited with transforming Safeway through, among other things, the development for the Lifestyle store format. Robert Edwards, formerly president of the company, succeeds Burd.
Investment firm FMR LLC owns more than 11% of Safeway's shares.