Safeway Inc.

Company Profile
Publication Date: 19 Aug 2011

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Safeway Inc.

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Safeway Inc.
TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4
Key Facts...............................................................................................................4
SWOT Analysis.....................................................................................................5

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Safeway Inc.
Company Overview

COMPANY OVERVIEW
Safeway (or the company) is one of the largest food and drug retailers in North America. The
company also operates an extensive network of distribution, manufacturing and food-processing
facilities to support its retail operations. It is headquartered in Pleasanton, California, and employs
more than 180,000 people.
The company recorded revenues of $41,050 million during the financial year ended December 2010*
(FY2010), an increase of 0.5% over FY2009. The operating profit of the company was $1,159.4
million in FY2010, compared with an operating loss of $628.7 million in FY2009. The net profit was
$589.8 million in FY2010, compared with a net loss of $1,097.5 million in FY2009.
*Safeways financial year ends on the Saturday nearest December 31. The FY2010 and FY2009
consisted of the 52-week period ended January 1, 2011 and January 2, 2010, respectively.

KEY FACTS
Head Office

Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton
California 94588 3229
USA

Phone

1 925 467 3000

Fax

1 925 467 3323

Web Address

http://www.safeway.com/

Revenue / turnover 41,050.0

(USD Mn)
Financial Year End

December

Employees

180,000

New York Ticker

SWY

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SWOT Analysis

SWOT ANALYSIS
Safeway (or the company) is one of the largest food and drug retailers in North America. The
company has strong in-house manufacturing and distribution capabilities which enable it to exercise
high quality control and flexibility over its business process. However, sluggish consumer spending
in the US may adversely impact the top-line growth of Safeway.
Strengths

Weaknesses

Strong manufacturing and distribution

capabilities
Products in line with the "eating at home"
trend
Specialty departments facilitate increased
footfall and differentiation

Focus on high end products and customer

service has impacted the price positioning
and Safeways competitiveness in Canada
Questionable recall practices

Opportunities

Threats

Positive trends in online retailing will

increase sales from the channel
Rising demand for organic and health foods
Increased acceptance of private label
merchandise
Positive trends in the ancillary service of
gasoline sale

Unionization of labor amid concerns of rising

healthcare costs and increasing wages
Sluggish consumer spending in the US
negatively impacted the top-line
Intense competition from discounters will
pressurize margins

Strengths

Strong manufacturing and distribution capabilities

Safeway operated 20 manufacturing facilities in the US and 12 in Canada at the end of FY2010. In
terms of sales dollars, 14% of Safeway's private-label merchandise is manufactured in these plants.
In order to ensure high standards of quality in the products manufactured by the company, Safeway
operates laboratories at some of its plants and corporate offices. These laboratories engage in quality
assurance and research and development. The company also has a strong network of distribution
/ warehousing centers. At the end of FY2010, Safeway operated 13 distribution / warehousing centers
in the US and four in Canada. A majority of products to Safeway's 12 retail operating areas (Chicago,
Denver, Eastern and Northern California, Phoenix, Portland, Seattle, Texas, Vons, Alberta, Vancouver,
and Winnipeg) is sourced through these centers.

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SWOT Analysis

Strong in-house manufacturing and distribution capabilities enable Safeway to exercise high quality
control and flexibility over its business process. Furthermore, direct control over the back operations
allows Safeway to make prompt product changes according to customer preferences and changes
in market demand.
Products in line with the "eating at home" trend
In times of recession, the tendency to eat at home increases to reduce spending on eating outside.
In the past few years, customers in the US have been increasingly opting to eat at home. In response
to this emerging trend, Safeway has increased its focus on offering prepared meals. The companys
Signature Cafe line features custom-made sandwiches, soups, fresh salads, and a large variety of
entrees. Additionally, Safeway also offers Waterfront Bistro line of products (launched in 2009) which
feature more than 100 seafood selections, entrees and complementary items. Some of the
do-it-yourself entrees and appetizers are offered with simple recipes while others are pre-made
entrees which can be prepared in a few minutes. Furthermore, to boost this trend of eating at home
Safeway publishes recipes on its website. By increasing focus on ready to eat, high quality packaged
food, Safeway has positioned itself well to respond to the emerging trend of eating at home. The
companys wide product offerings in the particular food category would act as a compelling proposition
for customers who prefer to dine at home.
Specialty departments facilitate increased footfall and differentiation
The company operates specialty departments within its stores. These specialty departments include
deli, floral, bakery, seafood, pharmacy, Starbucks, and fuel stations. These specialty departments
allow Safeway to attract wider customer base at its stores. Pharmacies are operated at 78% of the
companys stores. These pharmacies offer services such as prescription-filling, health-related advice,
immunizations, travel medicines, medication therapy management, and point-of-care screening,
among others. Increasing number of people find these pharmacies and immunization program
attractive as the pharmacies do not require any appointments and also offer healthcare services at
lower price compared to the hospitals. Additionally, Starbucks being a popular brand in the US also
drives customer footfall. The fuel stations operated by Safeway also help in deriving demand for
other consumer goods offered by the company. Safeway can leverage on these specialty departments
within stores to drive footfall and increase the average sales as well. These specialty departments
also act as a differentiating factor between Safeway and other players in the industry.

Weaknesses

Focus on high end products and customer service has impacted the price positioning and Safeways
competitiveness in Canada
Safeway, over the years, has invested in differentiating itself on service, "lifestyle experience" and
higher-end products. The company introduced "Lifestyle Concept" which focuses on the ambience
of the stores to remodel its stores. Safeway did not compete on price. In Canada, it has been years

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SWOT Analysis

since the company competed on price leaving the price-conscious market to its competitors such
as Price Chopper. This positioning although led Safeway to gain high loyalty in the past, the price
positioning has adversely impacted the company as customers started to trade down and have
become more price conscious. According to a study conducted in 2010 by industry sources, low
prices and discounts were the primary reasons most consumers quoted for remaining loyal to the
retailers they used in the grocery, personal care, mass merchandise, department store, and specialty
retail categories. Compared to a similar survey conducted in 2009 customers had very different view.
Customers then said that although low prices ranked first for department stores and mass merchants,
customer service was the biggest value in grocery, personal care and specialty stores. This indicates
a clear shift in consumer behavior and also high preference for low price products. The 2010 survey
showed that Wal-Mart led the grocery category in the Northeast and Northwest regions in the US,
leaving behind Safeway and Albertsons. Safeway and Albertsons had the highest level of loyalty
score in their respective regions among the grocery brands in the 2008 loyalty survey.
Safeway has been slow in adjusting its positioning with the changed customer behavior and hence
has been unable to maintain its loyalty leadership. Though Safeway introduced several price cuts
and value oriented programs in 2009 and 2010, it will be a long time before customers respond to
this shift in positioning. Till then the company faring low on customer loyalty will suffer pressurized
margins and low revenue growth amid the shift in consumer preference for value retailers.
Questionable recall practices
Safeway's recall practices were questioned by its customers in the recent times. In February 2011,
a class action lawsuit was filed against the company by two consumers and The Center for Science
in the Public Interest (CSPI) for failing to notify loyalty cardholders who have purchased recalled
food. Previously, in May 2010, Safeway was issued a notification by CSPI to provide adequate notice
to its Club Card customers about the recalled products. The notification was issued after investigating
the company's recall practices and finding nothing suggesting that loyalty cardholders are contacted
in recall situations. This practice of Safeway violated state consumer protections laws.
Over the years, Safeway has focused on building its brand through quality perception. However, in
the light of the recent events with respect to its recall practices the consumers will doubt the
commitment of the company towards customer satisfaction.

Opportunities

Positive trends in online retailing will increase sales from the channel
Over the years, the preference to shop online has been growing among the US based customers.
According to the US Department of Commerce, the e-commerce sales in the US totaled $166.5
billion in 2010 compared with $45 billion in 2002, representing a compound annual growth rate
(CAGR) of 18% for the period FY200210. e-commerce sales accounted for 4.3% of the total retail
sales in 2010. In comparison, in 2002, e-commerce sales accounted for only 1.4% of the total retail

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SWOT Analysis

sales. Further, the nations retail e-commerce sales reached $46 billion in the first quarter of 2011,
representing an increase of 3.4% over the previous quarter.
According to industry estimates, the online sales of groceries account for less than 2% of total grocery
sales in the US. The market is however growing. Increasing number of grocers such as Wal-Mart,
Ahold, Kmart, and Publix among others have started testing the online service for sale of groceries,
based on the in-store, pick-up model. Moreover, Amazon.com, a non-traditional retailer, has also
been expanding its household goods and groceries category, and is testing a grocery delivery service
called "Amazon Fresh" in Seattle. The growing spread of broadband access across the US, and the
trend among shoppers to research products prior to making the final purchase is further expected
to boost online retail sales. The online channel has several counter recessionary characteristics
such as low infrastructure costs which can be passed on to the consumers, and convenience. In
addition to the direct sales, dissemination of information through the website can also be used to
drive sales.
Safeway owns and operates GroceryWorks.com Operating Company, an online grocery channel
which operates business through the Safeway.com, Vons.com and Genuardis.com websites. By
leveraging its online retailing platform Safeway can target larger audience and increase the revenues
from the channel.
Rising demand for organic and health foods
Customers in the US are more health conscious now than before and the trend has impacted the
preference of food products. It has been observed that majority of consumers (more than 70%) read
ingredient statements on packaging and are using nutritional information to make their purchasing
decisions. Due to the increased health consciousness, there has been a spurt in demand for all-natural
and organic foods. According to industry estimates, organic food and beverages industry was valued
at $26.7 billion in 2010. While the total food sales grew by less than 1% in 2010, organic food and
beverages sales increased by 7.7%. Consumers prefer organic food products because of concerns
regarding health, the environment and animal welfare and therefore are willing to pay price premiums
associated with the products.
Safeway was early to recognize this trend and in 2005, introduced its first wellness brand, O
Organics. Currently the product line offers more than 1,300 organic food and beverage products
certified by the US Department of Agriculture. The O Organics line includes, among other products,
milk, chicken, salads, juices and entrees. In 2007, Safeway launched O Organics for Baby and O
Organics for Toddler products. In the same year, the company introduced its Eating Right brand for
health conscious consumers. Eating Right products feature a unique nutritional icon system that
helps consumers to identify product attributes that they seek. This line currently includes more than
230 items. Further in 2010, Safeway introduced the Open Nature line of products. This line offers
more than 100 products made with 100% natural ingredients.
The company through its varied offerings in the organic and health product category can cater to
the customers who are increasingly seeking nutritional values in their meals.

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Safeway Inc.
SWOT Analysis

Increased acceptance of private label merchandise

The private label market in the US is expected to grow at a fast pace. According to industry estimates,
private label brands accounted for 17.4% of the US food products sales in 2010 as against 15.2%
in 2006. The private-label branded products industry in the US is estimated to be worth $90 billion,
and account for nearly 30% of the total servings of food products sold. This represents a huge gain
as compared with the period between 1984 and 2003, when the market share of private label products
remained in the range of 20%. One of the main reasons for growing demand for private label goods
has been the recent slowdown in the US that has kept price the top concern for consumers. Instead
of expensive brands, consumers across the industry are turning to generic and private label products.
Even upper-income shoppers are more willing to buy generic, which has traditionally appealed more
to shoppers with limited budgets.
Safeway offers a wide range of private label products that are sold at its stores, as well as to
non-competing retailers in the US and abroad. These private label brands are divided into four
categories: core, expertise, aspirational, and wellness. Under the core category, the companys
Safeway brand offers over 4,000 items across 350 categories, including cereal, spaghetti, hand
sanitizer, and laundry detergent. Another core category brand Value Red, which will be transitioned
to Pantry Essentials in 2011, offers more than 100 items over 45 categories, including dairy, meat,
canned vegetables, and paper goods among others. Under the expertise category, Safeway offers
the following brands: Lucerne (comprises more than 400 dairy related items), Snack Artist (a new
line of snack items launched in 2010), and Primo Taglio (a full line of premium meats and cheeses).
The aspirational category comprises the following brands: Safeway SELECT, Ranchers Reserve,
Signature Cafe, and waterfront BISTRO. Under the wellness category, Safeway offers products that
are focused towards consumers who consume more nutritional and organic products.
Increased penetration of private labels will enable the company to increase sales from these products.
Additionally, private labels typically have higher margins and rising demand for these products will
also impact bottom line positively.
Positive trends in the ancillary service of gasoline sale
The demand for gasoline in the US market is expected to increase. According to industry estimates,
in 2010, the sale of motor fuels accounted for more than two-thirds of the convenience store industrys
sales. The recovering US economy indicates further increase in revenues from the motor gasoline
segment. According to the US Energy Information Administration (EIA), the consumption of motor
gasoline totaled 9,034 thousand barrels per day in 2010 compared with 8,997 thousand barrels per
day in 2009. Further in 2012, the total consumption of liquid fuels is expected to increase by 170
thousand barrels per day, and the consumption of motor gasoline is expected to increase by 50
thousand barrels per day.
Safeway operates gas stations at 23% of its stores. At the end of FY2010, the company had 393
fuel stations in the US. The growing demand for motor fuel will not only increase sales but also drive
traffic to its stores. Therefore, the positive trend in this sector will convert into high customer footfall
at the companys stores.

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SWOT Analysis

Threats

Unionization of labor amid concerns of rising healthcare costs and increasing wages
The labor costs for companies have been rising as the healthcare costs and wages increase in the
recent times. Tight labor markets, increased overtime, government mandated increases in minimum
wages and a higher proportion of full-time employees are resulting in an increase in labor costs,
which could materially impact the company's results of operation. In the US, the government increased
the minimum wage rate from $6.55 per hour in 2008 to $7.25 an hour in July 2009. Many states and
municipalities in the US have minimum wage rates even higher than national level due to higher
cost of living. In addition to this, the health care costs for employers in the US are increasing.
According to industry estimates, healthcare costs for the US employers are estimated to increase
by 8% in 2011 and by 8.5% in 2012. Increasing number of consolidations in the healthcare sector,
and an expected rise in the medical claims from workers are some of the reasons that would keep
the healthcare cost high in the coming two years. Though, industry consolidation would increase
efficiency and reduce costs in the long term for healthcare companies, it can also reduce competition
among the service providers and lead to increased service charges. Additionally, the medical claims
from workers are expected to go up, as they feel the pressure of the uncertainty with respect to the
future source of income in the scenario of high unemployment rate, and a troubled financial market
in the country.
Approximately 80% of Safeway's employees in the US and Canada are covered by collective
bargaining agreements negotiated with union locals affiliated with one of nine different international
unions. The company is a party to approximately 430 collective bargaining agreements. In FY2010,
contracts covering nearly 32,000 employees were ratified. In May 2010, nearly 1,400
union-represented grocery workers in Kitsap County and 25,000 in Puget Sound were affected by
the contract negotiations between themselves and Allied Employers. These employers included
retailers such as Safeway, among others. The employees demanded for changes in their sick pay
among other things. Negotiations with labor unions with respect to rising health care, pension and
wage costs, among other issues, are some of the important topics. Amid the rising healthcare costs
if the company is unable to negotiate acceptable contracts with labor unions, it could result in strikes
by the affected workers and thereby significantly disrupt operations and result in increased operating
costs.
Sluggish consumer spending in the US negatively impacted the top-line
The retail market in the US, the geographical region where the company derives most of its income,
has been witnessing low consumer confidence. The consumer confidence in the US has registered
a decline during recent times. The US consumer confidence index increased slightly and reached
59.5 in July 2011, compared with 57.6 in June 2011. However, this figure is very low compared to
a consumer confidence index of above 100 in the first half of 2007. Since purchases of Safeways
products are dependent upon consumer spending, its financial performance is sensitive to changes
in overall economic conditions that affect consumer spending. Although consumer spending is seeing
some positive growth, Americans seem cautious and are not willing to increase spending, one of

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SWOT Analysis

the reasons why the pace of the recovery is estimated to be more subdued than in the past. High
unemployment rate, sluggish wage gains and credit crunch are all expected to keep consumers
relatively cautious. According to the industry estimates, the number of trips customer make to buy
groceries decreased to 1.69 trips per week in the first half of 2011. People shopping for groceries
only once a week increased to 34% in 2011 compared with 29% in the previous year. Additionally,
it is estimated that shoppers would put off spending on big ticket items and remain value-oriented
in the near future. A survey on retail trends indicates that even the financially sound families would
cut short on their spending, and the young population has also become conservative in their attitudes
toward shopping and their willingness to spend as older shoppers. Based on survey data, it was
also observed that as many as one-third of shoppers with incomes more than $150,000 per year
are cutting spending and avoiding places where they tend to overspend. Also, more than half of all
ages and income groups feel that the economic recovery will be slow, and may take them some
time after that to recover their financial stability. This indicates an adverse customer sentiment which
will pressurize spending in medium term.
The current economic environment has made consumers more cautious and led to reduced consumer
spending. Increasing number of customers are trading down to a less expensive mix of products
and to discounters for grocery items. Further deterioration of any macro economic factors impacting
consumer spending will be detrimental for the companys top line growth and profit margins.
Intense competition from discounters will pressurize margins
Food retailing sector is the US is highly competitive. Non-existent switching costs for consumers,
who are largely driven by price, increased the appeal of discounters and other value retailers.
Wal-Mart's entrance into the grocery market and its ongoing expansion has proved to be a major
risk to traditional operators, whose cost structures are higher and cannot match the low prices that
Wal-Mart offers. Merchandise offered at Wal-Mart's stores is priced at much lower range than the
range offered by its competitors. Grocery stores, amidst such competition, have experienced pricing
pressures. As consumers' purchasing power is decreasing, pricing matters more, which plays into
the hands of the low-price leaders. Although Safeway has been reducing prices to handle pressures
from discounters, it has not been immune. Competition for the consumers food dollar continues to
intensify as supercenters and warehouse clubs increasingly promote lower prices on food to drive
traffic. Increasing competition may lead to price war in the industry and pressurize Safeways margins.

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