BOSTON -- Safeway's top executive expects the company to return to an era of declining operating and administrative expenses during the next few years, he told an investor conference here last week.
"Safeway has a long history of reducing costs," said Steve Burd, chairman, president and chief executive officer of the Pleasanton, Calif.-based company, noting that Safeway had 31 consecutive quarters of reductions in operating and administrative costs before 2001. "But over the last three years, we've had cost increases because our non-fuel identical-store sales have been negative and because of escalating costs in health care and pensions and previously negotiated wage rates.
"But with the restructuring of our labor contracts nearly completed and with other reductions in our cost structure -- and with large blocks of opportunities still available to reduce costs -- we will get back to seeing cost reductions for the first time in the next couple of years."
He said the company has already restructured 67% of its labor contracts and expects that proportion to grow to 97% by the end of this year.
In other remarks to the 13th annual Prudential Equity Group Back-to-School Consumer Conference, Burd said he expects vendor-allowance income to decline in the next five years as the company seeks more dead-net pricing from suppliers.
"We think the way supermarkets typically buy goods is more complicated than it should be," he said. "Our goal is to get down to a net cost so allowances go away and [price reductions] are reflected in the cost of goods.
"We have strategies for the center of our stores that will revitalize grocery and general merchandise sales. As we grow that business, we would expect to pay less for the products."
He said Safeway is already purchasing on a net-cost basis from several vendors.
Burd said Safeway's goal is to differentiate its stores by improving the quality of its perishable offerings while maintaining a competitive pricing position with conventional competitors, without sacrificing gross margin.
"We've always been a highly promotional operator, though we haven't always been as low [as other conventional chains] on regular prices," he said. "That worked for a couple of decades, but it doesn't work any longer.
"So we're busy lowering our regular prices. As a result, we're selling more product at regular prices, the blended gross is higher, and we have a better price image."
In other comments:
Burd said service levels in Southern California have returned to the levels that existed prior to the 141-day strike that ended last March. "In the first week after the strike, service levels were at 85% of pre-strike levels, and they are now at 99%, which is full recovery," he said.
Safeway offers up to 100 organic produce items at stores where the demographics warrant, Burd said, compared with 140 organic offerings at Whole Foods. "We feel the Whole Foods shopper is a Safeway shopper, and although Safeway might not appeal to all of them, we believe we can capture some of that business with a move to a larger organic offering," he noted.
Burd made similar comments later in the day at a Goldman Sachs conference in New York.
In response to a question there, Burd said he anticipates some movement on union negotiations at its Dominick's chain in Chicago now that Safeway has settled contracts in other markets.