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SAFEWAY CEO: WE'RE IN ACQUISITION MODE

RENO, Nev. -- Industry consolidation will continue to accelerate, and Safeway intends to be right in the thick of things, Steve Burd, the chain's chairman, president and chief executive officer, told the California Grocers Association convention here last week. Addressing the convention as its keynote speaker, Burd said U.S. supermarketing is still extremely fragmented, with the Top 5 supermarkets

RENO, Nev. -- Industry consolidation will continue to accelerate, and Safeway intends to be right in the thick of things, Steve Burd, the chain's chairman, president and chief executive officer, told the California Grocers Association convention here last week. Addressing the convention as its keynote speaker, Burd said U.S. supermarketing is still extremely fragmented, with the Top 5 supermarkets accounting for only 24% of food-store sales in 1997, compared with 19% in 1992 -- a rise of five points in five years. That will change rapidly over the next few years, Burd said. Including the proposed acquisition last week by Kroger Co., Cincinnati, of Fred Meyer Inc., Portland, Ore., Burd said, the Top 5 supermarkets will do 33% of industry business in 1999 -- reflecting a rise of nine points in one year -- "and by 2002, concentration could be at least 43% among the Top 5 chains, and possibly higher."

Burd also said sales from today's Top 4 chains (Safeway, Kroger, Albertson's and Ahold) have nearly doubled in the past two years, from $70 billion in 1996 to $126 billion in 1998, "illustrating that consolidation is occurring from the top down."

Burd said growth through acquisition remains a key part of Safeway's strategy, "and we expect to be a continuing player."

Safeway's next two acquisitions have not yet been completed -- the purchase of Carr Gottstein Foods, Anchorage, Alaska, which Burd said he expects to complete in the first quarter of 1999 following Federal Trade Commission action because of store overlaps; and Dominick's Supermarkets, Northlake, Ill., which was announced two weeks ago and which will close before Thanksgiving because there are no overlaps.

"And there are more acquisitions we can do and will be doing," he said.

Burd said acquisitions offer Safeway the means to maintain its industry-leading rate of cash-flow growth.

"We believe acquiring companies and taking advantage of additional sales and best practices will boost our operating cash-flow margins, so we must continue to do acquisitions to maintain our high growth rate," he told the convention.

Burd said he is optimistic that Safeway can push its operating cash-flow margins to 9% from the current level of 8.38%. "Given our present margins, there are limited opportunities to expand margins, except through acquisitions," he said.

Based on previous merger-related successes, "we have a religious zeal to make acquisitions work," Burd said.

"Acquisitions are difficult to do well," he said, citing a survey of chief executive officers in which one-third said acquisitions were OK, one-third said they didn't work and one-third said they worked very well.

"Looking at that survey, it's my view that two-thirds of the acquisitions failed. But we're good at making acquisitions work because we've previously merged nine Safeway divisions, and our experience with the acquisition of Vons Cos. [in 1997] was no different. "It's hard to do an acquisition and make it additive in the first year.

"Kroger said its acquisition of Fred Meyer will be earnings neutral in the first year. But we were additive with Vons in the first quarter after we acquired it because we borrowed some of Vons' best practices and applied them to Safeway.

"The management team at Vons came from a different experience so defining their best practices improved Safeway's operations.

"The Vons acquisition is complete, and it's been a total success."

Among Burd's other comments:

Safeway's Top 4 priorities are building sales, particularly in continuing units; lowering operating costs to be more competitive in all markets; improving capital management; and driving additional sales through acquisitions.

By focusing on sales, Safeway has been the industry's same-store sales leader for six years. During the same period Safeway has reduced operating expenses as a percentage of sales for 22 consecutive quarters "by defining the single best way to do things and applying that throughout our organization."

As a multiregional operator, Safeway has learned from all its competitors. "A regional operator will compete against and learn from two or three competitors, but we compete with 40 major players, so we learn from a wider base."

Safeway has more than tripled capital spending in the past six years, moving from $290 million in 1993 to $950 million this year, "and we've tripled the amount with a better return on investment." Safeway will spend $1 billion next year, and the addition of Dominick's will boost that figure to about $1.1 billion, he said.

TAGS: Kroger News