Wolf: With regard to Safeway, think about this. I said to Safeway, this cost inflation must be hell for you because you've got these signs in your stores that say thousands of new lower prices — and you've had them for a relatively short period — but now, if you pass through inflation, all you can tell customers is, “They were lower before they were higher.” I think Safeway is really at a crossroads now in terms of which direction to go — having already invested in price, will it see it through?
I was thinking what Whole Foods and Kroger and Trader Joe's have in common, and the answer is a better value image. Nobody is doing well if they aren't focused on value. Whether you are Whole Foods and you've fixed your value image, or whether you are someone who's always gone to market that way, it's almost existential. That's why I give so much credit to David Dillon. He really put his neck on the line, and I'm sure if the Kroger program hadn't worked out, the board would have gotten rid of him.
My point on Safeway is, I think it has a similar decision to make, though I don't think it's really in Steve Burd's DNA to go that way. But I think he already has Safeway positioned halfway there, and with what the company is doing with “Just for U” pricing, the question is, does it have the patience and the forbearance and determination, because it's not an easy road for a corporation to change to that extent? So I think it's going to be a really interesting business case over the next year or two.
Adler: When you look at Safeway, you see that, other than using its loyalty-card data, it really doesn't have a lot of low-hanging fruit.
Wiltamuth: I think Safeway has laid its stake down, betting on differentiation and higher-quality remodels, and it has made the decision that it will not go below the competition on price. Safeway wants to pass through price, it is going to pass through price, and it is just going through a tougher time. I think the rest of this year is going to be characterized by prices up and volume down.
Cerankosky: Safeway said it doesn't want comps to go below zero, so it slowed the pass-through of inflation enough to come up with a comp of one-half of 1% when everybody was expecting more because it was looking at Kroger's comps. But Kroger built value over time, and Safeway realizes it's not there yet. So you've got Kroger with this huge gap, Safeway struggling to get more attractive comps, and then Supervalu in a spot of its own — with 13 quarters of negative comps, it is not even in the game.
Adler: I believe some of the capital Safeway invested, even in Northern California, allowed it to simply “play catch-up.” It had starved a lot of the stores for capital because it could — that is, limited competition meant customers would not defect even if the stores got rundown-looking. But for all it's done putting money into the stores since 2004, the truth is that, from the customer's perspective, the stores went from terrible to just OK.
Cerankosky: I think Safeway walked away from a lot of the lower-end neighborhoods, and as a result, when Safeway runs into a Kroger store, it's a lot like its own store. And if it runs into an H-E-B, it's a lot like the Safeway.
Wiltamuth: It almost feels like the Safeway strategy needs some upward plane to the economy for the lifestyle remodel strategy to work. In fact, I think that's what it's waiting for, because I don't think Steve is willing to cut the price and chase other strategies at this point because he already has his bet placed on differentiation, and he's waiting for the good news on jobs and the economy to help him.
Mushkin: I'm also concerned over the fact Safeway has done a lot of the things you would want it to do, yet it's frightening that it hasn't been able to do better. The stores look better, the pricing has come down …
Wiltamuth: … and the merchandise looks good.
Mushkin: Vendors say Safeway was awful two years ago. But Kelly Griffith, who now runs its merchandising, does a very good job and as a result it is executing across the company, yet sales are actually stepping down again. So what is wrong with Safeway? It may simply be competition. It has Amazon and Target's P-fresh, and Costco is huge out there on the West Coast.
Adler: But it operates in a lot of other places. Keep in mind its biggest competitor, outside of Northern California, is Kroger, who as we have said, gets a lot of things right.
Mushkin: So your core market, where you make all your money, is being attacked by all these different operators, and then in your non-core markets you are competing against Kroger, who is brutal. Safeway may have just waited too long to fix its business.
Adler: I found it kind of amazing that Steve Burd was willing to tell us 75% of his customers were hurting because it wasn't that long ago he told us Safeway had a more upscale customer base.
Wolf: The economy has changed.
Adler: The point I want to make, though, is that you could argue that fundamentally Safeway's mindset has been wrong and that it waited too long, and it is totally unprepared to …
Mushkin: … to fend off its competition. We've been saying that for years. It should have focused on its West Coast markets a long time ago — to become the Publix or the H-E-B of the West Coast. But Safeway didn't do that. Even though its share in the Bay Area is good, it should be higher, and it may have been higher if the company had focused on its core markets.
Wiltamuth: Costco has been calling out California as a positive region for several months now, but we're not hearing that out of Safeway, which has one-third of its stores in the state.
Cerankosky: Safeway is at a point where you have to think about de-consolidation — where you say, maybe Genuardi's doesn't belong to us any more and maybe it's worth more to somebody else, and maybe the same is true of Dominick's. Then you focus on the West Coast and Canada. But it's a rough time to be selling broken divisions. The bids that people throw out there are below replacement costs.
Mushkin: Selling some divisions is something Safeway should have done five years ago.
Cerankosky: My point is, Safeway's got to focus on its strengths, and that might mean it's now time to back up a bit.
Mushkin: We heard Genuardi's was for sale for a while last year.
Adler: When I asked a competitor what was wrong with Genuardi's, he said Safeway tends to run everything like a Safeway store on the West Coast — that the acquired stores operating under other banners were too much the same. So the idea that Genuardi's is truly differentiating itself is unfortunately not true. Too many decisions are made in Pleasanton, Calif., which of course is not necessarily relevant to Genuardi's in the Philadelphia market.