PLEASANTON, CALIF. — Safeway here said last week it expects ongoing cost reductions to enable it to implement lower pricing during 2009.
“The market underestimates Safeway's ability to reduce costs — it believes if we invest in price, then earnings will decline,” Steve Burd, chairman, president and chief executive officer, said at the chain's annual investors conference here. “But that is not the case.”
Safeway is projecting earnings per share for 2009 of $2.34 to $2.44 and non-fuel identical-store sales growth of 2% to 3%.
“That ID number is quite aggressive,” Burd pointed out, “but we see opportunities in the marketplace that we alone can exploit, and we believe that, despite all the price investments we plan, we will still be able to expand operating margins in 2009.”
According to Burd, “Some people on Wall Street have questioned whether we have the right strategy for a recession. But recessions are temporary, and we believe you build a strategy to create long-term shareholder value, not to deal with a recession.”
Safeway's ability to improve pricing without impairing the customer experience will come from several factors, he said, including the following:
Reducing capital spending 25% to $1.2 billion next year. Having remodeled nearly 75% of its store base over the last five years, Safeway has learned how to reduce the cost of those upgrades, he noted; it's also been able to reduce the cost of lifestyle-light store upgrades by 50% of the cost of a full remodel, he added.
Reductions in capital spending as the lifestyle remodeling program ends will result in a doubling of free cash flow to between $1 billion and $1.2 billion, “which will enable us to respond to opportunities in the marketplace,” Burd said. “In a poker game, the guy with the largest wad coming in usually wins, and that will be Safeway — with a stronger balance sheet and more free cash flow putting us in a better position than anyone else in the industry.”
Taking a more aggressive position on cost reductions. “With 20 million front-end transactions a week, removing 1 second per transaction can save a lot of money, and 5 seconds can mean a bigger savings,” he said. “And shifting to more everyday pricing will mean less time changing shelf tags, which could enable us to reduce costs by 5% — and we wouldn't stop at just 5%.”
When he's asked whether Safeway hasn't already picked off all the low-hanging opportunities for cost savings, Burd said he replies, “We got a ladder.”
“Reducing costs is a bottomless pit and a never-ending exercise,” he explained, “and after reducing shrink over the last seven years by $527 million, we're contemplating a reduction of another 5%.”
Regarding its small-store test, Burd said results at the initial store in Long Beach, Calif., that opened in May are “good but not great.”
Safeway plans to open two more small-format stores next year, including at least one that will be built from the ground up, he said, “but unless the results go from good to great and we feel we can open 30 to 50 of these per year, it won't make enough difference for these stores to be more than an experiment.”
However, he said Safeway has learned a lot about SKU rationalization that it can use to improve its offering at traditional stores in the 35,000-40,000-square-foot range.