Pricing Impacts Safeway’s Profits

MARK HAMSTRA

Price fluctuations in fresh categories worked to keep pressure on Safeway's margins in 2009, the company said at its annual investors' conference earlier this month.

Steve Burd, chairman, president and chief executive officer of the Pleasanton, Calif.-based company, described how a few key, fast-moving items worked against the company's profitability as competitors kept shelf prices low even as deflationary pressures eased and sometimes lowered prices beyond deflation.

Mainstream white milk, he explained, “loomed fairly large in the scheme of things.”

“The deflation was so severe that it actually represented less than 2% of our sales but 10% of our actual deflation,” he explained. “Cheese was another 15%, eggs another 6% and the dominant piece was really produce. So there were basically four categories that represented 75% of the price-per-item decline that we experienced in 2009.”

In his 17 years with Safeway, Burd said, he had never seen retail pricing “overreact” to the cost of goods on products like milk, but that is what happened in 2009. Retail prices were driven lower than deflation, he explained, because operators were using low milk prices to drive traffic.

“This is a commodity, and when the cost per gallon would normally go up, let's say, 20 cents, retails would go up 20 cents and our pennies per gallon of profit would be identical,” he said. “And when the cost would go down 20 cents, the retails would go down 20 cents. For the first time in 17 years this has not happened in 2009.”

This segment of the company's business — about 1.9% of sales — had a sales impact of $137 million, or 6 cents a share, he said.

“For a relatively small piece of the business, we thought it had a pretty powerful effect,” Burd said.

He also described an internal technology system Safeway uses to screen market-by-market price comparisons against competition that help the company set prices.

The chain conducts these price checks every four weeks, comparing 12,000 to 13,000 items with traditional competitors, seeking to match prices except when conducting promotions. In addition, it conducts intermediate checks on the 1,000 highest-velocity items “if we think something is happening in the market,” he said.

In the general price checks, Burd said, “we don't concern ourselves in a market if in a week suddenly we're 2% higher [than the competition]. But if that happens in two consecutive price checks, then we think maybe there is something we have to do about it. If it happens in three, we clearly need to do something about it. We are looking for identical matches wherever we can.”

The price checks compare prices at three or four competitors in each market, examining both the “regular” price — or the normal, everyday pricing — and the “shelf-to-shelf” pricing, or the pricing that might include promotions or temporary price reductions.