Safeway Eyes Smaller Format as Competitive Weapon

ELLIOT ZWIEBACH

BOSTON — Safeway is prepared to open smaller-format stores if Tesco's Fresh & Easy concept proves to be a winner with consumers, Steve Burd, chairman, president and chief executive officer, said at an investor conference here last week.

“If the small-store format works, we think we could do that, and probably do it more effectively [than Tesco], simply because we're a well-known brand in the market,” he said.

Pleasanton, Calif.-based Safeway is the latest food retailer to consider introducing a smaller format as the industry prepares for the debut of Tesco's concept and sees increasing competition from Trader Joe's. Whole Foods said it would convert one of its recently acquired Wild Oats locations in Boulder, Colo., to a small grab-and-go format called Whole Foods Market Express, and Wal-Mart recently was reported to be considering two new small formats, including an “urban fresh” store (see Page 33).

Burd said he thinks Safeway could leverage its own-brand success in introducing such a concept.

“To make that format really successful, you've got to sell a lot of private label, and if you did a consumer survey about whose private label is better known in our operating areas — Tesco's or Safeway's or Vons' — I think there is no comparison,” he said. “Tesco is a highly regarded retailer that's been successful around the globe, but we're not losing any sleep over the fact they want to come into the market.”

Having tracked wine and liquor licenses, which require a six-month waiting period, Safeway knows every location Tesco plans to open, Burd said, and at Safeway stores near those locations, “we're pulling together traffic counts, demographic and ethnic information, and income levels to try to get a bead on what kind of market Tesco might be going after, and then preparing ourselves to defend our business.

“There isn't much we can do to get ready for them until we see them go to market, but we think the first stores we'll see will be in the Phoenix area in October, so before year's end we'll know exactly what they're offering and how we'll respond.”

Tesco has indicated it will begin opening Fresh & Easy stores in Southern California, Phoenix and Las Vegas in early November, though it hasn't said specifically where or when those first locations will open.

Burd made his remarks during a presentation to the Lehman Brothers Back-to-School Consumer Conference.

Elaborating slightly a day later at the 14th annual Goldman Sachs Global Retailing Conference in New York, Burd said it would be no problem for Safeway to find adequate real estate for smaller stores.

“Small real estate is not hard to get,” he said. “If we wanted 100 store sites of 15,000 square feet, we could contact developers and real estate people who have known us for 50 years and get what we needed in a short period of time.”

In other comments at the Lehman conference, Burd said:

Burd said the Eating Right line has been available for about 28 weeks, “and while it doesn't have as many SKUs as O Organics did at that point in its history, it is outselling O Organics, and we expect the brand to be equally powerful.”

Safeway began running TV ads for Eating Right earlier this month, “which we didn't do for O Organics in the first year, and we think we will get great results,” Burd added.

Burd said O Organics and Eating Right are manufactured by third parties based on Safeway's specifications.

To make it easier for consumers to pursue personal health and wellness, Safeway has added foodflex to its website (safeway.com/foodflex) — a tool it has not yet marketed, Burd noted — that allows shoppers to download their purchase histories and compare the nutritional content of their family's diet to a normalized diet “and soon to a heart-healthy diet or maybe a diet for pre-diabetics, to identify if there are minerals or vitamins of which they are consuming too much or too little,” he explained.

“Consumers can even click on sodium, for example, and it will identify every item they've bought in the last six to 12 months with sodium content in the highest range and the lowest range so they can pick the best alternatives.

“By the end of this year we should be able to tell them, based on the information they enter, the aisle locations of the desired items.”

Asked about prepared foods, Burd said, “The real opportunity is to be in the meals business, and our challenge is to overcome the consumers' mind-set that we are a place to buy ingredients.

“Whole Foods is offering a shopping environment that is 50% perishables, with a pretty strong meals content and with entrees as high as $28.

“Our market is more of a mass market, and $28 for pan-seared halibut wouldn't work as effectively. But I think we can be successful in the meals business, and we've proved that with some of our entrees. But there's no way to be effective in the meals business without heavy sampling, and the way to do that is probably one entree at a time.

“It's not good enough if it simply looks good in the case — the challenge is to get people to try the product. So we are doing trials and tracking repeat purchases, and we have basically been able to evaluate the economics of hammering the product a lot harder. With our Signature soups, for example, we've noticed that where we do heavy sampling, 65% of consumers who buy one unit average 12 units over a 12-month period.”

Burd also discussed Blackhawk Network, the third-party gift-card business it developed for its own stores and that it now offers to retailers worldwide, “and we're committed to creating other growth engines over time, maybe every two or three years, that will be related to the supermarket business but not necessarily for a supermarket.”

He did not indicate what the next growth engine might be.