Safeway Well-Positioned for End of Recession: Burd

ELLIOT ZWIEBACH

NEW YORK — The end of the recession could occur within one or two quarters, but there is no evidence yet of consumers trading back up to more discretionary purchases, Steve Burd, chairman, president and chief executive officer of Pleasanton, Calif.-based Safeway, said at an investors' conference here last week.

“The process of trading down took several quarters to be complete across all categories, and it is now so pervasive that it's hard to believe there is much room to trade down further from where we are,” he said at the Goldman Sachs 16th Annual Global Retailing Conference. “And if you see the Consumer Price Index go up in September, October and November, then I would predict a strong Christmas this year.”

When the recovery does come, he added, he expects Safeway to be well-positioned in terms of store conditions and price perceptions as low-price operators begin to look less attractive to consumers.

“Those have been attractive vehicles in this economy, but you will see an equally dramatic change in identical-store sales when things return to normal,” he said. “I don't think people have a great desire to do all their shopping at a dollar store, for example. They will have a tendency to want to trade up, and that should mean a return to conventional stores.”

He also said he expects some store locations operated by regional players to become available once the economy recovers.

“Many regional operators who don't report same-store sales numbers may appear to be doing well,” he noted, “but many are really struggling in this elongated recession, and there will be a lot of weakness among many of those companies once the recession ends” — a situation Burd said might mean small groups of stores will be available for acquisition.

“I'm not predicting bankruptcies, but some companies will see their businesses deteriorating and consider selling options,” he explained. “We don't see ourselves particularly as acquirers, but we do see opportunities to pick up five or 10 or 20 stores in some existing markets.”

Burd defended Safeway's strategy of lowering prices gradually over the last few years, though he acknowledged the recession has speeded up that process.

“Part of our strategy since 2004 has been to go from being the most promotional operator to one with fewer highs and lows in our pricing. But as the recession lengthened, we elected to accelerate our investment in price — moving from a twofold pace to a fourfold pace this year to get to parity with other conventional supermarkets or with the key players in each market.”

The extraordinary deflation in produce and dairy prices has made it difficult for Safeway's pricing strategy to be evident in positive sales increases, he said, “but our volume trends are the strongest they've been in a couple of years so our pricing is building volume, and once deflation disappears, you will see the trend to stronger sales.”

Burd said Safeway begins seeing volume pick up when it lowers prices four to six weeks before launching a marketing campaign. “We have those campaigns going in only four markets now, and while it's still early, we're very pleased with the consumer response,” he noted.

In response to a question, Burd said CPG companies are showing little inclination to lower their costs, despite sales declines. “Our view is, if we can't provide consumers with a good value on the national brands, we will push hard on private label, and we're seeing private label growing at 10 times the rate of national brands.

“At the same time volume for the 10 largest CPG companies is declining, so at some point they're going to have to respond.”

Burd said the small-format 20,000-square-foot store Safeway opened two weeks ago in downtown San Jose, Calif., is exceeding gross-margin expectations “by a considerable distance.”

For example, sandwiches are big sellers in Northern California, he noted, “and that store sold twice the Northern California average during the first week of operation.”

The store assortment includes a mix of produce, foodservice and heavy private labels.

Burd said Safeway hopes to test a small-format store it builds from scratch, “and we're probably six months away from knowing if the smaller format will become a growth vehicle for us. And if it does, we can move forward quickly with some scale, with perhaps 12 stores in existing markets.”