BEAR STEARNS CONSUMER CONFERENCE

ELLIOT ZWIEBACH

NEW YORK - Safeway is "evaluating the future" of its relationship with Tesco in an online marketing venture, Brian Cornell, executive vice president and chief marketing officer for the Pleasanton, Calif.-based chain, told an investors conference here last week.

Safeway and United Kingdom-based Tesco have been partners since mid-2001 in an online venture called GroceryWorks.

"[We] think [online marketing] is an important part of our offering, and regardless of our relationship with Tesco, we are committed to the online channel," Cornell said. He did not elaborate.

Safeway formed its alliance with Tesco to gain access to Tesco's Internet know-how and proprietary software, in return for which it gave Tesco a 35% equity stake in GroceryWorks, an online provider originally based in Texas in which Safeway held - and continues to hold - a 50% stake.

Cornell made his remarks during a presentation at the 12th annual Retail, Restaurants and Consumer Conference sponsored by Bear Stearns here.

"We look at [Tesco] as a very successful global retailer, [but] they have no operating experience in a very challenging U.S. market [and] no brand equity, and I think some very big challenges lie ahead as they look at expansion in California or any other Western market," Cornell said of Tesco's announced plans for a West Coast chain of convenience stores offering home-meal solutions.

"We will certainly be evaluating their movement over the next 12-18 months, and we are going to certainly respect them as a new competitor in the marketplace," he said.

Cornell and Robert Edwards, Safeway's chief financial officer, reiterated Safeway's commitment to its Dominick's division.

"We are optimistic about creating value in the Chicago area," Edwards said. "We are pleased with the labor agreement that was achieved last year, and we're in the final stages of executing a buyout in that market."

Safeway has opened three lifestyle stores in the division.

Beyond the chain's commitment of capital to Dominick's and its plans to expand the number of lifestyle stores, Cornell said, "are all the other key strategic levers being deployed in that market, including improved perishables quality, proprietary branding, and Center Store and consumer efforts, so we are very optimistic about the future in Chicago."