Business Innovation Trumps Safeway's Q1 Stumble

A miscalculation of promotional investment was cited earlier this month as the reason Safeway misstepped in its first-quarter results for the year.

The fifth-largest supermarket chain in the country has proved over the years it is not risk-averse. While the immediate effort to boost sales and earnings backfired, resulting in a 25% decline on earnings, there was promising news from Safeway's top executive Steve Burd that, I believe, will allow the retailer to quickly regain momentum, especially when the economy turns up.

Burd noted the positive performance of its Blackhawk Network gift card subsidiary, which was launched in 2001 as a new business growth venture with resident entrepreneur Don Kingsborough at its helm. Blackhawk sales rose 30% when adjusted for the Easter holiday that fell late this year, Burd reported.

“If you are sitting there concerned about retail in general and how that plays out with Blackhawk, Blackhawk continues to have a very different experience. The Blackhawk growth story remains very strong despite a very soft economy,” Burd told analysts.

Beyond Blackhawk, the gift card sector racked up 20% growth rates before being stalled by the poor economy. It also has come under scrutiny due to expiration dates and hidden fees. Credit card reform legislation (“Credit Cardholders' Bill of Rights”) headed to a vote by the Senate last week included a provision requiring any gift card to have at least a five-year lifespan and eliminate any hidden fees in the card.

But despite the current environment, the gift card sector is ever evolving and holds promise for future growth in driving retail sales and brand awareness. Safeway invested early in the sector and has become the largest provider of third-party prepaid cards in North America. It claims a mass retailing network of 80,000 stores, including other food chains. The company has also been expanding internationally with operations in Mexico, Australia, the United Kingdom and France.

This says a lot for Safeway's ability to innovate and strategize outside its core business model in order to capitalize on future opportunities. It's not always about price investment.

The announcement this month that Safeway continues to grow its private-label business internationally, as well as through other food chains in the U.S., also illustrates Safeway's willingness to take risks. Its O Organics and Eating Right store brands will be sold at ShopRite stores in South Africa and Exito supermarkets in Colombia. Albertsons LLC stores have picked up the O Organics line.

Safeway here again has departed from the norm by marketing health-conscious lines appropriate for the times we live in. It remains to be seen if opening its store brands up to competitors risks diluting the brand. Look for O Organics to be sporting the “voted product of the year” label on its four-cheese, stone-baked pizza in the frozens aisle. The designation is based on a poll of 100,000 consumers who voted based on innovation. Look for freezer clings that state: “I am organic and an award winner.”

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