SAFEWAY: CONSUMERS BEGINNING TO TRADE DOWN

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said it anticipates making changes in its product mix -- including offering items it has never sold before -- to reflect shifts in consumer buying habits, as shoppers start switching to less expensive items.

According to Steve Burd, chairman, president and chief executive officer, Safeway can continue to grow sales not only by taking market share from competitors but also by diversifying assortments, he told industry analysts in a conference call. "You will see items in our stores in the fourth quarter that we've never sold before," Burd said.

However, he declined to elaborate.

Burd said consumers have already begun shifting their buying to lower-priced alternatives. "We've seen a dramatic shift out of red meat and into chicken; a major shift away from luncheon and deli meats to, believe it or not, peanut butter and jelly; and a large increase in meal stretchers, with potato sales up 25%."

Safeway has not been negatively impacted by the buying shifts, he added. "We may see some impact on topline sales growth, but we don't believe it will have any effect on earnings per share," he said.

The shift in buying habits -- which Burd said he attributed to "a lack of consumer confidence" -- began showing up in August and continued through the last four weeks of Safeway's third quarter and the first two weeks of its fourth, Burd said. However, the company is unable to measure whether the shift has been more pronounced since the Sept. 11 terrorist attacks, he added.

Safeway's sales have been stronger in the last six weeks than they were in the third quarter, Burd pointed out. "But with the economy flattening out and people reeling from the Sept. 11 tragedy, no one really knows what the next several weeks will mean for sales.

"We see consumers scrambling a little bit, and I would say that, in the fourth quarter, we'll be able to shed more light on how consumer confidence affects our mix and identical-store sales.

"If you look across all retail channels, you're seeing pronounced changes in sales, though we're probably alone among companies without any profound changes in sales due to our skill and the opportunities to reduce the cost of goods as well as shrink."

Burd made his remarks following the release of financial results for the third quarter and 36 weeks ended Sept. 8, which showed sales up 6.8% to $80 billion for the quarter and 7.5% to $23.6 billion for the 36 weeks -- primarily as a result of its acquisition of Genuardi's Family Markets, Norristown, Pa., last February -- and net income up 14.5% to $309.2 million for the quarter and 13.6% to $900.3 million for the year to date. Same-store sales rose 0.8% for the quarter; the company did not release same-store sales for the year to date.

According to Burd, same-store sales continued to be impacted by excessive square-footage growth in three of Safeway's 10 operating divisions, though he declined to pinpoint the three areas.

However, he said that while overall same-store sales were up 0.8% for the third quarter and 5% for the past two years, same-store sales in the seven strongest markets rose 2.5% in this year's quarter and 7.3% over the last two years, "and we believe excess square footage will work its way through over the next 12 months and those other three markets will adjust.

"Each one is different because the behavior of the competition is different, but things will gradually get better because this is a waiting game. We are one of the stronger players in each market, and many other companies are hanging on by their fingernails and we're seeing more store closings every week."

Asked how Safeway is changing its mix, Burd replied, "We're not trying to buck the trend. So we carry flags and whatever else consumers want, and we promote them, so people are aware we're ready to serve their needs. So we're battening down the hatches a little bit and preparing for those changes in the fourth quarter by being as good at the cost reduction game as anyone out there."

Regarding cost reductions, Burd said, "Safeway laid out an aggressive general plan a year ago to cut the cost of goods, and we're on track to exceed our estimated reductions by 20% -- and we're just getting started, with opportunities for additional reductions for at least four more years.

"In addition, we set an aggressive target for shrink reduction, and we've exceeded that by more than 50%. We're probably no more than one-third of the way through our effort, and we'll probably be able to reduce shrink for at least one more year and possibly two."

Burd said those savings will more than offset the combination of energy cost increases, declines in real-estate property gains and declines in pension income from the prior year. "And as people shift down, they will move away from eating away from home, and we anticipate a benefit from that as well," he added.