SAFEWAY CUTS 940 MID-LEVEL JOBS TO REDUCE EXPENSES

Elliot Zwiebach

PLEASANTON, Calif. -- Safeway here said last week it is eliminating 940 administrative positions in an effort to reduce its cost structure -- a move some industry observers said could be a prelude to additional cutbacks at a higher corporate level.

The company declined to pinpoint the cost savings it anticipates until it reports second-quarter financial results on July 24, and estimates by securities analysts contacted by SN ranged from $50 million to $100 million or more, excluding severance pay.

Safeway said half the positions being eliminated come from its corporate office in California and from Arizona, where accounting, information and technology and human resources are centered, with the other half coming from retail division offices across the United States and Canada. The cutbacks had been hinted at earlier this year, when Safeway indicated it was conducting a review of strategic costs and, subsequently, a review of labor costs.

Steve Burd, chairman, president and chief executive officer, said last week Safeway determined it needed to lower its costs of doing business "because of the prolonged economic downturn and a difficult operating environment. Accordingly, we have taken this painful but necessary step of reducing our administrative office expenses."

Brian Dowling, Safeway spokesman, said the cutbacks -- the first head-count reduction for Safeway in 10 years -- involve salaried associates as well as hourly personnel, encompassing staff employees in management jobs and administrative assistant positions. The highest level positions being eliminated are directors, he added.

The 940 jobs represent 13% of the chain's administrative workforce of 7,000. Excluding 252 positions that were already vacant and will not be filled, the percentage drops to 10%.

In addition to the 252 open positions, Safeway eliminated 416 positions immediately and plans to eliminate the balance of 272 over the next six to 12 months, Dowling told SN.

None of the cutbacks were connected with the chain's move toward centralization, he pointed out.

Safeway said all employees whose positions have been eliminated will receive severance allowances and extended group health-care benefits; they will also be able to utilize the services of Lee, Hecht and Harrison, an outplacement service Safeway has hired.

Jonathan Ziegler, a principal in PUPS Investment Management, Santa Barbara, Calif., said additional cutbacks are possible "because Safeway is not out of the woods yet -- it still faces intense pressures."

He also said Safeway may be able to use the cutbacks of non-union personnel as leverage in negotiations with the unions. "This move may send a message to the unions that Safeway needs concessions," Ziegler said. "It shows Safeway is not keeping all its white-collar people around, which should help when it asks the unions to give up some benefits."

Meredith Adler, an analyst with Lehman Brothers, New York, said the 10% to 13% cutback could be indirectly related to the eventual sale of Dominick's, Safeway's Chicago-based division, which will eliminate 7% of the chain's revenue base.

Some of the cutbacks encompass positions in the areas of real estate or acquisitions, Adler noted, "and those certainly make sense because Safeway is slowing its real-estate activity, and it's not focusing on acquisitions."

Other positions being eliminated "involve people whose jobs relate to Dominick's, and once Dominick's is sold, they won't be needed," she said. "Although Safeway indicated this reduction is not related to the eventual sale of Dominick's, the cutbacks will allow Safeway to maintain operating expenses at about the same level, with some additional savings."

Lisa Cartwright, an analyst with Citigroup Smith Barney, New York, said the administrative restructuring at Safeway is "a work in progress and, hopefully, the company will be able to invest the savings it realizes in lower prices and/or in its ability to differentiate itself to compete better. But if consumer spending doesn't pick up, it's possible there could be more cutbacks later this year."

Mark Husson, an analyst with Merrill Lynch, New York, said the cutbacks involve "bread-and-butter people, but not anyone in senior management. But there's a natural progression to make those cutbacks first, and then make additional cutbacks in senior management -- it's just a question of timing."

Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said he's not sure whether there will be a need for more cutbacks. "It's clear Safeway is in a position where it needs to focus on cost reductions because of top-line issues, and personnel is a likely area for any retailer to look at for cost reductions. And because Safeway wants to maintain the existing level of contact with customers, no store positions are being eliminated."

He said he wasn't surprised that a large number of the positions eliminated were in California since wages and benefits are higher there.

Gary Giblen, senior vice president and director of research for C L King Associates, New York, said he was surprised that a large portion of the cutbacks will occur in Arizona "because Safeway outsourced a lot of administrative functions there from its main office in Northern California and its Vons office in Southern California because it's a lower-cost area than California. Cutting positions in Arizona indicates to me that Safeway is really scrambling and is very much in a reactive mode."

Asked if he anticipates more cutbacks, Giblen replied, "A good tenet of management is, if you're going to make cutbacks, you do it all at once to reassure everyone who's left. But Safeway didn't say this is the extent of the cuts, which tells me there are probably more coming."