SAFEWAY EXPANDING SERVICES TO INCREASE SALES

SARAH LACY

PLEASANTON, Calif. -- Safeway here is continuing to test a variety of nontraditional services to boost its customers' transaction size, Steve Burd, chairman, president and chief executive officer, told the company's annual meeting here last week.

Burd said Safeway is pursuing key growth strategies in several areas, including fuel stations, banking, e-commerce ventures and even the sale of patio furniture at selected stores for part of the year.

Safeway operates what Burd called "a sprinkling" of fuel stations in several markets. "You haven't seen them here [in northern California] for the same reason we aren't building power plants -- because the zoning is hard to come by," he explained.

However, he said Safeway will open its first northern California fuel station at a store in Dublin next January and plans to install additional fuel stations in the future.

In the area of banking services, Safeway anticipates continuing to develop its relationship with Canadian Imperial Bank of Commerce, Toronto, Burd said.

Safeway formed a relationship about five years ago with Wells Fargo Bank, but it didn't work out as well as Wells Fargo had expected, he added, and the bank abandoned the concept. Safeway subsequently created its own on-line bank with CIBC.

"Because an Internet transaction is cheaper than a brick-and-mortar transaction, the rates are competitive," he explained. However, Safeway also offers in-store kiosks with phone connections so customers have access to an actual banker, he added.

The service was launched at stores in Sacramento and San Jose, Calif., and Denver last summer, with other Western markets scheduled to be added over the next year or so.

One shareholder complained that the rollout has been slow, leading to some customer inconvenience. "Customers who want to get cash out of their accounts by using their Select Card at the checkstand at some stores are being told by the manager it's not yet authorized," the shareholder said.

Burd said the bank features will be expanded over time, adding he will issue a note to managers to deal with customer situations.

On the subject of on-line grocery sales, Burd cited the example of Webvan, Foster City, Calif., as evidence that pure-play Internet companies do not work. "I'm not surprised at the road-kill along the way," he said.

He also noted that Peapod, Chicago, a former pure-play now aligned with Ahold, spends 25% of sales on marketing while Safeway spends only about 1%.

For the second year in a row, the annual meeting drew pickets. But whereas last year's pickets objected to Safeway's use of engineered technology in some food products, this year's protesters represented the United Brotherhood of Carpenters, who were protesting the occasional use of nonunion contractors by Safeway.

Shareholders entering the meeting walked past a large inflatable rat and balloons reading, "Don't shop at Safeway," while picketers chanted, "We want justice" -- all of which prompted one shareholder to remark, "I don't remember this welcoming committee before."

Inside the meeting, Burd appeared outwardly unfazed by the picketers, telling shareholders the company's contract with the United Food and Commercial Workers Union was up for renewal this year and noting he didn't expect any possible salary increase to shrink margins.

Even without the pickets, labor was already on the minds of shareholders, who were aware that Safeway's earnings for fiscal 2000 had been impacted by a strike last fall in northern California against the third-party distribution center that supplies Safeway stores in the area.

During the meeting, Burd reviewed Safeway's financial performance of the past year and the past eight years, during which the company has generally led the industry, with earnings growth of 20% or more in each of the last eight years and operating cash flow of 10.2%, considerably ahead of its nearest competitor.

Safeway's stock has also been very strong, Burd said, capping his review with a slide that showed the stock's performance compared with the Dow Jones Industrial Index and the Nasdaq over the past few months, the past year and the past eight years.

"If you've invested in the past eight years, you are happy," Burd said. "If you just got into the stock, you may not be happy, but you will be happy."

The closest Burd came to addressing the economic downturn was in reference to the shakeout between established companies and overvalued startups. "All I can say now is, there is a God. It takes real earnings to sustain a decent share price."