SAFEWAY REMERCHANDISES TO GROW PERIMETER DEPARTMENTS

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said it is trying to reinvent itself.

According to Steve Burd, chairman, president and chief executive officer, the company is seeking to capitalize on merchandising opportunities in perimeter departments to differentiate its stores from those of competitors, while simultaneously trying to keep labor costs in line.

"We see an opportunity to reinvent the business," Burd told an investors conference here.

SN contacted several industry analysts last week for their reaction to Safeway's strategy. One observed that chain was right to "move the battleground onto terrain that suits [its] strengths," while another said the strategy represented "a rather frank admission" that much remains that needs to change.

Burd, though, said the stars are aligning for Safeway. He stated, "The economy feels like it's improving, and we believe we will generate positive non-fuel identical-store sales in the range of 1% next year. This recovery is different from other recoveries because unemployment is not materially changing, and is actually rising. But we're seeing more consumer confidence, though not yet at the levels we saw in 2000, and that's having some positive impact on sales. In addition, we see our merchandising strategies helping us."

Those strategies involve efforts for Safeway to differentiate itself on the stores' perimeters, Burd said.

Based on consumer surveys, Safeway can create a quality image with the right product selection, though not necessarily more selection, and an improved in-store environment for produce, meat, deli, bakery and floral departments, Burd said. Safeway is in the process of improving its buying, handling and merchandising efforts in each category, with the changes expected to be completed over the next couple of years, he said.

"We're probably the most promotional operator out there, and we will continue to promote, though we want to lower our regular prices. In addition, we want to move from best-in-class to world-class, and we want to restructure labor."

Labor remains a problem. Safeway is engaged in a strike-lockout in Southern California entering its 10th week.

Laree Renda, executive vice president in charge of retail operations, public affairs, human resources and labor relations, told investors Safeway's pay gap with non-union operators ranges from $5 an hour "in our best market," which she did not pinpoint, to $11 in California.

"That gap creates enormous problems for us, and those problems don't get solved with any one agreement. They get solved with changes in each component to allow us to be more competitive in every market."

Indeed, the company faces a phalanx of contract expirations next year: in its Eastern division (the Washington, D.C.-Baltimore area) in March; Seattle (including Alaska and Montana) in May; part of Northern California in July; and Denver, Fresno, Las Vegas and the rest of Northern California in September, with open contracts in Phoenix, Chicago and Saskatchewan.

Renda said Safeway has been successful in restructuring labor contracts covering 39% of its stores over the last five years by creating new hiring tiers that utilize market-based pay scales; seeking voluntary severance; offering lump-sum payments rather than annual wage increases; adjusting work rules; and introducing cost-sharing in health care. Each market is unique, and requires unique solutions, she added. "It all happens at the negotiating table. There are no cookie-cutter contracts.

"In addition, we've encouraged and begged employees not to shop at Wal-Mart and other big-box stores that feed the beast that creates the problem," Renda said.

Among analysts contacted by SN for reaction to Safeway's competitive strategies, Mark Husson, Merrill Lynch, New York, referred to Safeway's attempt to differentiate as "Whole Foods-Lite -- a mainstream, accessible retailer who is prepared to go the extra mile for quality and service for people who are prepared to pay an extra buck to get it.

"Safeway has figured out that it can't beat non-union discounters at center-store grocery commodity retailing for price-oriented consumers, but it sees it can win in other areas. It's classic 'art of war' stuff to move the battleground onto terrain that suits your strengths." Lisa Cartwright, an analyst with Citigroup Smith Barney, New York, said she sees positive long-term benefits from Safeway's efforts to improve quality, selection and merchandising. "Its focus on differentiating its store base is well thought-out and impressive. However, this level of attention to detail requires a great deal of labor, and the labor front is still an issue."

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said Safeway has been talking for several years about differentiating its store base, first with so-called breakaway strategies "that didn't work," and more recently with a series of ongoing initiatives in perishables "that haven't worked so far."

Indeed, Wolf said it was "a rather frank admission" for Safeway to indicate it doesn't feel that it has already differentiated its stores. "But if it wants to differentiate itself on quality, that will require an investment, including hiring more people to work in the stores. But that's separate from the issue of labor costs because differentiating the stores could take years, or even decades."