SAFEWAY SEES ITS U.K. COMEBACK CONTINUING

JAMES FALLON

LONDON (FNS) -- Safeway U.K. is on a roll.

The food retailer is growing rapidly again after a thorough review and substantial restructuring of its business over the last two years, according to an interview here with Steve Webb, Safeway's director of corporate development.

In the increasingly competitive U.K. market, Safeway's growth is matching that of market leader Tesco. Safeway is now firmly established as Britain's third-largest food retailer, a rank achieved by carving out a niche as Britain's family-oriented and service-driven chain.

The proof of its success is in the numbers: Safeway is reporting an 8.2% increase in after-tax profits to $189.28 million (112 million pounds at an exchange rate of $1.69 to the pound). The company posted a 9% rise in sales to $6.3 billion (3.72 billion pounds) for the half-year ending Oct. 12, 1996. The figures are contrasted with after-tax profits of $174.9 million (103.5 million pounds) on sales of $5.75 billion (3.4 billion pounds) in the corresponding period a year earlier.

"We have implemented a series of changes and there has been a significant strengthening in our sales performance and a growing confidence," said Webb. "Our position as No. 3 has strengthened and we are closing the gap between us and the two others, Tesco and J. Sainsbury PLC."

Webb admitted that the gap remains large and there is no likelihood that Safeway will vault into the No. 2 position. However, the situation represents a marked reversal of Safeway's state three years ago, when the chain was losing market share to the two larger chains as well as to ASDA PLC. Analysts criticized Safeway for lacking focus and failing to be as innovative as its competitors in terms of private label, customer service and store layout. The changes began with the implementation of the Safeway 2000 program, which aimed at refocusing the business, reducing costs by $101.4 million (60 million pounds) and cutting 3,500 jobs. Webb said Safeway is on target to achieve that level of annualized savings by the end of the year.

"Our ongoing efficiency program with all areas will then produce the equivalent of a 0.2% margin improvement, at least, each year," he said, adding many of these efficiencies will come through greater use of information technology and the implementation of initiatives under the Efficient Consumer Response program. These include better supply-chain management and such programs as continuous replenishment.

Other initiatives include growth in apparel, where Safeway focuses on children's wear; the rollout to more stores of such services as pharmacies, gas stations and dry cleaners; the introduction of more home-entertainment products, which remains an underdeveloped category in food retailing in the U.K. compared with the U.S.; and self scanning, where Safeway is the world leader, with plans to roll out the program to all its superstores beginning this spring.

The latter program, which Safeway calls "Shop and Go," combines self scanning with the use of the company's new green-box trolley and its loyalty card. Safeway also has followed its competitors into financial services with the introduction of a credit card linked to its loyalty card.

"We are operating in an increasingly homogeneous superstore sector, and it is increasingly difficult to differentiate yourself in that sector," Webb said. "These initiatives help us to provide that differentiation."

The Safeway executive said the U.K. consumer is increasingly sophisticated and has moved beyond emphasizing price or quality of offer. "Price is now a given in this market; if you're not competitive on price you're not in the game," he said. "It's now what you do beyond price that determines your position. The customer expects service now."

Webb also indicated the competitive nature of the British market will not change for the foreseeable future. British food retailers enjoyed significant growth in the '80s by opening a large number of stores each year. But the government has tightened planning rules for new superstores, and food retailers now must rely more on same-store growth. Most food retailers now are restricted to opening only 10 to 15 superstores a year, compared with as many as 25 annually a decade ago.

Safeway is in a better position than most of its competitors, Webb said, because it is a less mature superstore operator. The food retailer didn't open its first superstore until 1987, and there still are large parts of the U.K. where it is under-represented. Safeway also has the Presto chain, which is gradually being converted to the Safeway name and which operates stores averaging 10,000 square feet in size in smaller cities and towns. Competitors, including Tesco and Sainsbury's, now recognize that such locations offer significant room for expansion and are developing new formats for them.