Safeway Debuts Health Services

MARK HAMSTRA

NEW YORK — Safeway has begun launching its new health care consulting service, saying at a financial conference here that the division could become a bigger revenue stream for the company than its nascent private-label marketing program.

In a presentation at the Goldman Sachs Global Retailing Conference here, Steve Burd, chairman, president and chief executive officer of Pleasanton, Calif.-based Safeway, said the consulting service was based on Safeway's own efforts to reduce its health care costs for 30,000 non-union employees.

“Unlike the rest of the country that has typically experienced in the last three years about a 20% to 25% increase in per capita health care costs, we have sustained a 13% decline [for the employees involved],” Burd said.

Safeway previously had disclosed plans for the new health care consulting business.

Burd described the health care program as being “behavior-driven,” saying that 70% of health care costs are affected by how employees choose to act.

In the Safeway company plan, for example, employees are incentivized to lose weight if they are overweight and to quit smoking.

The company also contracted with fitness centers by negotiating a payment that would allow employees to join without an enrollment fee and at a reduced monthly rate.

“If you design a health care plan where behavior really matters, people actually respond, just like they respond to gas prices and food prices, and they actually change their behavior,” Burd said. “And that's what's driving our cost reduction, so we think that we know more about health care plan design than even those who have been practicing insurance and health care for a long time.”

Burd said the company's health care cost reductions could be incorporated into its union contracts over the course of two contract negotiations, or about six years.

Part of the program also involves a pharmaceutical reimbursement plan that offers strong incentives for employees to choose generic alternatives for prescription drugs.

“There is no doubt that if your company contracted with [Safeway's health care services business], we would reduce your pharmaceutical spend by about 30%, and it would take about 12 weeks to make that happen,” Burd said.

He went on to note that the new venture “was not a capital-intensive business” — that in fact it would cost less to finance than it does to convert a store to the “lifestyle” format.

In terms of potential revenues for the company, the health care consulting business could be bigger than both the O Organics and Eating Right private-label marketing programs, and bigger than the company's experimental small-store format, Burd estimated, although “it's way too early” to predict whether it could be as big a business as Blackhawk, the gift-card marketing arm that Safeway has said could comprise up to 30% of its earnings in the next few years.

“Give us another year or 18 months and I might be able to answer that question,” he said.

Safeway also said it was expanding a prepared-food offering that it had initially launched in 10 stores. After a preliminary test in which it had difficulties managing distribution and shrink, the company adjusted the product line and now has it in about 50 stores.

The line is “making money” amid strong sales, Burd said. “But again, to scale that up to an operation that spans from Washington, D.C., to Hawaii, from Alaska to Houston, Texas — that remains a logistical challenge. So that product will not be completely rolled out for probably almost 12 months.”

He also said Safeway's test of a small-format store — a 15,000-square-foot location in Long Beach, Calif., called The Market — has yielded some interesting lessons in SKU reduction.

“We were pretty stunned by some of the things that we learned — dramatically reducing linear footage and seeing some categories actually growing sales,” he said.

The company plans to test about four or five locations before proceeding further. The store is “very different” from Tesco's Fresh & Easy concept, which Safeway competes with at most of Tesco's locations, Burd said.

“In fact, [The Market] is earning an attractive return on investment,” he said. “But we're not interested in building five stores that generate an attractive return on investment. If we don't think there is a market to do 30 or 50 of these a year, we'll not roll that concept out.”

He said the format Tesco is rolling out will be difficult to make work, and he does not believe it is profitable.

“We don't believe that they are anywhere near break-even,” he said. “We don't think they had built an attractive vehicle, and it's not having much of an impact on our business, and essentially they are running what we think is the equivalent of about 12 supermarkets in terms of volume out of a million-square-foot distribution center.”

13% Cost decline for employee health care at Safeway

Source: Company presentation