SAFEWAY, EXPANDING IN EAST, BUYS GENUARDI'S

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here moved to expand its operations on the East Coast last week with its announcement of a definitive agreement to acquire Genuardi's Family Markets, Norristown, Pa.

The acquisition of the 39-store chain will add approximately $900 million to Safeway's volume -- boosting sales this year to approximately $33 billion on a pro forma basis -- and extend its Eastern operations from Maryland and Washington northward to Pennsylvania, Delaware and New Jersey.

Steve Burd, chairman, president and chief executive officer of Safeway, said the Genuardi's stores are located within 100 to 120 miles of Safeway's Maryland-based Eastern division, "so this is more like an in-market acquisition."

The sale will be a cash transaction. Although Safeway and Genuardi's declined to pinpoint the amount, industry observers pegged the price at around $550 million.

Burd said the acquisition is expected to be completed in early first quarter 2001, pending approval by federal authorities and other customary closing conditions. The transaction -- which Safeway said will be accretive to earnings in 2001 -- has already been unanimously approved by directors of both Genuardi's and Safeway and by holders of Genuardi's voting stock.

Charles A. Genuardi, chairman, president and CEO of the family-owned company, said the sale to Safeway "will allow us to gain the resources of a world-class supermarket company known for innovation and leadership in meeting the needs and expectations of its customers. We are proud of our 80-year history of commitment to customers, employees and the communities we serve, and we are confident this transaction will enable Genuardi's to carry on that legacy.

"Our customers will continue to see the Genuardi's name on our stores and will benefit greatly from what Safeway will bring to our operation."

Observers said the benefits from the acquisition will include the following:

Improving operating margins at Genuardi's by 300 to 400 basis points, with Safeway using its purchasing clout and category management expertise to lower the cost of goods.

Lowering corporate overhead by leveraging Safeway's existing East Coast infrastructure.

Re-engineering Genuardi's in-store operations to improve labor productivity.

Enhancing Genuardi's private-label offerings, including a rollout of the Safeway Select premium product line.

Adding in-store pharmacies.

Introducing a loyalty card program at Genuardi's.

Most of the 39 Genuardi's stores are located in upscale suburbs of Philadelphia, and three operate in New Jersey under the Zagara's banner. Although stores average 43,000 square feet, the selling areas average only about 28,000 square feet -- smaller than the 45,000-square-foot prototype Safeway prefers, analysts pointed out.

However, Burd said the stores' weekly sales average $450,000, "which is higher than Safeway's average."

Meredith Adler, a securities analyst with Lehman Brothers, New York, said the Genuardi's stores have a strong reputation for perishables, service and quality. "They are upscale stores without a high price image," she noted.

The Genuardi's stores are supplied by Supervalu, Minneapolis, whose contract runs through next October. Adler said Safeway could supply the stores from its 688,000-square-foot distribution center in Maryland, which is operated by C&S Wholesale Grocers, Brattleboro, Vt.; turn wholesale distribution over to C&S; or renew the Supervalu contract on more favorable terms. "The final decision will be based on which alternative has the best economics," Adler said.

During a media conference call from Genuardi's offices, Burd said most of Safeway's future acquisitions are likely to be east of the Mississippi River, given its already strong presence in the western United States.

"We have Dominick's in Chicago and 125-plus stores in the Baltimore-Washington, D.C., area, and I think you will see us acquiring more assets on this side of the river. And to the extent that we're able to grow our East Coast operations, the Genuardi's acquisition will be a positive move for Safeway.

"And the beauty of this acquisition is, if another good opportunity arises nearby, we have the management talent to take it on," Burd said.

Chuck Cerankosky, an analyst with McDonald & Co., Cleveland, said the acquisition will allow Safeway to build scale "in regions where it operates islands compared to its operations west of the Rockies. As it fills in its stand-alone regional operations in the East through future acquisitions, scale will build and efficiencies will increase."

Gary Giblen, senior vice president and director of research for C L King Associates, New York, said the Genuardi's acquisition "allows Safeway to begin to fill in the jigsaw puzzle. And there are a lot of other players available that would fit logically with Safeway in adjacent but not overlapping areas, including Pathmark."

The acquisition of Genuardi's would be Safeway's fifth in less than four years. Safeway acquired Vons Cos., Arcadia, Calif., in April 1997; Dominick's Finer Foods, Northlake, Ill., in November 1998; Carr-Gottstein Foods Co., Anchorage, Alaska, in April 1999; and Randall's Supermarkets, Houston, in September 1999.

The acquisition will give Safeway approximately 1,720 stores in 21 states and four western Canadian provinces.

According to Burd, Genuardi's has been on an aggressive building program, with 10 store sites in the pipeline, including seven locations set to open in 2001.

Genuardi said the Genuardi family approached Safeway "as part of a well-thought out strategy to secure its future and the future of our employees and the communities we serve.

"We looked at various alternatives and decided selling to Safeway was the best strategy for us at this time, and we're convinced that Safeway will make Genuardi's a better company."

He said Hank Mullany, the chain's executive vice president and chief operating officer, will become president of Safeway's Genuardi division once the sale is completed. Mullany, 42, has been with Genuardi's 12 years. He joined the company in 1988 as controller, was named vice president, finance, in 1991 and executive vice president and chief operating officer in 1996. He has been on Genuardi's board since 1990.