SAFEWAY'S ACQUISITION STRATEGY LACKS TOTAL SUCCESS

David Merrefield

A sluggish economy, price deflation, recalcitrant consumers and intense competitive pressures have all conspired to hand the food-distribution industry enough challenges to call into question many of its core fundamentals.

The veracity of that situation has been demonstrated in countless ways in recent months and various companies have stepped to the plate with new plans to deal with it. This time Safeway is at bat, as you'll see in a news article referenced on the front page of this week's issue.

Looking at the litany of Safeway's problems, perhaps the most unexpected is the new acknowledgement of difficulties Safeway has experienced with some of its acquisitions. Acquisitions as a source of trouble is surprising since Safeway has long been seen as the exemplar of seemingly successful buyout activities. Let's take a closer look.

Problems seem especially vivid at Genuardi's Family Markets, Norristown, Pa. Safeway has gone so far as to inaugurate an advertising campaign in local newspapers, offering an unusual apology. "Despite our best intentions, not all of the changes we've made recently have gone smoothly, and we're sorry if your Genuardi's experience was affected," says the ad copy.

Steve Burd, Safeway's top officer, blames some of Genuardi's problems on a wholesaler switch that led to stockouts during the transition. Safeway bought Genuardi's last year, at which time it was pulling product from Supervalu. Supply was changed later to C&S Wholesale Grocers. Burd says, "We're retooling and going after business [at Genuardi's]."

Meanwhile, in Houston, Safeway has been grappling with its Randalls acquisition of 1999. Burd says that Safeway lost some of the chain's renown sense of theater, which now must be restored in a bid to build business. It's being bruited about that Safeway may sell Randalls/Tom Thumb. Says Burd, "We believe we have a good chance of still being successful there, though it will require us to do things differently while the market rationalizes itself. We don't contemplate closing stores there."

Finally, in Chicago, the heat is being turned up on labor negotiations at Dominick's Finer Foods, which Safeway acquired in 1998. The union has authorized a strike, and Safeway has threatened to close the operation should one occur and to sell the chain if negotiations don't produce the lowered labor costs Safeway envisions.

So what does all this mean for the future of Safeway's longstanding acquisition strategy? "We've had successful integrations of Vons and Carrs, but we've struggled in other areas because of market conditions and distance from our main office [in California]," says Burd. "In the last couple of years, we've seen a lot of assets for sale, but we looked and said no. We have a lot to do with our own agenda, and while we're interested in acquisitions, we think the better way to go is to improve shareholder value with what we have over the next two to three years."

That's clear enough: These instances alone demonstrate that absorbing other chains is not the panacea it was once thought to be. Don't look for much more of it to occur soon, unless some real fire-sale prices are put on the table.