SAFEWAY: TOUGH YEAR AHEAD ON LABOR FRONT

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said last week the time to take a stand on escalating labor costs is now.

With the strike against its Southern California stores moving into its ninth week and employees in Chicago, Phoenix and Saskatchewan working without contracts, Safeway acknowledged it faces a tough year ahead, with agreements due to expire in 2004 in its eastern division in March, Seattle in May, part of Northern California in July, and the rest of Northern California, along with Denver, Fresno and Las Vegas, in September.

"So if you think we're busy now, 2004 will be a very busy year," Laree Renda, executive vice president, told the chain's annual investor conference here last week.

In terms of dealing with the challenges posed by the growth of nonunion operators, Renda said. "It's not too late. This is the time to take action, not after all the business goes away. All markets are vulnerable, and while it's almost too late, the timing is nearly perfect [for dealing with those challenges]."

According to Renda, Safeway's efforts to restructure labor costs have been successful over the last couple of years in 40% of its markets, "but we still have a lot of work to do. And while we don't like strikes, sometimes there's no reasonable alternative than to take a strike."

Steve Burd, chairman, president and chief executive officer, said Safeway plans to boost capital spending in 2004 -- from $1.1 billion to $1.2 billion in 2003 to $1.1 billion to $1.3 billion -- "with the possibility of exceeding that a bit," he added.

Byrd said the budget plan calls for approximately 45 new stores, 105 major remodels and 60 minor remodels, "but if the remodels work as well as we expect, then we could change the spending mix from 20% for remodels up to 40% or 50% of store dollars."

In other comments made during the conference:

Burd said Safeway's 2004 earnings per share could come in at $1.95 to $2.03, excluding the impact of the Southern California strike, compared with consensus estimates of $2.05 per share.

He said identical-store sales for the fourth quarter ended Nov. 29, excluding the struck Vons stores, rose 0.4%. Excluding the chain's Dominick's stores in Chicago, which had been temporarily discontinued, identical-store sales increased 0.9%, and excluding the effect of fuel sales, identical-store sales dropped 1.2%.

Burd estimated that free cash flow in 2004 will be in the range of $700 million to $900 million.