March 15, 2007
Safeway Looking to Buy
In the past, Safeway experienced some self-inflicted shrinking pains after acquiring supermarket chains in metro markets around Chicago, Dallas, Houston and Philadelphia. That has not deterred the company, which is now looking at the possibility of growing its store count through another acquisition, according to Reuters.
Safeway’s CFO Robert Edwards told attendees at a Bank of America conference the likelihood of an acquisition was made more likely by the amount of consolidation that has been taking place in the grocery business.
To be fair to Safeway, the chain has found a formula to help begin correcting many of the mistakes it made when it acquired chains including Randalls, Dominick’s Finer Foods and Genuardi’s. The company’s “Lifestyle” format has been heralded as a vital element of the company’s recent strong financial performance. Mr. Edwards said Safeway expects to have 300 “Lifestyle” stores in operation by the end of the year.
Discussion Questions: What do you think about Safeway looking to grow through acquisition? Has the company learned from past mistakes to avoid the problems it has experienced in other markets? What are the corrections that Safeway has made in other markets where it has acquired popular local chains?
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Safeway would do well to acquire. First, it would make THEM a takeover target in the mid-term and that ought to happen. The folks at Pleasanton really have no idea about the grocery business. Witness their latest effort in the organic foods arena. For Safeway, it’s just a quick ride on a hot pony. Their corporate commitment to serving food is way below their corporate commitment to profits at any cost and that my friends is a recipe for disaster. The customer base already has sensed a disconnect at Safeway, et al, and has responded by shopping elsewhere…in droves. Just note the SPINS and other Neilsen data.
Product sourcing has become the primary reason that Safeway, and many other larger chains, are becoming stagnant. Lack of variety on the shelves that customers demanded. Analyzing sales data streams led to DC’ing many brands and introducing ‘house’ branding and the public will not likely ever get used to that scenario.
Ergo, Safeway and others will feel a strong pinch and become targets for take-over or, victims. The grocery store chain industry is a rare beast and it does not appear that it can do well at more than a regional level. When one considers all of the mechanics involved in providing product to consumers, particularly fresh/raw products, it becomes apparent that the Great American Model For Business Nationwide is a poor fit. Witness the latest effort of importing foods from Chile and Peru. Picked waaay too early, ripen some during transport, rotten on the shelf.
Acquisition, expansion, profits? Not in this period of history. Safeway and all others face the same issues and in this arena for sure, the customer is king. They will, literally, bite the hand that’s trying to feed them!
Unlike Todd Belveal’s suggestion above, I believe it’s a wise move for Safeway to keep the Dominick’s name here in Chicago. I believe the only reason that Dominick’s is still alive under Safeway is because of the Dominick’s name.
Also, in disagreement with Todd’s opinion of making Safeway one banner across the USA, Jewel-Osco stores were recently bought by Supervalu and the change has been TRANSPARENT to the consumer. The Jewel stores still carry the same products, same management techniques, same marketing, same slogans…all without the corporate parent pushing their ways on the consumer. One can shop at Jewel now and experience the Jewel they have always known. And it shows in Jewel’s sales in Chicago…they are the market leader and their stores are busy and profitable, while Dominick’s is closing stores and developing new concepts to retain customers.
When will others in the retailing industry realize that consumers don’t like “dumbed” down operations to where everything is the same? Safeway creating one banner for the entire USA would be disastrous!
In regards to Safeway’s acquisitions in the USA, I strongly believe Indianapolis Marsh Supermarkets would be a great company to roll into the Safeway Lifestyle concept…of course under the Marsh name. This would only happen if the private equity company decides to sell Marsh. Conversely, I believe it would be disastrous if Safeway bought Spartan Stores. Spartan Stores are an extremely successful BIG player in Michigan and many Michiganders would not tolerate Safeway stomping into their familiar Spartan Store banners Glen’s, D&W Fresh Market, Family Fare and Harding’s Market.
Just an opinion, but I believe Safeway would be better served by growth from innovation than by acquisition.
There are probably only five or six sizable chains ($1 billion or more in sales) Safeway can target for acquisition, one less now that Pathmark is gone. Ingles and Harris Teeter in the South, Spartan Stores in the Midwest and DeMoulas and Big Y in New England are the right size and have stores that could be molded to the Lifestyle format. Problem is that DeMoulas and Big Y are privately held, Ingles and Harris Teeter are closely held by family/management and Spartan Stores still does half its business as a wholesaler. The company could go on a bit of a spree buying companies in the $250 million to $1 billion range, but the question becomes what will that result in–a marginally bigger company? The resources otherwise used for acquisition are better dedicated to fixing the problem units already owned by the company.
Well, it’s no secret Safeway had been Midas in reverse with just about all their acquisitions. Store numbers have been reduced along with a downward trend in sales and sales per square foot. For the most part, sales increases from these Lifestyles remodels still fall far short of the pre-Safeway sales volumes.
Safeway isn’t the only retailer to mishandle acquisitions. Look at A&P. Have they ever improved anything? Their track record is even worse. Albertsons fared no better with their acquisitions and was eventually forced to sell the company. Kroger and Delhaize have had their problems with acquisitions but to a lesser degree.
Perhaps the lessons to be learned is if you buy a successful group of stores, if they are not broke, don’t try to fix them. Still, Safeway needs to stay on the offensive. For example, in Dallas/Ft. Worth, the sun is setting on Albertsons and Minyards. If Safeway doesn’t take their best locations, HEB probably will and if HEB gets rolling in Dallas, all of Safeway’s remodel investments will go down the drain.
This is an interesting scenario! Safeway has a better format for future stores but I think any acquisition has to be a good fit demographically for the Lifestyle stores! I am not sure Safeway has the resources to manage yet another retailer if it does not match up to Lifestyle.
It goes without saying that each and every acquisition a company makes is a learning experience, and I am sure that is the case for Safeway’s leadership. That being said, integrating acquired companies both culturally and commercially is never easy, and it is difficult to say whether lessons learned from acquiring one regional grocer translate to another. If acquisitions were easy, there would be no hidden value to unlock in them.
Safeway does have an obligation to consider acquisitions as a way to deliver growth and build value for its shareholders, particularly in light of the cheaper currency they have available in the form of an outperforming stock price. That being said, working to integrate another banner at this time may add unnecessary complexity at a time when it might be more opportune to continue to focus on extracting the full value from past acquisitions. It is unclear whether or not Safeway has a well-defined strategy and plan for the companies it acquires, beyond the traditional measures such as cost-cutting and consolidation.
This may be out there, but perhaps Safeway might consider the example of Terry Lundgren’s strategy at Federated Stores and consider moving to a single, national banner. They might end up with a clearer consumer proposition nationally, a better experience, and fewer cultural issues across the organization.
Two thoughts: First, as much as I’ve criticized Safeway’s handling of acquisitions in the past, they’ve done as well as Yucaipa has, and SuperValu is not off to a great start with Albertsons (and Albertsons did poorly acquiring Lucky). There is no “model of perfection” in this sort of business move. Kroger, perhaps more than anybody, has set the standard.
Second, as I commented previously about KKR’s recent retail acquisitions, what’s being purchased is cash flow. That, and manufacturer influence. Don’t be fooled by speeches and sonnets about the customer benefits of consolidation. The more cash you have flowing through your hands, the better you do.
I agree with Peter; Safeway definitely lacks resources to manage another chain. I also don’t think they would change their ways if they took over another chain. When the NorCal Albertsons were purchased by Save Mart, the employees jumped with joy. Safeway will not have that same effect, and that’s a huge problem.
5 years ago, Safeway stock was $47. Today it’s $35. Yes, it was down around $18 in January of 2005, so investors obviously like the recent progress. But the track record hasn’t been very long. If Safeway can steal a decent chain at a low price, particularly one that owns its real estate, then an acquisition is a no-brainer. But it’s unlikely that investors will favor acquisitions that dilute Safeway’s earnings per share. In retailing, it doesn’t pay to be big. It pays to be profitable.
I agree with Dusty0 and Dr. Banks. Safeway is only in the grocery business for the “cash flow”; that much money goes along way in pleasing the share holders. They truly have no idea how to run a grocery store–and I do not believe that a grocery chain can be successful on a nation scale (especially with a national name). Grocery stores are about neighborhoods and customers–giving them what they want, and Safeway is not capable of that. The only people I hear talking up the “Lifestyle” stores is Safeway, I sure don’t hear competitors or for that matter manufacturers talking about what great stores these are. They lack variety, quality perishables and knowledgeable associates.
Here in Southern California, Vons is just the shell of the store it used to be–all the business and customers have moved on to other formats (Costco, Trader Joe’s, Henry’s Marketplace) and to regional operators like Stater Bros. All you have to do is drive around and see the empty store locations and the lack of cars in the parking lots of existing stores to see how poorly Safeway is doing in Southern California.
In a brief response to ‘omnisuperstore’: you may have misinterpreted my suggestion that Safeway convert to a single banner nationally. Not sure what the Safeway equity or awareness would be in Chicago or the broader Midwest would be for that matter, but it would be interesting to see. If the Dominick’s brand were that strong, then things would be better. Chicagoans appear to be voting with their wallets. Not to say that Safeway as the banner would make more sense, but it would certainly mitigate cultural issues associated with holding company strategy, and leverage a strong national platform. Just an option though, and it would be a risky one for certain, just like Federated’s transition to Macy’s.
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Safeway would do well to acquire. First, it would make THEM a takeover target in the mid-term and that ought to happen. The folks at Pleasanton really have no idea about the grocery business. Witness their latest effort in the organic foods arena. For Safeway, it’s just a quick ride on a hot pony. Their corporate commitment to serving food is way below their corporate commitment to profits at any cost and that my friends is a recipe for disaster. The customer base already has sensed a disconnect at Safeway, et al, and has responded by shopping elsewhere…in droves. Just note the SPINS and other Neilsen data.
Product sourcing has become the primary reason that Safeway, and many other larger chains, are becoming stagnant. Lack of variety on the shelves that customers demanded. Analyzing sales data streams led to DC’ing many brands and introducing ‘house’ branding and the public will not likely ever get used to that scenario.
Ergo, Safeway and others will feel a strong pinch and become targets for take-over or, victims. The grocery store chain industry is a rare beast and it does not appear that it can do well at more than a regional level. When one considers all of the mechanics involved in providing product to consumers, particularly fresh/raw products, it becomes apparent that the Great American Model For Business Nationwide is a poor fit. Witness the latest effort of importing foods from Chile and Peru. Picked waaay too early, ripen some during transport, rotten on the shelf.
Acquisition, expansion, profits? Not in this period of history. Safeway and all others face the same issues and in this arena for sure, the customer is king. They will, literally, bite the hand that’s trying to feed them!
Unlike Todd Belveal’s suggestion above, I believe it’s a wise move for Safeway to keep the Dominick’s name here in Chicago. I believe the only reason that Dominick’s is still alive under Safeway is because of the Dominick’s name.
Also, in disagreement with Todd’s opinion of making Safeway one banner across the USA, Jewel-Osco stores were recently bought by Supervalu and the change has been TRANSPARENT to the consumer. The Jewel stores still carry the same products, same management techniques, same marketing, same slogans…all without the corporate parent pushing their ways on the consumer. One can shop at Jewel now and experience the Jewel they have always known. And it shows in Jewel’s sales in Chicago…they are the market leader and their stores are busy and profitable, while Dominick’s is closing stores and developing new concepts to retain customers.
When will others in the retailing industry realize that consumers don’t like “dumbed” down operations to where everything is the same? Safeway creating one banner for the entire USA would be disastrous!
In regards to Safeway’s acquisitions in the USA, I strongly believe Indianapolis Marsh Supermarkets would be a great company to roll into the Safeway Lifestyle concept…of course under the Marsh name. This would only happen if the private equity company decides to sell Marsh. Conversely, I believe it would be disastrous if Safeway bought Spartan Stores. Spartan Stores are an extremely successful BIG player in Michigan and many Michiganders would not tolerate Safeway stomping into their familiar Spartan Store banners Glen’s, D&W Fresh Market, Family Fare and Harding’s Market.
Just an opinion, but I believe Safeway would be better served by growth from innovation than by acquisition.
There are probably only five or six sizable chains ($1 billion or more in sales) Safeway can target for acquisition, one less now that Pathmark is gone. Ingles and Harris Teeter in the South, Spartan Stores in the Midwest and DeMoulas and Big Y in New England are the right size and have stores that could be molded to the Lifestyle format. Problem is that DeMoulas and Big Y are privately held, Ingles and Harris Teeter are closely held by family/management and Spartan Stores still does half its business as a wholesaler. The company could go on a bit of a spree buying companies in the $250 million to $1 billion range, but the question becomes what will that result in–a marginally bigger company? The resources otherwise used for acquisition are better dedicated to fixing the problem units already owned by the company.
Well, it’s no secret Safeway had been Midas in reverse with just about all their acquisitions. Store numbers have been reduced along with a downward trend in sales and sales per square foot. For the most part, sales increases from these Lifestyles remodels still fall far short of the pre-Safeway sales volumes.
Safeway isn’t the only retailer to mishandle acquisitions. Look at A&P. Have they ever improved anything? Their track record is even worse. Albertsons fared no better with their acquisitions and was eventually forced to sell the company. Kroger and Delhaize have had their problems with acquisitions but to a lesser degree.
Perhaps the lessons to be learned is if you buy a successful group of stores, if they are not broke, don’t try to fix them. Still, Safeway needs to stay on the offensive. For example, in Dallas/Ft. Worth, the sun is setting on Albertsons and Minyards. If Safeway doesn’t take their best locations, HEB probably will and if HEB gets rolling in Dallas, all of Safeway’s remodel investments will go down the drain.
This is an interesting scenario! Safeway has a better format for future stores but I think any acquisition has to be a good fit demographically for the Lifestyle stores! I am not sure Safeway has the resources to manage yet another retailer if it does not match up to Lifestyle.
It goes without saying that each and every acquisition a company makes is a learning experience, and I am sure that is the case for Safeway’s leadership. That being said, integrating acquired companies both culturally and commercially is never easy, and it is difficult to say whether lessons learned from acquiring one regional grocer translate to another. If acquisitions were easy, there would be no hidden value to unlock in them.
Safeway does have an obligation to consider acquisitions as a way to deliver growth and build value for its shareholders, particularly in light of the cheaper currency they have available in the form of an outperforming stock price. That being said, working to integrate another banner at this time may add unnecessary complexity at a time when it might be more opportune to continue to focus on extracting the full value from past acquisitions. It is unclear whether or not Safeway has a well-defined strategy and plan for the companies it acquires, beyond the traditional measures such as cost-cutting and consolidation.
This may be out there, but perhaps Safeway might consider the example of Terry Lundgren’s strategy at Federated Stores and consider moving to a single, national banner. They might end up with a clearer consumer proposition nationally, a better experience, and fewer cultural issues across the organization.
Two thoughts: First, as much as I’ve criticized Safeway’s handling of acquisitions in the past, they’ve done as well as Yucaipa has, and SuperValu is not off to a great start with Albertsons (and Albertsons did poorly acquiring Lucky). There is no “model of perfection” in this sort of business move. Kroger, perhaps more than anybody, has set the standard.
Second, as I commented previously about KKR’s recent retail acquisitions, what’s being purchased is cash flow. That, and manufacturer influence. Don’t be fooled by speeches and sonnets about the customer benefits of consolidation. The more cash you have flowing through your hands, the better you do.
I agree with Peter; Safeway definitely lacks resources to manage another chain. I also don’t think they would change their ways if they took over another chain. When the NorCal Albertsons were purchased by Save Mart, the employees jumped with joy. Safeway will not have that same effect, and that’s a huge problem.
5 years ago, Safeway stock was $47. Today it’s $35. Yes, it was down around $18 in January of 2005, so investors obviously like the recent progress. But the track record hasn’t been very long. If Safeway can steal a decent chain at a low price, particularly one that owns its real estate, then an acquisition is a no-brainer. But it’s unlikely that investors will favor acquisitions that dilute Safeway’s earnings per share. In retailing, it doesn’t pay to be big. It pays to be profitable.
I agree with Dusty0 and Dr. Banks. Safeway is only in the grocery business for the “cash flow”; that much money goes along way in pleasing the share holders. They truly have no idea how to run a grocery store–and I do not believe that a grocery chain can be successful on a nation scale (especially with a national name). Grocery stores are about neighborhoods and customers–giving them what they want, and Safeway is not capable of that. The only people I hear talking up the “Lifestyle” stores is Safeway, I sure don’t hear competitors or for that matter manufacturers talking about what great stores these are. They lack variety, quality perishables and knowledgeable associates.
Here in Southern California, Vons is just the shell of the store it used to be–all the business and customers have moved on to other formats (Costco, Trader Joe’s, Henry’s Marketplace) and to regional operators like Stater Bros. All you have to do is drive around and see the empty store locations and the lack of cars in the parking lots of existing stores to see how poorly Safeway is doing in Southern California.
In a brief response to ‘omnisuperstore’: you may have misinterpreted my suggestion that Safeway convert to a single banner nationally. Not sure what the Safeway equity or awareness would be in Chicago or the broader Midwest would be for that matter, but it would be interesting to see. If the Dominick’s brand were that strong, then things would be better. Chicagoans appear to be voting with their wallets. Not to say that Safeway as the banner would make more sense, but it would certainly mitigate cultural issues associated with holding company strategy, and leverage a strong national platform. Just an option though, and it would be a risky one for certain, just like Federated’s transition to Macy’s.