December 9, 2008
Safeway to Develop New Business Opportunities
Dan Hyman, president
of Millennium Properties, told the Chicago Sun-Times that it makes
perfect sense for Safeway to move into retail site development. His question
was, "What took them so long?"
Safeway has decided that
the timing and prices are right for it to develop its own shopping center
projects where it would anchor the development and then lease or sell space
surrounding new stores.
"The
opportunities [to develop undervalued real estate] are pretty extraordinary
right now for people who can step up to the table," Steve Burd, president,
chief executive and chairman of Safeway, told analysts at the company’s
headquarters. "We have 36 projects under [review] with very little
capital investment at this point."
Safeway’s
balance sheet puts it in a position to develop properties. Mr. Burd, according to Reuters, described
the company’s finances as being in "absolutely
terrific shape." The company expects to have cut its debt from $5.7
billion in 2007 to $5.4 billion this year. It also expects to nearly double
its free cash flow in fiscal 2009.
Discussion Questions:
What do you think of Safeway’s decision to begin developing shopping
centers at this point-in-time? Why do you think it "took them so
long" to take this step?
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Lets see…easy pick’ns for a while, but then the segment will require deep expertise and arm’s-length decisions. Replace the name Safeway with Sears and replace real estate development with financial services and then go read the postmortems. It would seem there are opportunities in the core business when in tough times Safeway is at 63% of its 52 week high while competitors Walmart and Kroger are at 88% and 81% respectively.
I wonder what they think their ‘core’ business is?
If Safeway has the cash, it’s a great time to get great deals on real estate. Real estate acquisition should be done with care to ensure that the right land/properties are purchased to enable long-term growth.
Several weeks ago I commented on the idea about Target spinning off its real estate holdings. My comment was that they were not in the real estate business and spinning off the real estate holdings would enhance total shareholder value.
My opinion hasn’t changed, however, I believe Safeway is making an opportunistic bushiness decision by developing UNDERVALUED real estate. They have the cash to do it. They minimize the risk by being their own anchor. The competition for real estate development is the lowest it has been in the last ten years, so they can cherry pick the properties they want.
I contend, however, that real estate isn’t their business and they know it. Thirty-six properties is a relatively small number. I predict that ultimately, whether it is 36 properties or several hundred, they will sell those properties to real estate operators when the property values rebound. To me, this is a low risk, high reward opportunity to provide shareholder returns that outpace the basic industry business proposition.
Most retailers have been shy about real estate development as a strategy. But if you look at where the value exists for many older retailers, it is in–surprise–the real estate. If you have the cash and can bring in the core competency of developing real estate it could be a nice hedge against those down years when others would like to take over your company to develop the real estate. Of course, this isn’t something for the faint of heart and real estate development usually takes a very different mindset from retail development and management.
If you have cash and cash flow, and sustainability for the next 25 years, it would be a great cash cow…They are just reducing their rental rate. Walmart was able to create their own destination.
Safeway may do the same.
Supermarkets still believe they are immune to the impact of the Internet. They still believe that somehow the nature of the products they offer will continue to bring people to their stores. I believe that supermarket retailers have to turn their heads and look to their “other customers,” the manufacturers and suppliers, to see how they can keep themselves relevant. If manufacturers and suppliers find cheaper and more effective ways of reaching consumers they will happily abandon the “pay to stay,” “bleed them for all you can,” “more for less” environment of the supermarket channel.
For this reason, I think supermarket operators are smart to build their own retail environment that makes them the focal point of a variety of services that bring consumers to them. This means combining supermarkets with services like cleaners, small office buildings for doctors and dentists, gyms, etc. By making their location relevant on a number of fronts, the supermarket operator can say to manufacturers and suppliers that they are able to reach consumers and potential new customers in ways that are impossible over the Internet by offering sampling events or ad-hoc discounts that both attract and motivate consumers.
Could Safeway accomplish this without becoming a developer? Probably, but it is a lot easier the other way.
Probably a good idea. Safeway has been all about numbers the past few years and not about execution at store level. Steve Burd was recently inducted in the Supermarket News Hall of Fame, not for being a great retailer but mostly for his financial accomplishments. He seems to have improved all the right ratios, made some health care initiatives, and developed a big gift card business.
While running grocery stores is their core business, it’s really not what they do best. So I see this as a positive move that will help overshadow their shortcomings as a retailer. Other grocers have done this too, like Weis Markets. They have done real well being a landlord. Remember Weingarten stores in Houston? Those stores have since disappeared (selling to Safeway years ago) and now have become a very successful REIT.
Over the time I’ve been participating here, a constant theme has been that for some chains–or maybe just Sears/Kmart?–the game was no longer about products and services but instead about real estate.
I would think that strategy would be biting those chains in the gluteus maximus about now. But while St. Louis is horrendously overbuilt in commercial real estate, apparently the commercial market is substantially better around the country.
So where Safeway’s concerned, if the strategy is to find the bottom of the market, pick up existing centers at near-fire-sale prices and redevelop them based on a solid sense of consumer wants and needs (research anyone?) that could work.
What I would NOT do is any new construction–at least, not for the next four to five years, until we see vacancy rates stabilize.
And, back to my original point, if Safeway gets distracted by real estate the way it looks to me that Sears/Kmart has, and Safeway loses sight of the retail customer’s needs, both sides of the business will suffer.
A while back I did a study of American retail companies founded over 100 years ago, and still in business. What was the single common thread to their longevity? Not management. Not employee ownership or public ownership or private ownership. Not expansion. Not market share. Not category. Not systems and procedures. Not culture. Not creativity. Only one common thread: they owned their locations. Safeway should’ve gone into real estate ownership long ago. As successful as it is today, what would its financials look like if it owned the locations it took in the 1950s, 1960s, 1970s, and 1980s?
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Lets see…easy pick’ns for a while, but then the segment will require deep expertise and arm’s-length decisions. Replace the name Safeway with Sears and replace real estate development with financial services and then go read the postmortems. It would seem there are opportunities in the core business when in tough times Safeway is at 63% of its 52 week high while competitors Walmart and Kroger are at 88% and 81% respectively.
I wonder what they think their ‘core’ business is?
If Safeway has the cash, it’s a great time to get great deals on real estate. Real estate acquisition should be done with care to ensure that the right land/properties are purchased to enable long-term growth.
Several weeks ago I commented on the idea about Target spinning off its real estate holdings. My comment was that they were not in the real estate business and spinning off the real estate holdings would enhance total shareholder value.
My opinion hasn’t changed, however, I believe Safeway is making an opportunistic bushiness decision by developing UNDERVALUED real estate. They have the cash to do it. They minimize the risk by being their own anchor. The competition for real estate development is the lowest it has been in the last ten years, so they can cherry pick the properties they want.
I contend, however, that real estate isn’t their business and they know it. Thirty-six properties is a relatively small number. I predict that ultimately, whether it is 36 properties or several hundred, they will sell those properties to real estate operators when the property values rebound. To me, this is a low risk, high reward opportunity to provide shareholder returns that outpace the basic industry business proposition.
Most retailers have been shy about real estate development as a strategy. But if you look at where the value exists for many older retailers, it is in–surprise–the real estate. If you have the cash and can bring in the core competency of developing real estate it could be a nice hedge against those down years when others would like to take over your company to develop the real estate. Of course, this isn’t something for the faint of heart and real estate development usually takes a very different mindset from retail development and management.
If you have cash and cash flow, and sustainability for the next 25 years, it would be a great cash cow…They are just reducing their rental rate. Walmart was able to create their own destination.
Safeway may do the same.
Supermarkets still believe they are immune to the impact of the Internet. They still believe that somehow the nature of the products they offer will continue to bring people to their stores. I believe that supermarket retailers have to turn their heads and look to their “other customers,” the manufacturers and suppliers, to see how they can keep themselves relevant. If manufacturers and suppliers find cheaper and more effective ways of reaching consumers they will happily abandon the “pay to stay,” “bleed them for all you can,” “more for less” environment of the supermarket channel.
For this reason, I think supermarket operators are smart to build their own retail environment that makes them the focal point of a variety of services that bring consumers to them. This means combining supermarkets with services like cleaners, small office buildings for doctors and dentists, gyms, etc. By making their location relevant on a number of fronts, the supermarket operator can say to manufacturers and suppliers that they are able to reach consumers and potential new customers in ways that are impossible over the Internet by offering sampling events or ad-hoc discounts that both attract and motivate consumers.
Could Safeway accomplish this without becoming a developer? Probably, but it is a lot easier the other way.
Probably a good idea. Safeway has been all about numbers the past few years and not about execution at store level. Steve Burd was recently inducted in the Supermarket News Hall of Fame, not for being a great retailer but mostly for his financial accomplishments. He seems to have improved all the right ratios, made some health care initiatives, and developed a big gift card business.
While running grocery stores is their core business, it’s really not what they do best. So I see this as a positive move that will help overshadow their shortcomings as a retailer. Other grocers have done this too, like Weis Markets. They have done real well being a landlord. Remember Weingarten stores in Houston? Those stores have since disappeared (selling to Safeway years ago) and now have become a very successful REIT.
Over the time I’ve been participating here, a constant theme has been that for some chains–or maybe just Sears/Kmart?–the game was no longer about products and services but instead about real estate.
I would think that strategy would be biting those chains in the gluteus maximus about now. But while St. Louis is horrendously overbuilt in commercial real estate, apparently the commercial market is substantially better around the country.
So where Safeway’s concerned, if the strategy is to find the bottom of the market, pick up existing centers at near-fire-sale prices and redevelop them based on a solid sense of consumer wants and needs (research anyone?) that could work.
What I would NOT do is any new construction–at least, not for the next four to five years, until we see vacancy rates stabilize.
And, back to my original point, if Safeway gets distracted by real estate the way it looks to me that Sears/Kmart has, and Safeway loses sight of the retail customer’s needs, both sides of the business will suffer.
A while back I did a study of American retail companies founded over 100 years ago, and still in business. What was the single common thread to their longevity? Not management. Not employee ownership or public ownership or private ownership. Not expansion. Not market share. Not category. Not systems and procedures. Not culture. Not creativity. Only one common thread: they owned their locations. Safeway should’ve gone into real estate ownership long ago. As successful as it is today, what would its financials look like if it owned the locations it took in the 1950s, 1960s, 1970s, and 1980s?