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Safeway (SWY)Stock (Food Industry, Grocery Stores Industry, Retail Industry)
Safeway (NYSE:SWY) is the nation's third largest retail grocery chain, operating more than 1,750 stores in North America. Currently, Safeway holds a 7.1% market share for retail grocers and faces stiff competition from top competitors, such as Wal-Mart and Kroger. In 2007, Safeway generated $42.3 billion in revenue and $888 million in net income. In recent years, Safeway faced challenges when the chain quickly expanded its number of stores. The rapid expansion caused great financial strain and ultimately forced the company to sell many of its stores. Currently, Safeway is focusing its efforts on renovation. In 2003, Safeway repositioned its branding to compete with higher-end grocery stores, such as the Whole Foods Market. The new branding format, which the company calls "Lifestyle," includes refurbished decor and new uniforms for employees and more premium products to customers. Revenue from Safeway's wholly owned subsidiary Blackhawk Network, the industry leader in pre-paid third party gift cards, has grown exponentially over the last few years. While only contributing a small percentage to Safeway's total revenue, the Blackhawk Network is hugely profitable, and without a significant competitor, is expected to continue its rapid growth in the near term. As a large retail grocer, Safeway faces competition from similar chains, local stores, and niche stores, such as Whole Foods and Kroger. Wal-Mart, however, represents the most significant long term threat to the firm's continued growth. Wal-Mart sells a wide variety of goods ranging from apparel to groceries. Because of its tremendous scale, the retailer is often able to offer below-market prices to its customers. Even if Safeway is able to compete in a lower price environment it is almost certain that doing so would eat into profits. To date, Safeway has been sheltered from the Wal-Mart effect given its predominanly west coast locations. As the super-retailer invests more resources in beefing up its West coast presence, Safeway may very well feel the pinch.
[edit] History and Business Overview  The name Safeway was born out of the 1926 merger of Skaggs Stores and Sam Seelig Company. Initially, stores were primarily located in the western United States but rapidly expanded domestically and internationally. Due to a tremendous debt in the 1980's, Safeway had to sell its international stores and a small percentage of domestic stores, leaving the company with its initial base within the western United States (though including Washington D.C.). In the 1990's, Safeway again began to aggresively pursue new markets, buying grocery chains in Texas, Alaska, Illinois, Pennsylvania, New Jersey, and Delaware. Expansion has always been a priority for Safeway, reaching a total of 3,527 stores in 1931. At the end of 2006, Safeway operated 1,761 stores. In 2001, Safeway launched its Blackhawk Network, a subsidiary which primarily provides third-party prepaid gift cards. Companies represented by Blackhawk Network include: Barnes & Noble, Chili's Grill and Bar, Sears, and Home Depot. In 2006, Blackhawk earned $50 million in profit, which is only 7% of Safeway's overall profit. But with its rapid growth, Blackhawk Network can become a more significant source of revenue for Safeway. In 2003, Safeway tried to differentiate itself from competitors by renovating stores in a new "Lifestyle" format. These renovated stores were meant to be more inviting to customers, build brand loyalty, and reflect the company's new slogan, "Ingredients for Life." Safeway continues to make progress in its remodeling of old stores to the "Lifestyle" format: in the latest quarter the company reported that 53% of its total store count or, 915 stores, were in the lifestyle format. [edit] Same Store SalesSame Store Sales are defined as the increase or decrease in sales for stores that have been in operation for one year or more. Same store sales is a measure of performance used in many industries, and are a measure of how well a brand is performing over an extended period of time. Below is a chart showing Safeway's Same Store Sales growth over the last five years. After a couple years of moderate losses, the Same Store Sales rebounded coinciding with the implementation of Safeway's Lifestyle format.  Source: 2006 Safeway Annual Report [edit] Trends and Forces[edit] The Wal-Mart EffectWal-Mart is the greatest external force affecting any grocer. The behemoth is a dominant presence in 89 of the 100 major MSAs. An MSA or metropolitan Statistical Area can best be thought of an extended metropolitan area. Although Wal-Mart's same store comp sales have been slowing over the last few years, it has continued to steal market share from every major grocer in each of the markets in which it has significant presence (almost all of them). Safeway, is no exception in that it has loss market share to Wal-Mart in the markets in which it competes. Safeway is, however, somewhat sheltered from Wal-Mart given its relatively more upscale focus and its geographical distribution. Safeway is a predominantly west coast chain. As a result Safeway has only a 24% overlap with Wal-Mart when compared to chains like Kroger which are closer to 70%. In the long-term Wal-Mart is expected to continue its expansion into the urban centers of the west coast and has begun experimenting with higher end products and store formats. It poses the most significant long term threat to Safeway's continued profitability. [edit] Growth of Blackhawk NetworkThe Blackhawk Network is a wholly owned subsidiary of Safeway whose primary means of revenue is prepaid third-party gift cards. Blackhawk is the largest such provider of these cards, with USD 50 million in card sale commisions in 2006. The Blackhawk gift cards are sold in over 60,000 stores nationwide (and recently in the United Kingdom), in addition to the cards sold in Safeways. The Blackhawk Network produces revenue for Safeway in three ways. First, Blackhawk receives a half of the 6% sales commision for distributing the gift cards. Second, Safeway receives a 3% commission for carrying the cards in-store; however, since Safeway is the parent company of Blackhawk, the company pockets the full 6% commission. For cards carried in other stores, those stores receive a 3% commission, while Blackhawk receives the other half. Finally, Blackhawk earns interest on the full value of the card during the time before revenue is distributed to the appropriate third party. Based on 5% interest and a one week holding period, the interest--though a negligible amount-- will earn Blackhawk Network up to USD 3 million in 2007. As the industry leader in gift cards, Blackhawk has enjoyed a 90% growth in commission revenues for each of the last two years. However, the subsidiary has yet to be challenged by a strong competitor. Its exponential success will almost certainly encourage other companies to enter the third-party gift card market. The future success of Blackhawk will depend on how the company continues to foster this growth while confronting the difficulties posed by anticipated competition. [edit] Success of Private Brands and Lifestyle FormatSafeway has had a battery of private labels over the last decade. Their primary private label is Safeway Select, which is now earmarked for premium products to complement the "Lifestyle" format. Other Safeway private labels include: Lucerne for dairy products, Primo Taglio for deli products, and, introduced in 2006, O Organics for organically grown and processed products. In addition to offering higher quality products, the "Lifestyle" stores are featuring more of Safeway's private labels and have had success with the brands. For example, O Organics earned USD 150 million in its first year. If the "Lifestyle" format continues to be successful, it will not only increase sales, but it will also increase sales of its own products. Recently, Safeway added fueling stations to some of its locations, offering discounted fuel in exchange for purchases of USD 50 or more from its stores. Though only serving a small portion of stores and contributing a small percentage of revenue, the addition of gas stations leaves the company more vulnerable to fluctuations in oil prices. [edit] Labor StabilityA significant portion of Safeway's workforce is unionized In 2003, Safeway endured a strike from its workers in Southern California, which is regarded as a very important region for the chain. 312 stores are located there. The strike lasted four months and reverberated throughout the entire chain. Lost revenues from the Southern California stores increased prices in other regions. With 207,000 employees, labor relations remains a core issue for Safeway. If future contract negotiations result in prolonged work stoppages or high labor costs, Safeway may lose customer loyalty and a significant amount of revenue. [edit] CompetitionAs a retail grocer, Safeway faces its stiffest competition from other industry giants, such as, Kroger Company (KR) , SuperValu (SVU) , and Wal-Mart Stores (WMT). In addition to these stores, Safeway faces competition from smaller neighborhood stores and niche stores (i.e. Whole Foods). Since Safeway does not have a significant market share, it must focus on differentiating itself and creating a market niche. Additionally, Safeway's large number of Southern California stores will face additional competition from Tesco stores, which debut in 2007.
 Safeway2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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