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Safeway And Stater Bros.
Approach Recession Differently

Jim Prevor’s Perishable Pundit, October 30, 2009

How to handle a recession is a very interesting business question. The Wall Street Journalran a piece by Timothy W. Martin, titled Safeway Shifts Tactics in Grocery Price War:

Safeway Inc. long banked on customers paying higher prices in return for top-notch fresh produce and upscale ambience in its Dominick’s, Vons, Tom Thumb and other supermarkets. Now the third-largest U.S. grocery chain by revenue says it is cutting prices to stop shoppers from going elsewhere.

It may be too little too late. The Pleasanton, Calif., chain Thursday reported its third straight quarter of declining sales at stores open at least a year as earnings slid 35% compared with a year ago.

Some analysts think the company is half-heartedly cutting prices while continuing to build and remodel stores that are monuments to better days.

Even after its discounts, its prices are still higher. Safeway’s prices are 10.7% higher than those of Kroger Co.’s, according to a September pricing study by J.P. Morgan, measuring identical baskets of 31 products.

Says Morgan Stanley retail analyst Mark Wiltamuth, “Safeway is on the wrong end of the trade-down occurring in grocery.”

Over the past six years, Safeway invested more than $8 billion upgrading its stores and adding exotic fresh produce and a bevy of prepared foods. Then the economy tumbled. Stung by high unemployment and economic uncertainty, many Safeway customers trimmed food budgets and left for less expensive grocers or warehouse clubs including Costco Wholesale Corp. Safeway’s embrace of olive bars and prepared foods were a turnoff to customers who took them as signs of extravagance.

Safeway Chief Executive Steve Burd declined an interview through a spokesman but told analysts last month that his strategy will be proven correct eventually. “When the business cycle returns to normal, we’ll be handsomely rewarded,” he said.

For now, Safeway’s paying a steep price for moving slowly. The company on Thursday posted fiscal third-quarter earnings of $128.8 million, or 31 cents a share, down from $199.7 million, for its fiscal-third quarter ended Sept. 12. Sales at stores open at least a year declined 3%, while overall revenue fell 7%, to $9.5 billion for the quarter.

Last month, Mr. Burd conceded had the chain moved quicker to lower prices, it would be “doing a bit better than we are now.”

It seems as if Steve Burd’s inclination is to stay upscale in the hope of maintaining its reputation. He is, in effect, saying that when this is all over, consumers will look to move upscale and Safeway wants to be there.

A contrasting attitude can be seen in this quote from the same article:

Stater Bros. Markets, a regional chain with 167 stores in southern California, lowered prices this summer on more than 6,000 items while sending employees to rival stores in search of discounts to match.

“We are scraping the bottom of the tank right now on prices,” Stater’s CEO Jack Brown said in a recent interview. “I’m not going to let somebody steal my customer, because when this (recession) is all over, I don’t want to go looking for my customer.”

So Jack Brown is basically saying that he wants to hold onto the customer and then, if the market changes and consumers start to want to go upscale, he will move upscale with them.

One never wants to underestimate Jack Brown but, with one caveat, we think Steve Burd has the better argument.

The problem with Jack Brown’s theory is that going upscale is not just a matter of carrying upscale merchandise… it is a matter of having an upscale reputation.

That is why Wal-Mart, try as it might, has a lot of trouble selling diamond engagement rings. The diamonds are nice, the price good, but the problem is they come from WalMart!

If food is a bit different, it is just a bit different, and all the issues of psychology and prestige, impressing neighbors, etc., come into play.

Of course, the article says that Safeway is now lowering prices:

In 2005, Mr. Burd told investors he wanted to brand his stores’ shopping experience “just as a consumer packaged goods company can brand a product.” The grocer invested in remodeling its 1,700-plus stores, installing softer lighting and painting ceilings and walls with earthy tones.

And during the economic boom it worked. Same-store sales grew steadily — from 1.5% to 4.5%, quarter-to-quarter — from 2005 through March 2008.

But, even as the economy began to sour, the chain fell behind rivals at lowering prices. By September 2008, same-store sales growth excluding fuel had slid to less than 1%; in the quarter ended June 20, same-store growth declined by 2.2% and September’s worsened.

Today, it’s trying to make up for lost time. In a Safeway-operated Dominick’s in Chicago, banners now proclaim, “Thousands of New Everyday Low Prices.” It promotes green bell peppers that have been marked down to 99 cents from $1.39. The price of a 10-pack of Capri Sun 100% grape juice was nearly halved, to $2.99 from its old price of $4.79.

On the front page of weekly ad circulars in Denver, Safeway stores tout “Dollar Deals!” like 79-cent brownie mix and 99-cent sausage links. Safeway’s Tom Thumb stores offer a weekend discount including five boxes of macaroni & cheese for $2.

The truth is that if your store is a brand, there are limits on what one can and should do. Otherwise the prestige will be gone when things turn around.

Of course, the problem with that strategy is that companies do not have infinite capital to wait for the cycle to turn, and executives at publicly held companies do not have infinite time before restless boards of directors and common shareholders force changes.

So the question is: Does a company like Safeway have enough staying power to stick to its brand positioning until things get better? The answer depends on how distant any turnaround is. Steve Burd thinks it is soon:

Mr. Burd is optimistic the boom days will return. He told analysts on Thursday the grocery giant is seeing signs of easing in the double-digit deflation in dairy and fresh produce. Shoppers are also showing signs of trading up, buying more lattes over coffee and purchasing more premium wines. “That suggests to me, we’re at or near the bottom of this whole thing,” Mr. Burd said.

Let us hope he’s right. Although, sometimes, the wish is father to the thought.

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