Private Label and Cost Reductions Return Safeway to Profit

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March 1, 2011

A heavy focus on private label and price cuts helped Safeway return to profit in the fourth quarter, beating Wall Street estimates.

The 1,694-store operator reported net income of $229.6 million for the quarter ended Jan. 1, compared to a year-earlier loss of $1.61 billion in the same period, which the company attributed to its “reduced market capitalization and a weak economy.”

Safeway also posted a 1 percent revenue gain in the fourth quarter to $12.8 billion, compared to $12.7 billion in the fourth quarter of 2009.

"We are pleased with the improving trends in sales in 2010, driven by our price reductions, reinvigorated private label brands and targeted marketing. These trends have continued into the first quarter of 2011," said Steve Burd, chairman, CEO and president of the Pleasanton, Calif.-based grocery chain. "We are also encouraged by the results of our efforts to achieve cost reduction, especially in shrink and store-level efficiencies, as well as our strong annual free cash flow."

Admitting during its quarterly conference call with investors that it feels some cost pressure in private label, Burd noted the company doesn’t expect any “margin squeeze. We had a brief period of time during 2010 where we actually made a bit more-than-normal margins in private label, but private label margins are sort of back to normalcy right now. Your margin would run about 1,000 basis points higher than it would be on a national brand, and we don't see that diminishing even with cost inflation.”

Answering a question about growth of its store brands, Burd said it “continues to grow at a pace much stronger than national brand. And not as strong as it was maybe a year ago, but it's more than 500 basis points stronger than national brand growth.

Burd pointed to the company’s strategy of developing store brands – such as it brand new Open Nature, O Organics and Eating Right -- that cut across commodity groups so that sales will be stable in good and bad economic times. “We’re creating some unique brands that really cut across business cycles, and they will do well in good times and in bad, Burd said.

SBD Views: Looks to me like Safeway is gaining momentum with their store brands portfolio. They appear to have a model in place that is working well across numerous product categories and multiple retail banners. -- John Failla for Store Brands Decisions

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