Safeway Rebuilds Sales in One Category by Refocusing on National Brands

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May 3, 2011

Although Safeway’s private label products outpace national brands in terms of growth and profit margins, the grocer has rebalanced one large category in favor of national brands to improve performance.

During a quarterly conference call with analysts, Chairman, President and CEO Steven Burd said the company’s sales and profits were challenged in one large category -- which he declined to disclose -- because it had become too private label focused.

“…we elected to actually make a shift and build sales volume by concentrating more on branded products in this category versus private label, [because] we thought we'd gotten a little imbalanced there,” Burd said. “And as I think you all know, the margins in private label are stronger than they are in national brands.”

When asked to identify the large category in question, Burd declined, but said: “I can't think of another category that we had any plans of doing that with. And the turnaround in sales of the category has been nothing short of dramatic. We went from a category that was near double-digit declines to a category that now has positive sales. We'd just taken the category too far in the direction of private label. We're also doing some things from a merchandising standpoint in several categories that will further enhance our sales of both national brand and private label. So don't think I expect private label sales to outgrow national brand sales. I don't know. I see that happening for years to come, quite frankly.”

Burd also noted he is pleased with the company’s Open Nature private label roll out, for which he has high hopes. Sales “continue to build. We will be adding SKUs as we move through the year. Every indication is that we would beat those. I think that Open Nature will end up being a brand of equivalent size as Eating Right and O Organic.”

For the quarter ended March 26, Safeway posted sales of $9,8 billion, up 4.8 percent. Same-store-sales, excluding fuel sales, increased 0.4 percent. Net income for the quarter was $25.1 million, a 74 percent decline due to a tax charge of $80.2 million to repatriate $1.1 billion from the company's wholly owned Canadian subsidiary, which was previously announced. Adjusted net income, excluding the charge, was $105.3 million, a 9.7 percent increase.

"Our first quarter results are in line with our expectations, and we are pleased with our improving sales trends," said Burd. "Identical-store sales, excluding fuel, improved for the fifth consecutive quarter and are now positive. We are successfully passing cost inflation along at retail, while making appropriate price adjustments to remain competitive."

SBD Views: Safeway’s move to rebalance the mix of store brands and national brands with positive results in this category provides further evidence that the role of store brands needs to be carefully evaluated and monitored on a category by category basis. Safeway’s ability to make the adjustment is testimony to their focus on doing what makes the most business sense.-- John Failla for Store Brands Decisions

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