Safeway’s Operations Put It at Top of Food Chain

Steven Burd began his career in the railroad industry and as a management consultant, but he keeps proving he was born to be in the supermarket business.

For the last seven years, Burd has been running Safeway Inc., and running it well.

The chain’s earnings, profit margins and stock price have all grown at a rapid clip despite the supermarket industry’s reputation for skimpy margins, hard-to-control operating costs and ferocious competition.

And this year, when “dot-com” and other technology stocks have been whacked, Safeway’s strong, dependable performance and rock-solid industry--everyone has to eat, right?--is just the alternative investors wanted.

Safeway’s stock, which soared during most of the 1990s as Burd’s management style took hold throughout the chain, has jumped another 67% this year.

That has added a whopping $10 billion to the company’s overall market value.

The stock (ticker symbol: SWY) closed Friday at $59.88 on the New York Stock Exchange.

Safeway’s spurt outpaces the 40% gain in the stock price of the nation’s largest grocer, Kroger Co., which bought Ralphs Grocery last year. And it’s far better than struggling Albertson’s Inc., which acquired Lucky grocery and Sav-On drugstores in 1998, and whose stock has tumbled 22% this year.

In addition, Safeway’s same-store sales--those of stores open at least a year, and retailing’s main gauge because it excludes stores that have been closed or newly opened--rose 4.9% in the firm’s fiscal third quarter ended Sept. 9.

That’s compared with Kroger’s 1.9% gain for its grocery stores in its quarter ended Nov. 4.

All of which makes Safeway the “best of the breed,” Morgan Stanley Dean Witter analyst Debra Levin declared in a recent report. The Pleasanton, Calif.-based chain “is a superb operator with excellent growth prospects,” Levin said.

Burd, Safeway’s chairman and chief executive, oversees an empire of nearly 1,700 stores in the United States and Canada. They operate not only under the Safeway name but also Vons (which it bought in 1997), Pavilions, Dominick’s and Carrs, among others.

Safeway’s biggest presence remains in California, with more than 500 stores. Its markets north of Fresno are Safeways, with Vons and Pavilions to the south.

Fastidious about the smallest details, Burd infuses Safeway with an attention to costs that enables the chain to cut its prices as low as any competitor. That in turn boosts sales and allows for more of those sales to drop to the bottom line.

The cost-cutting has ranged from the enormous to the mundane--stories abound about how Burd, 51, has saved money by changing everything from Safeway’s salad bars to the ribbons sold in its florist departments. But for a company whose annual sales exceed $30 billion, even meager cost savings can translate into millions of dollars of extra profit.

Burd, however, keeps many of his specific moves to himself, for competitive reasons.

“We don’t provide a lot of detail about what we’ve done, because everyone wants to emulate us,” he said.

“There aren’t a lot of edges in this business, so we don’t get into specifics.”

And just as other big chains have bought rivals in recent years, Safeway bought Vons and some other regional chains in the late-1990s for the heft to extract more-favorable prices from food makers and other suppliers.

And earlier this month, Safeway agreed to buy the 36-store Pennsylvania-based Genuardi’s Family Markets Inc. for an undisclosed price to bolster its presence in the East.

But Safeway has focused on smaller acquisitions than many of its peers, because it’s easier to spread its management practices across those companies than across another giant chain.

Safeway’s acquisitions have been deft for another reason, said analyst Steven Chick of J.P. Morgan Securities.

Safeway tends to buy chains that are often in urban areas where it’s less likely that nearby there’s a gigantic Wal-Mart--whose “supercenter” stores with grocery aisles are becoming one of the supermarket industry’s toughest rivals, he said.

“I don’t think it’s a coincidence that Safeway is the most profitable food retailer and the one with the least amount of Wal-Mart exposure geographically,” he said.

Chick estimates about 6% of Safeway’s stores are close to Wal-Mart supercenters, whereas Kroger’s exposure is more than 30% and Albertson’s is above 20%.

Burd, who has a master’s degree in economics, also centralized purchasing centers at each of Safeway’s separate divisions, shaving millions of dollars in costs for buying supplies such as plastic carry-out bags.

And like other chains, Safeway has put more of its own private-label items on its shelves, because those items carry higher profit margins than those purchased from outside vendors.

He has also urged Safeway’s work force to put more emphasis on customer service, though that hasn’t always gone smoothly because Safeway has a history of periodic labor disputes with various groups of its 200,000 employees.

Safeway also has done a better job than many rivals of rapidly integrating its newly acquired chains into its overall system, so that all of its stores are enjoying “quick, centralized procurement [of supplies] and inventory control,” Chick said.

The result: In the quarter ended Sept. 9, Safeway earned $270 million on sales of $7.5 billion--a bigger profit than No. 1 Kroger earned in its third quarter even though Kroger had $3.5 billion more in sales for the three months.

It wasn’t always so.

In the early 1990s, Safeway languished under a heavy debt load after being taken private in 1986 in a leveraged buyout--where the purchase is done mostly with borrowed cash--by the LBO house Kohlberg Kravis Roberts & Co.

KKR took Safeway public again in 1990, and Burd, then a consultant who often handled management assignments for KKR, joined Safeway as president in 1992 and became chief executive the next year.

Indeed, Burd can’t afford to get sloppy because Safeway still has a lofty $5.6 billion of long-term debt on its books.

But his turnaround speaks for itself.

Safeway’s stock has soared more than 19-fold in price since mid-1992; its profit margin went from less than a penny per dollar of sales to 3.6 cents today, and its annual sales have more than doubled.

And finally, Burd helped KKR, which now owns less than 5% of Safeway, prosper from what at first seemed to be one of its most troubled deals.

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Taking Stock of Grocers

Safeway has been the stock leader among major and minor grocery chains in 2000. Here’s a look at a number of grocery retailers, with analysts’ consensus estimates for 2001 earnings per share (EPS) and the stocks’ price-to-earnings (P/E) ratios based on those earnings estimates.

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Ticker Fri. YTD 2001 2001 Stock symbol close change EPS P/E Safeway SWY $59.88 +67% $2.62 23 Kroger KR 26.38 +40 1.57 17 Whole Foods WFMI 59.88 +29 2.34 26 Royal Ahold AHO 31.00 +4 1.67 19 Delhaize DZA 17.56 -14 NE NE Winn-Dixie WIN 18.88 -21 0.90 21 Albertson’s ABS 25.13 -22 2.12 12 Ruddick RDK 11.63 -25 1.18 10 Supervalu SVU 12.94 -35 2.05 6 Great A&P; GAP 6.50 -77 0.83 8 Wild Oats OATS 4.38 -80 0.28 16 Pathmark PTMK 14.94 NA NE NE S&P; 500 1,305.95 -11 62.93 21

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Earnings estimates are for calendar 2001 or fiscal year most closely approximating that period.

NE: No estimate available.

NA: Not applicable; Pathmark recently emerged from bankruptcy.

Sources: Bloomberg News, IBES International, Times researchLos Angeles Times

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Green Grocer

The supermarket business is known for its paper-thin profit margins, but Safeway Inc. has fattened its profit margins since Steven Burd became chief executive in 1993. Here’s a glance at Safeway’s margins, which measure how much after-tax profit the company earns per dollar of sales:Net profit margin each year* Nine months ended Sept. 9

Sources: Value Line Investment Survey, Times research