Safeway pins hopes on natural foods
To celebrate its new line of foods made with natural ingredients, Safeway Inc. built the world’s largest picnic table on San Francisco’s Marina Green, looking out onto the Golden Gate Bridge, and hired Food Network chef Tyler Florence to cook up meals using the items.
The brand, called Open Nature, rolled out in January and features sausages, ice creams, salad dressings, breads and yogurts -- all made without artificial colors, flavors or preservatives. The market for natural foods, which aren’t necessarily organic or low in fat or calories, is worth $4 billion, and it’s largely untapped by big food stores, Pleasanton, California-based Safeway says.
Safeway Chief Executive Officer Steven Burd is using Open Nature, along with lower prices and a revamped website that offers personalized digital coupons, to lure back shoppers who flocked to cheaper competitors such as Wal-Mart Stores Inc. during the recession. Whole Foods Market Inc., meanwhile, has done a better job of attracting a wealthier clientele.
“Safeway is in a difficult position: They can’t compete on price with Wal-Mart, they can’t compete on quality with Whole Foods and they can’t compete on service with the smaller regional chains,” said David Livingston, a grocery consultant and president of DJL Research LLC. “Safeway is a middle-of- the-road, vanilla grocery store. In the middle of the road is where you find road kill.”
The company estimates that sales, excluding gasoline, at its stores open for at least a year will rise as much as 1.5 percent in 2011, after declining 2 percent last year.
Faster-growing rivals
Safeway shares have risen less than 1 percent this year, compared with an 8.2 percent gain for the Standard & Poor’s 500 Food Retail Index. More analysts rate the stock a “sell” than “buy,” and almost half consider it a “hold,” according to a Bloomberg survey.
Kroger Co., the largest U.S. supermarket chain, earlier this month increased its sales forecast for fiscal 2011 to 3.5 percent to 4.5 percent growth, from earlier projections of 3 percent to 4 percent. Whole Foods, the largest U.S. natural- goods grocer, also boosted its full-year earnings projections in early May, after reporting a 33 percent jump in second-quarter profit.
“We are perfectly positioned at this point to please the consumer,” said Melissa Plaisance, Safeway’s senior vice president of finance and investor relations. “We have the right pricing, we have the strongest quality, we have the right facilities.”
Remodeled stores
Safeway invested billions of dollars to revamp its stores since 2004, betting that consumers wanted a more upscale shopping experience. It remodeled 85 percent of its almost 1,700 locations to add softer lighting, faux wood floors, expanded deli and bakery departments, sushi bars and Starbucks kiosks.
While the move helped the company generate higher sales during the housing boom, when consumers were feeling flush, the benefit was lost when the economic crisis hit, said John Rand, senior vice president at consulting firm Kantar Retail.
“The problem with that strategy is that it ran into a recession,” Rand said. “Then people became value- and price- focused,” and Safeway “didn’t shift strategy to match.”
Declining consumer confidence and unemployment remain a challenge for retailers trying to persuade shoppers to open their wallets. A Bloomberg National Poll conducted June 17-20 found that two years after the start of the recovery, 25 percent of those surveyed worried the economy was getting worse, while 23 percent said they were hopeful the recovery was improving.
Frequent-shopper data
Safeway needs to make a bigger effort to court bargain hunters, said Meredith Adler, an analyst at Barclays Capital Inc. in New York.
“They’ve got to be more aggressive on price,” Adler said. “And they should use their frequent-shopper data more effectively.”
Safeway’s Plaisance says the company has adjusted its strategy and is better positioned now to win back shoppers. Sales at stores open at least a year rose 0.4 percent in the first quarter, compared with a decline of 3.1 percent a year ago.
In addition to offering new products such as its Open Nature line, the company is trying to use its customer database better to offer personalized deals to shoppers. The program, called “Just for U,” is being expanded from a few regions this year and includes access to what Safeway calls one of the largest digital grocery coupon site in North America.
“When you make the magnitude of price investment that we made, it takes consumers a little while to catch on and understand what you’ve done and appreciate it, and change some of their buying habits,” she said. “We feel like it’s starting to happen.”