COMPANY PROFILE

Safeway Inc.

REFERENCE CODE: 1D179D8A-13FA-4B5D-A8A4-A129FB80105E

PUBLICATION DATE: 10 Jun 2014
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Safeway Inc.
TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................3
Key Facts...............................................................................................................3
SWOT Analysis.....................................................................................................4

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Safeway Inc.
Company Overview

COMPANY OVERVIEW
Safeway Inc. (Safeway or 'the company') is one of the largest food and drug retailers in the US. The
company operates an extensive network of distribution, manufacturing and food-processing facilities
to support its retail operations. Safeway primarily operates in the US. It is headquartered in
Pleasanton, California and employed more than 138,000 people as of December 28, 2013.
The company recorded revenues of $36,139.1 million in the financial year ended December 2013
(FY2013), an increase of 0.2% over FY2012. The operating profit of the company was $635.4 million
in FY2013, a decrease of 10.4% compared to FY2012. The net profit was $3,507.5 million in FY2013,
compared to $596.5 million in FY2012.

KEY FACTS
Head Office

Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton
California 94588 3229
USA

Phone

1 925 467 3000

Fax

1 925 467 3323

Web Address

http://www.safeway.com

Revenue / turnover 36,139.1

(USD Mn)
Financial Year End

December

Employees

138,000

New York Ticker

SWY

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Safeway Inc.
SWOT Analysis

SWOT ANALYSIS
Safeway is one of the largest food and drug retailers in the US. The company has strong in-house
manufacturing and distribution capabilities which enable it to exercise greater quality control and
flexibility over its business process. However, increasing competition could negatively impact
Safeway's market penetration.
Strengths

Weaknesses

Strong manufacturing and distribution

capabilities
Specialty departments facilitate increased
footfall and differentiation

High level of indebtedness

Overcharging customers hurts consumer
confidence and exposes the company to
penalties

Opportunities

Threats

Positive trends in online retailing will

increase sales from the channel
Rising demand for organic and health foods
Increased acceptance of private label
merchandise

Intense competition
Increasing labor and healthcare costs
Increase in food safety regulations

Strengths

Strong manufacturing and distribution capabilities

Safeway operates through a strong manufacturing and distribution network. At the end of FY2013,
the company operated 20 manufacturing and processing facilities in the US. In terms of sales dollars,
13% of Safeway's private-label merchandise is manufactured in these plants. In order to ensure
high standards of quality in the products manufactured by the company, Safeway operates laboratories
at some of its plants and corporate offices. These laboratories engage in quality assurance and
research and development activities. The company also has a strong distribution/warehousing
network. Safeway operated 13 distribution/warehousing centers in the US at the end of FY2013.
Through these centers, the company supplies majority of products to its seven retail operating areas
(Denver, Eastern, Northern California, Phoenix, Northwest, Texas and Southern California).
Strong in-house manufacturing and distribution capabilities enable Safeway to exercise greater
control and flexibility over its business process. Furthermore, direct control over the back operations
allows Safeway to make prompt product changes according to customer preferences and changes
in market demand.

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Specialty departments facilitate increased footfall and differentiation

The company operates specialty departments within its stores, including deli, floral, bakery, seafood
and pharmacy. Majority of its stores also operate Starbucks coffee shops and fuel stations. These
specialty departments allow Safeway to attract a larger customer base to its stores. Pharmacies are
operated at 79% of the company's specialty stores. These pharmacies offer services such as
prescription-filling, health-related advice, immunizations, travel medicines, medication therapy
management, and point-of-care screening, among others. Increasing number of people find these
pharmacies and immunization program attractive as pharmacies do not require any appointments
and also offer healthcare services at lower price compared to the hospitals.
Growing number of customers have been using the facilities offered by these retail clinics as these
clinics offer several advantages. Low cost entry points and extended hours of operations compared
to hospitals are the key factors driving the growth of retail clinics. According to industry estimates,
the number of retail clinics in the US is expected to grow from about 1,400 in 2012 to more than
2,800 by 2015. Another area where retail pharmacy channel plays an important role is immunization
against various types of flu. According to a survey conducted by the Centers for Disease Control
and Prevention during 201213 flu season, nearly 57% of children and 42% of adults received
influenza vaccination. Though the most common place of vaccination among both adults and children
was a doctor's office, pharmacies, supermarkets and other stores were also key places which saw
customers coming for their vaccine shots.
Additionally, Starbucks being a popular brand in the US also drives customer footfall. The fuel stations
operated by Safeway also help in driving demand for other consumer goods offered by the company.
Safeway can leverage on these specialty departments within stores to increase its sales. These
specialty departments also act as a differentiating factor between Safeway and other players in the
industry.

Weaknesses

High level of indebtedness

Safeway has considerable amount of indebtedness. At the end of FY2013, the company had nearly
$4.2 billion in total consolidated debt outstanding, including capital lease obligations. The high level
of indebtedness may require the company to dedicate a substantial portion of its cash flows from
operations to the payment of principal and interest on its debt, thereby reducing the availability of
cash to fund capital expenditures and other purposes. It could also limit the company's ability to
obtain funds for its working capital requirements.
Overcharging customers hurts consumer confidence and exposes the company to penalties
Safeway was charged for overbilling its customers. Safeway and its Vons stores in Southern California
were sued by the State of California for overbilling its customers in 2003 and 2008. As a result of

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SWOT Analysis

these claims, a judgment was passed against Safeway stating that if an item below $5 is charged
for more than the lowest advertise price then Safeway and Vons must give the item for free to its
customer (limit one item and the other items must be given at the lowest advertised price). Similarly,
if an item more than $5 is charged more than the lowest advertise price then Safeway must give a
$5 gift card to its customers. The judgment excluded dairy, alcohol, tobacco, fuel and pharmacy
products. Later, in 2012, customers across California claimed that Safeway overcharged them on
purchases at Safeway and Vons supermarkets. In several inspections carried out by an industry
source, Safeway-operated stores in 31 California counties and 11 different states were found to
overcharge on one out of every 50 items purchased over the past five years (200812). Furthermore,
in March 2014, Safeway agreed to pay nearly $2.3 million to settle a lawsuit filed by district attorneys
from nine California counties. The lawsuit alleged that the company overcharged customers and
engaged in false advertising. It also alleged that Safeway misrepresented the weights of products
and falsely claimed that produce from other countries was locally grown.
Such charges severely hurt consumer confidence in the company. In a market where consumers
are attracted to low price high value products, over pricing will erode Safeway's brand image.
Additionally, fines and penalties will increase the expenses for the company.

Opportunities

Positive trends in online retailing will increase sales from the channel
The preference for online shopping has been increasing among the US consumers in the past few
years. According to the US Department of Commerce, online retail sales (adjusted for seasonal
variation) in the US increased from $165.8 billion in 2010 to $262.5 billion in 2013, representing a
compound annual growth rate (CAGR) of 16.6%. e-commerce sales increased 17% in 2013 over
the previous year. Total retail sales, on the other hand, grew by only 4.3% during 2013. e-commerce
sales accounted for 5.8% of total retail sales in 2013, compared to 4.3% in 2010.
Additionally, the US market is showing strong signs of growth for online grocery retailing as new
technology continues to change the way consumers shop. According to industry estimates, the online
grocery market is expected to grow at a CAGR of 9% during 201217 to surpass $9 billion by 2017.
Increasing number of grocers such as Wal-Mart, Ahold, Safeway and Fresh Market among others
started online service for sale of groceries. Safeway owns and operates GroceryWorks.com Operating
Company, an online grocery channel which operates business through the Safeway.com and
Vons.com websites. Further in 2013, the company announced an initiative to make its online grocery
shopping website more accessible for shoppers with visual impairments. By leveraging its online
retailing platform, Safeway can target larger audience and increase the revenues from the channel.
Rising demand for organic and health foods
Natural and organic food products segment is one of the fastest growing categories in food retailing.
The demand for organic foods is growing in the US, due to the increasing preference of consumers

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SWOT Analysis

for healthy food. It has also been observed that majority of consumers read ingredient statements
on packaging, and use nutritional information to make their purchasing decisions. Due to the increase
in health consciousness, there has been a spurt in demand for all-natural and organic foods.
According to the MarketLine estimates, the US organic food market grew by 6.3% in 2013 to reach
a value of $34,239.6 million. In 2018, the US organic food market is expected to reach a value of
$45,901.4 million, an increase of 34.1% since 2013. The companys health and wellness portfolio
includes O Organics, Eating Right, Open Nature and Bright Green brands. These offerings address
consumers' specific health needs and preferences. O Organics is an exclusively organic brand while
Eating Right offers products for specific eating needs such as high protein, gluten free, low calorie
and general health maintenance. Open Nature is a line of products that are 100% natural and Bright
Green is an environmentally friendly household product line. The company through its varied offerings
in the organic and health product category can cater to customers who are increasingly seeking
nutritional values in their meals.
Increased acceptance of private label merchandise
The private label market is growing at a fast pace in the US. According to industry sources, among
all major US retail channels, private label sales increased by approximately 3% to reach nearly $109
billion in 2012. Since 2009, annual growth of store brands sales has averaged approximately 5%,
compared to national brands sales annual growth of approximately 2%. Private label products provide
customers with an attractive alternative to higher-priced national brands. Instead of buying expensive
brands, consumers across the industry are turning to generic and private label products. Even
upper-income shoppers are more willing to buy generic, which has traditionally appealed more to
shoppers with limited budgets.
Safeway offers a wide range of private label products. These private label brands are divided into
three categories: core, premium, and health and wellness. Under the core category, the company's
Safeway brand offers more than 4,000 items across 350 categories, Lucerne brand offers 400 items
across 20 categories, Pantry Essentials brand offers more than 100 items across over 45 categories,
Refreshe brand offers more than 40 varieties of beverages, and The Snack Artist brand offers a line
of snacks. Under the premium category, Safeway offers the following brands: Safeway SELECT
(includes 1,000 items in over 60 categories), Signature Cafe (includes a variety of items in the
deli/food service department), Primo Taglio (includes more than 80 premium meats and cheeses),
Rancher's Reserve (includes Tender Beef), waterfront BISTRO (comprises more than 140 seafood
items), debi lilly (a line of bouquets, candles, vases and gifts) and mom to mom (baby products).
Under the health and wellness category, Safeway offers products that are focused on consumers
who consume more nutritional and organic products.
Increased penetration of private labels will enable the company to increase sales from these products.
Additionally, private labels typically have higher margins and rising demand for these products will
also impact the bottom line positively.

Threats

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SWOT Analysis

Intense competition
Food retailing sector is the US is highly competitive. The key factors influencing the competitiveness
of the company include location, quality, price, service and selection. Safeway competes with
traditional grocery retailers, non-traditional competitors such as supercenters and club stores, as
well as specialty and niche supermarkets, drug stores, dollar stores, convenience stores and
restaurants. In addition, the company also faces stiff competition from discounters. Non-existent
switching costs for consumers, who are largely driven by price, increased the appeal of discounters
and other value retailers. Wal-Mart's entry into the grocery market and its ongoing expansion has
proved to be a major risk to traditional operators, whose cost structures are higher and cannot match
the low prices that Wal-Mart offers. Competition for the consumer food dollar continues to intensify
as supercenters and warehouse clubs increasingly promote lower prices on food to drive traffic.
Increasing competition could negatively impact Safeway's market penetration.
Increasing labor and healthcare costs
There has been an increase in labor costs in the US in the recent years. The federal minimum wage
rate in the US, which remained at $5.15 per hour since 1998, increased to $5.85 per hour in 2008.
It further increased to $6.55 per hour in 2009 and to $7.25 per hour in 2010. Moreover, many states
and municipalities in the country have minimum wage rate even higher than $7.25 per hour due to
higher cost of living. The minimum wage rate has increased in the states of Arizona (from $7.8 in
2013 to $7.9 in 2014), Colorado (from $7.78 in 2013 to $8 in 2014), Oregon (from $8.95 in 2013 to
$9.1 in 2014) and Washington (from $9.19 in 2013 to $9.32 in 2014) in the recent past. In addition,
the healthcare costs for employers in the US are increasing. According to industry estimates,
healthcare costs for the US employers are estimated to grow by 7% in 2014 compared to 2013.
Thus, increasing labor costs coupled with high healthcare expenses could increase the company's
overall costs and affect its margins.
Increase in food safety regulations
The company's business operations are subject to regulation by a variety of federal, state, local and
foreign laws and regulations regarding manufacturing, marketing and distribution of food products.
In 2009, a new legislation was passed requiring more frequent inspections of processing plants and
giving the government authority to order the recall of tainted foods. According to several organizations,
the present food safety regulations are inadequate and these organizations have recommended
stricter regulations. For instance, in 2009, the American Public Health Association recommended
legislative changes to establish a new authority to strengthen the food safety system. In April 2013,
the US Food and Drug Administration (FDA) requested a budget of $4.7 billion for fiscal 2014 (October
1, 2013 through September 30, 2014). Of this, $295.8 million would be spent on food safety
regulations. Increased food safety measures, although beneficial, will increase the burden of specific
compliances for Safeway and could increase the related expenditure for the company.

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