EXPERT COLUMN: Safeway Sale Could Rattle U.S. Ranks
A traditional supermarket operator, Safeway has fallen victim to being in the unenviable "middle" position – squeezed on one side by a growing base of value-oriented competitors and on the other by increasingly popular specialty and premium chains.
There were times when Kroger, Safeway and Supervalu rattled off the tongue as the firmly entrenched numbers 1, 2 and 3 in U.S. supermarket retailing. Not anymore – those days are in the rear-view mirror. While Kroger remains strong (and getting stronger) atop the supermarket leader board, the other two – Safeway and Supervalu – are fading into the sunset, seemingly no longer part of the "Big 3" mix.
Supervalu’s fate was decided last year with the sale of huge chunks of the company to investment firm Cerberus Capital Management. Now Safeway’s future hangs in the balance. The retailer has disclosed it is in discussions concerning a possible sale of the business. Planet Retail analyzes the possibilities.
A Smaller, Stronger Safeway
Compared with last year, Safeway is in a stronger financial position today following the 2013 sale of its Canadian operation to Sobeys and an exit from the Chicago market through the disposal of its Dominick's chain. Its assets might even look attractive to the right buyer.
For the year ended Dec. 28, 2013, Safeway reported sales from continuing operations remained flat at $36.1 billion. Same-store sales (excluding fuel) rose 1.7 percent. Net income from continuing operations for FY 2013 was $246.3 million, a decline from $294.6 million last year.
Robert Edwards, president and CEO, said: “Strategies to grow sales and improve operating profit dollars have begun to produce results. In 2013, we generated our best volume growth since 2006, and we had our best identical-store sales growth in the last five years. At the same time, we continue to pursue strategies to enhance momentum and increase shareholder value."
Retailer Confirms ‘Talks’ Underway
The juiciest nugget revealed in Safeway’s FY and Q4 statement, however, was confirmation that it is in discussions concerning a possible sale of the business. At present, no details of parties involved in any talks have been disclosed. Meanwhile, the company plans to distribute the 37.8 million shares of Blackhawk Network Holdings (the gift and pre-paid card unit it took public last year) to Safeway shareholders. Details of distribution will be determined in the near future. Safeway also is seeking ways to monetize its 49 percent investment in Mexican operator Casa Ley. A sell-off here is likely on the cards -- presumably to Casa Ley itself should it be able to come to terms.
What Safeway Brings to the Table
Safeway operates more than 1,300 grocery stores, primarily located in the western U.S. and Texas, as well as Safeway-Eastern in the greater Washington, D.C., area. Stores average about 45,000 square feet with most having been remodeled fairly recently. For more, see the Vons Pavilions – Marina del Rey, Calif., store tour. A key drawback is the heavy concentration of stores in California, which has been particularly troubled by a weak economic climate, more so than the rest of the country. California also is a hotly contested retail market where Safeway faces steep competition from Costco, Target and Kroger. In addition, leading value retailers – Dollar General, Family Dollar and Aldi – are taking up residence there. Walmart’s growing presence is another factor.
A solid private label program with a number of premium and specialty brands, Safeway’s health & wellness labels are competitive differentiators. The O Organics and Eating Right lines have found success not only in Safeway stores, but also on the shelves of other retailers (e.g. Price Chopper, Hy-Vee and Big Y) as part of Safeway’s Better Living Brands Alliance launched in 2008. The brands are also distributed in international markets (e.g. ShopRite in South Africa and Carrefour in Taiwan). Inheriting this kind of brand portfolio presents a unique opportunity -- and possible coup -- for the right buyer.
The "just for U" digital marketing and shopper loyalty program is Safeway’s golden goose. It provides shoppers with special offers, personalized pricing and coupons customized to their shopping history. just for U is a key vehicle for enabling Safeway to differentiate its operation and better compete with the increasing base of value-oriented retailers. The retailer has reported rapid shopper acceptance and related sales uptick due to the program.
For more information, see Safeway Insight Deck, September 2013.
Some Possible Scenarios
A number of potential plays come to mind, but I can’t neatly pinpoint any one that makes a ton of sense.
The "biggies" and most obvious – i.e. Walmart, Target, Kroger – are probably not in the consideration set. Walmart does not seem a good fit due to store size differences and its existing national presence, including in Safeway markets. Target is not a supermarket operator per se, but the possibility exists it would be interested in buying more grocery capabilities. But due to extensive overlap in California, an already huge sunk investment to update its own stores to the PFresh concept, and its own share of financial woes as of late (read: big data breach), I’m counting Target out too.
Kroger, typically very choosy about growth through acquisition, has just completed the Harris Teeter deal. There’s too much geographic overlap for a Kroger/Safeway merger to make sense. The one standout, however, is Safeway-Eastern. Kroger just gained a small foothold in Washington, D.C., through Harris Teeter. It could very well look to strengthen its position by adding Safeway’s East Coast operation. But so could Publix, which while not yet in D.C., has been extending its reach north from its home base of Florida. Picking up Safeway-Eastern stores could make some sense. Southeastern Grocers (parent of Bi-Lo and Winn-Dixie), which has been on a buying spree as of late, could also have an interest in moving up the coast.
The wild card could be an international play, i.e. Tesco, Ahold, Delhaize Group. But is Tesco – which just pulled the plug on its Fresh & Easy venture and left the U.S. with its tail practically between its legs – really in a position to make the same mistake twice? It’s doubtful. So let’s consider Ahold or Delhaize, long-time players on the East Coast. There appears too much geographic overlap to make a play for Safeway-Eastern. So would they be interested in supermarket operations in far-flung geographies like the West Coast and Texas? From a U.S. analyst viewpoint, operating on the East vs. West coasts are worlds apart. I’m discounting the likelihood of a move by either Ahold or Delhaize, but it’s not completely out of the question.
The most likely scenario, therefore, is a management buyout – something which has circulated in the rumor mill for several months. Investment firms reportedly in pursuit include CVC Capital Partners, Leonard Green & Partners and Cerberus Capital Management. My money’s on Cerberus, which has been on a buying spree as of late. Combining Safeway into its Albertsons holdings acquired a little less than a year ago from Supervalu makes some sense. There would be some overlap of course requiring the disposal of a good number of units, but Cerberus is notorious for its real estate plays as well. It might be a good fit. And who wouldn’t love to see a potential unification of what were essentially the former #2 and #3 supermarkets into a single organization – a potential powerhouse that could give the likes of nationally represented Walmart and Kroger a run? Interesting!
Planet Retail View
The one thing I can say about the future of U.S. grocery retailing is that change is the only constant. The possibility of a Safeway sale is indeed another play in the string of many M&As over the past year to shake up the U.S. retailer rankings. Should a potential buyout combine Safeway assets into Cerberus’ existing holdings (i.e. Albertsons), the future of U.S. grocery could again be redefined, and indeed defined by fewer, bigger "big" players. Stay tuned for further analyses as developments unfold.
Sandy Skrovan is research director at Planet Retail.