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Safeway to Grow Comps by 'Reinventing the Enterprise'

NEW YORK -- "Branding the shopping experience" is Safeway's scheme for regaining ground lost to the impact of the infamous California strike, said an enthusiastic Steve Burd, chairman and c.e.o. of the chain, at the Banc of America Securities Consumer Conference 2005 yesterday.

Burd was telling investors about his company's strategy to grow strike-affected identical-store sales by making changes that will "materially differentiate" Safeway from its competitors. These changes include improving the perishables offering, narrowing the price gap with discounters, and moving from "best in class" to "world-class" service, Burd said.

Other planks in the company's platform: to further boost profits by lowering COGS, labor, and O&A costs; revitalizing center store sales by leveraging proprietary shopper insights and focusing on corporate brands; and accelerating investment in the company's new Life Style format, which includes a streamlined organic produce section, a sandwich bar offering exclusive items, "reformulated" bakery items, and an improved floral section. According to Burd, the company had 142 Life Style units up and running in 2004 and plans to have 457 in 2005, including new stores.

Burd noted that Safeway had tapped c.m.o. Brian Cornell, formerly of PepsiCo, to helm its "evolving brand definition" -- a process Burd compared to that undergone by Target, which has successfully positioned itself as a hipper alternative to Wal-Mart and Kmart. The initiative is to launch in "the next couple of weeks," added Burd.

Further, Burd spoke of his company's centralization of procurement systems, which he said has resulted in simplified execution at store level. He also noted that the supermarket segment was moving to more of a dead net cost basis from slotting fees, scanbacks, and the like, which leads to costs savings and an easier-to-manage business, and added. "Look for us to go over time to a dead net cost."

Burd acknowledged that although supercenter competition isn't going away any time soon, Safeway was up to the challenge through its efforts to differentiate itself. "We're not trying to be anything else but a supermarket," he stressed. The current financial climate was "all about strategy and execution," he noted. "This will make for interesting times."

On the subject of proprietary products, Burd, using the example of the company's successful Rancher's Reserve meat, observed that such items, "uniquely serving consumer needs and available only at Safeway, drive traffic." In speaking of the revitalization of the center store, he said that it was a matter of having the right item, size, and price, as well as promoting the right items at the right price often enough, but also employing more EDLP and otherwise "thinking more like a consumer."

Burd admitted that "reinventing the enterprise" will be a "difficult and lengthy" process, but one that had already seen rewards; for example, he noted Safeway will see identical-store sales "comfortably north of 1 percent," excluding fuel and pre-Easter sales, for the first quarter of 2005.

Safeway's 2004 sales were $35.8 billion, and the company had made steady progress in seven of the last nine quarters, he added. Free cash flow was up 42 percent and debt reduction was down to $6.7 billion. The company is considering returning cash flow to shareholders in the form of a dividend or stock buybacks, Burd said.

Among the company's other goals is to return its Vons banner to its pre-strike profitability levels. Vons was particularly hard hit by the Southern California labor dispute.

-- Bridget Goldschmidt
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