Title: Squeezing Safeway Workers Wont Solve the Problem
1Squeezing Safeway Workers Wont Solve the Problem
An Analysis of the Real Issues
Undermining Safeways Competitiveness
Shareholder Value
Presentation to Safeways Institutional Sharehol
ders Investment Analysts By Hope Crifo, CFA f
or the AFL-CIO Office of Investment October 30,
2003
2Safeways Stock Down 58 in 3 Years Substantialy
Underperforms Direct Peers
Three-Year Relative Share Price Performance
Albertsons
Kroger
Safeway
Loss of 19.9 B in shareholder value in just
under three years, adjusted for stock repurchases.
3Safeways Issues(thats Issues with an Attitude)
- Deteriorating fundamentals
- Lost market share/declining same store sales
- Acquisition prices and flawed integration
- Mistimed stock repurchases
- Under investing
- Loss of management credibility
- Credit rating change possibility
- Lack of detailed and timely disclosure
41 -Falling Profitability Relative to Peers
Year over Year Margin Changes, 2002 vs. 2001
- Operating miscues allowed a poor economy to hurt
Safeway more than its competition.
52 Losing Market ShareIts Neither Wal-Mart nor
the Economy
39 weeks ending 6/29/03 (Stater Bros has 9/29
fiscal year end)
Unlike Stater Bros., Safeway and Kroger include
fuel sales in same stores figures, which should
result in even more favorable same store sales
comparisons. Safeway without fuel would be 0.9
in 3Q03. Stater Bros. period adjusted for com
parability (e.g. 3/30 quarter compared with 1Q at
Safeway and Kroger)
6Losing Market Share Its Not the Supercenters,
Its the Other Competitors
- Safeway competes with Wal-Mart at approximately
18 of its stores.
- About 60 of Kroger stores compete with Wal-Mart,
yet Krogers same store sales are stronger than
Safeways.
- For us, its not the supercenters, its not the
clubs that are creating the soft sales that we
had in 2002 and certainly in the first part of
2003. Its really predominately the business
slowdown that has affected our top line sales
growth and not either the supercenters or the
clubs that we have competed with, really, for
decades. (Steven A. Burd, Safeway Chairman and
CEO, at Goldman Sachs Conference, 9/3/03)
73 - Failed Integration Strategy
- Well-executed acquisitions can be a key component
of a grocery chains growth strategy.
- Safeway has made five acquisitions, plus some
relatively small store purchases, since 1997,
paying between 6MM and 16.5MM per acquired
store. The price paid for each sales dollar
ranges from 36 cents to over 70 cents. - Two of the five acquisitions appear to have been
successes. Three have cost the company mega
dollars.
- Whether one views Safeways acquisition strategy
as prudent, the 1.5 billion goodwill write-offs
from the acquisition of Dominicks and Randalls
indicate Safeway overpaid. With free cash flow
of 5 at best, the need to achieve quick cost
savings to earn a return on the investment
resulted in mistakes and increased, not
decreased, costs.
84 - Mistimed Stock Repurchases
- Safeway paid 2.9B to repurchase stock since 4th
quarter 1999, at between 22 to 44 per share.
- These share purchases have an ongoing cost the
interest expense on money borrowed to fund them.
Using the companys recent five-year borrowing
cost, interest expense on the 2.9B in funds
equates to over 121MM per year.
95 - Safeways Underinvesting Jeopardizes
Future Competitiveness
according to revised plan 11/02 2003 plan
called for 135-160 store remodels
- Rule of Thumb 80 of supermarket stores should
have been remodeled within past five years.
- At year-end 2001, Safeway believed approximately
75 of stores had been remodeled within the
previous five years. Above chart shows the
percentage has gone down since then. - Last year, Safeway claimed to be revisiting the
prudence of what they term defensive remodels,
resulting in reduced remodeling spending.
- Aggregate capital spending also declined, by 18,
to under 4 of sales.
106 - Management Credibility Concerns
- On an April 2001 analyst call, Safeway management
said an EBDIT margin of 11 is a very realistic
target.
- Management also forecast that, at most, economic
softness would cause two negative quarters of
same store sales growth.
- Genuardis transition is right on track, was
the company line early on.
- Management was forecasting 13-15 annual earnings
growth until 12 months ago.
116 - Management Execution Problems
- Managements strategic plan was to generate
higher gross higher identical store sales.
- In addition to the acquisition-related write
offs, recent failed investments include 30MM in
an internet business, and another 30MM charge
for an investment in a meat venture. - The 2001 strike at the Tracy, California
distribution center operated by 3rd party Summit
Logistics cost Safeway roughly 67MM. Less than
two years later, Safeway replaced Summit and
decided to operate the facility directly. - Operational issues including the shrink program
which had to be changed, plus integration and
centralization of dry grocery/non-perishables,
which approximate 60 of total sales.
Centralization has proved costly so far, cutting
an estimated 50bp from quarterly gross margins
earlier this year. - Randalls loss of market share and store closures
shortly after their acquisition resulted in
related charges.
-
Safeway has repeatedly failed to deliver on its
promises to Wall Street. The chains execution
of a number of initiatives to get the company
back on the right track continues to disappoint.
127 - Credit Ratings Financial Flexibility
- What the credit rating agencies have said about
Safeway
- Safeways strengths valued by the rating agencies
are eroding
- Dominicks issue introduces uncertainty
- Should investors be concerned that the rating
companies will revisit their outlooks?
138 Lack of Detailed Timely Disclosure
- Declining same store sales at Dominicks were not
disclosed on a timely basis.
- Yucaipa lawsuit not mentioned in recent 10-Q.
- Safeways conference calls and analysts meetings
are not available in an archived format after the
call.
- The company consistently provides only anecdotal
information regarding food inflation, cost
components, competitive store openings, gasoline
sales and margins. This contrasts with the detail
provided by Krogers and Albertsons, as well as
information provided by privately-held Stater
Bros.
In comparison to other supermarket firms, Safeway
discloses little in a formal, traceable way.
14The State of the Grocery Industry
Source Food Marketing Institute Annual Financial
Review 1Beginning in 1983, data is based on a fis
cal year instead of a calendar year.
2Prior to 1984-1985, statistics were based on
sales, assets and liabilities of companies
operating only supermarkets. Beginning in
1984/1985, includes diversified companies with
primary supermarket operations.
3Net profit was pulled down by extraordinary
items not related to normal supermarket
operations. Excluding these factors, net profit
is 0.74 . Key Industry Facts - Prepared by FMI I
nformation Service
Record industry net profitability in 2001-2002
15The Wal-Mart Worry
- Safeway has a different customer.
- It is cheaper to retain existing customers than
attract new ones.
- What other chains are doing to improve strategic
competitiveness
- Investing 100 of cash flow in the business
- Improving the value proposition
- Upgrading fresh foods expanding higher margin
frozen foods, perishables
- Increasing customer loyalty by adding services,
i.e. banks in stores, etc.
- Experimenting with other formats
- Reducing procurement and logistics costs
- Extensive remodeling
- Focusing marketing strategies to leverage
demographic regional strengths
- Pursuing growth through greater successful
industry concentration
16The Wal-Mart Worry
- Factors that top the list when customers decide
where to shop for groceries, according to the
Food Marketing Institute, are
- a clean, neat store
- a convenient location and ease of shopping
- value not necessarily price, but includes
selection service
- According to Safeways own 2002 10-K, the
principal competitive factors that affect the
Companys business are location, quality,
service, price and consumer loyalty to other
brands and stores. - Given Safeways shopper demographics, the FMI
findings may be especially relevant to Safeways
future prosperity.