UK: Safeway follows the leader.

UK: Safeway follows the leader. - Given its limited buying power, Safeway has had to find new ways of staying in the highly competitive game of food retailing.

by Fiona Lewis.
Last Updated: 31 Aug 2010

Given its limited buying power, Safeway has had to find new ways of staying in the highly competitive game of food retailing.

Pick a motorway, any motorway. Drive on it for any length of time, and the chances are you'll pass a couple of lorries sporting the logos and claims of two well-known supermarket giants. Should they belong to Tesco and Safeway, the former may well read, 'Why pay more?'; the latter, 'Lightening the load'.

As is only to be expected, years of corporate history and strategy are bound up in those few words. While media coverage of Tesco may focus heavily on the company's drive towards customer service, the grocery chain has always been aggressive on the price front too. So for the past four years, Safeway's managers under chief executive Colin Smith have been grappling with the challenge (or should that simply be problem?) of creating an offering which will entice customers into its aisles, while reassuring them that a trip to Safeway will cost them no more than an outing to the market leader. No small feat when price has been such an important determinant of success for food retailers, and when being a small player, currently equal number three in marketshare with Asda, means purchasing power advantage lies with the competition.

Why has the problem only been preoccupying Smith for the past four years?

Talk to any food retailing expert, or indeed anyone who has read a British newspaper in the same period, and the answer is clear: 1993 was a watershed, the year when vicious price wars saw the margins the established players regarded almost as a birthright come crashing down. For those involved, it seems life falls into two categories: the pre-1993 era and the post.

None of the established players enjoyed the hostilities that were unleashed, and Safeway, part of the then Argyll Group, was no exception. Safeway's parent had spent the 1980s putting together a food-retailing, biscuit-making and freezer-centre combine in the aftermath of the bout of price fighting which Tesco had launched in the late 1970s. In fairly textbook fashion, Argyll's founders had hunted down underperforming businesses, snapped them up and turned them around. They had bought Safeway UK from its American owners in 1987, and embarked on a huge expansion programme, but once the 1993 price wars began to bite, they must have started to wonder if they had been sold a pup. For at the very point when price seemed to becoming all, Safeway was offering customers premium products paradoxically often sold in fairly shoddy locations, and the chain was haemorrhaging previously loyal, previously childless couples almost at the very moment the pregnancy test came up positive. The pattern traced by the sales records was one no manager wants to see on their desk; when Smith holds up a chart dating from 1993 which plots Safeway's share of total grocery spend against different age bands, the thick black line is nothing if not extreme. It peaks dramatically around the age of 30, then plummets, only stabilising again at the 40-plus mark. 'It was as though people suddenly decided that Safeway wasn't for them,' says Smith.

The problem, easy to see in retrospect, was that Safeway, which had traditionally concentrated on what the marketeers call 'early nesters', had failed to take account of the dramatic shock to the wallet that having a young family represents, and wasn't providing those young families with the products they wanted at the prices they could afford. Putting it more bluntly, one insider claims that senior managers preferred to expend their precious time and energy poring over the company's accounts rather than trying to fathom out what customers might actually want from their grocery store.

All well and good, or all well and workable at least, in the five or six years leading up to 1993 when Safeway had been expanding into superstores in a big way, and a generally benign environment meant margins were on a pleasing upward run. Rather less well and good when competition suddenly intensified, causing margins to dry up faster than a seedless grape.

Faced with such an unappetising prospect, Safeway called in McKinsey.

With input from the management consultancy, the company devised Safeway 2000, the change programme which was intended not only to propel the retailer over the immediate hurdle, but also to see it over the distance.The first strategic decision was to rule out any attempt to tackle Tesco head on, a wise move, according to David McCarthy, retail analyst at BZW (who are also Safeway's brokers), for immediately obvious reasons. 'If you fight a war of attrition against the Chinese army, you will lose,' he explains.

(Asda meanwhile felt that its blue-collar customer base meant it had to fight on price. 'If we're not the cheapest, we lose customers,' finance director Phil Cox told Management Today in 1995.)

Safeway 2000 began, logically enough, by identifying the customers who would be key to the company's success. Customer needs - both for products and for services - at every point in their life cycle were identified, and product ranges were modified so that they would be more clearly aimed at families. In concrete terms, this meant less emphasis on the premium parts of key product ranges and more on economy and standard items. One expression of the strategy over the past couple of years has been the rolling out of extremely successful Safeway sub-brands (own-label products which go out under a different badge), Cyclon in detergents and Vecta in household cleaning products. These have enabled the firm to offer consumers lower price tags while itself benefiting from more than decent margins. At the same time, the company has been able to offer customers price guarantees on around 500 of its most basic lines.

The rethink also entailed revisiting received ideas about the physical presentation of the stores and the facilities they offered (see table), with the store development programme focusing on developing superstores across England, Wales and Scotland. Argyll Group (now re-named Safeway) also sold off all its extraneous businesses, with the exception of its Presto stores. There were just over 200 of these stores four years ago, but only a handful more than 100 in March 1996. Last autumn the company announced that remaining Presto stores would start trading under the Safeway badge within 18 months or so.

The Safeway store in Camden, north London, which opened just two years ago when the new strategy was really getting under way, shows the extent of the rethink. It has 30 parent-and-child parking spaces near the store entrance so that parents don't have to fight for a parking space only then to drag children (and loaded shopping trolleys) across expanses of tarmac. In the store itself, there is a baby changing room and a creche which is open from eight in the morning until eight at night.

Smith, for one, is convinced that the new formula is working. 'One way of measuring our success in attracting more big-spending family shoppers,' he says, ' is to look at the proportion of main shoppers, those who spend more than £40 a trip. The figures show that in the first half of the last financial year, the proportion of main shoppers, which was 28% has moved up to nearly 31%, and the proportion of sales they represent has moved from 36% to 39%. If we went back and looked at the same figures six and 12 months before,' he explains, 'you would see that we had progressively improved the situation'.

The Camden store illustrates the progress Safeway has made in other directions too. As part of its customer friendliness, Safeway was the first of the major food multiples to introduce self-scanning, the system it calls Shop & Go. To avoid the usual checkout procedures, this allows loyalty club members to pass their purchases, complete with bar codes, through a hand-held scanner before items are loaded into trolleys or baskets. When shoppers have selected everything they want to buy, the scanner is returned to its dispenser, a bar-coded slip is printed out, and when that is handed in at the pay point, an itemised bill appears. The parallel introduction of what Safeway calls Green Boxes (cartons customers buy as they enter the store or retain from a previous visit, tessellate into their trolleys, fill up and then unload directly into a car boot) also reduces the hassle.

The beauty of the system is that goods don't need to be taken out of the trolley on one side of the checkout simply to be replaced on the other, so the problem of queueing is vastly reduced where it is not eliminated altogether.

Self-scanning has brought the low-profile Smith the sort of news coverage that Archie Norman at Asda or Lord Ian MacLaurin at Tesco are generally much more skilled in courting. But those who watch Safeway closely say that its real technological innovation is not the scanning ('hype' says one observer rather dismissively), rather the company's analysis of the customer data it captures through its ABC loyalty card. Although not recognised as the pioneer of nationwide loyalty schemes, Safeway is given credit for the thoroughness of its data mining which enables the company to build up the most sophisticated customer profiles of any of the supermarket chains. Observers are also watching the way rewards are delivered to the 5.6 million shoppers who have signed up.

Some have carped that Safeway has been slow to exploit its customer profiles but if Paul Smiddy, food retail analyst at Credit Lyonnais Laing, has a criticism of Safeway's loyalty scheme, it is that Smith and Co could have beaten Tesco to it, and thus benefited from the kudos of being the first. 'They (Safeway) had trials with Air Miles a few years ago,' he says. 'Then they had second thoughts about ABC and in the meantime Tesco went ahead. I think Safeway regretted it later. They could have been the front runner but they just got cold feet.'

The original ABC tie-up with Air Miles is all the more easily explained by taking a look at the new blood Smith has brought in since the early 1990s. The senior executives he has recruited come from Air Miles, Nestle, the Boston Consulting Group, J Sainsbury, Boots, and WH Smith among others.

If the words marketing and communications seem to feature prominently in their titles, that is because of the new importance Safeway is attaching to the function. One other structural change to have taken place since 1993 is that the marketing department has regrouped along five target customer lines: singles, couples, family formers, established families and empty nesters. In stark relief to the new blood, however, stand Smith, an accountant who has been with Argyll since 1979, and David Webster who will take over as chairman from Sir Alistair Grant at the end of this month. Smith stepped up to chief executive from Argyll Group finance director four years ago. Meanwhile Webster, currently deputy chairman, is a co-founder of Argyll, and as McCarthy - who points out that in recent and coming months six of the top eight jobs in UK food retailing will have changed hands - calls him, 'a safe bet'.

Of course Smith has overseen many more changes than those outlined above, including a fairly late alliance with BP to set up bijoux convenience stores with petrol pumps attached, a partnership with Abbey National, its Queue Busters initiative, and a range of high margin children's clothes to name but a few. It has also conducted the Harry and Molly advertising campaign, widely regarded as highly successful - in terms of audience recall at least.

And to manage the process of change internally, the company has launched staff schemes to restore morale among employees who have seen 3,500 of their number made redundant and a further 10,000 retrained and redeployed (the head count is currently around 68,000). Working the checkout or stocking supermarket shelves tends to be the classic McJob, and, says Smiddy, demotivation really set in a few years ago when 'everyone's job was recategorised at head office and in the stores. One or two levels of management in the stores were deleted altogether - understandably morale took a dive.'

The obvious question, though, is whether it all gives Safeway a strong enough hand for the game ahead. The profits warning issued in early February did little to offer reassurance. Analysts immediately scaled back their profits predictions, with NatWest Securities reducing its estimate by £13 million to £427 million for the year to the beginning of March and by £20 million to £458 million for the following year. The chief consolation for Smith and his colleagues must have been the much more calamitous profits warning issued by J Sainsbury, number two in the market, only a few days before. The problem is that Sainsbury's performance has been so appalling in recent years that anyone else can only look great in comparison (see total shareholder return table). Moreover, while the Institute of Grocery Distribution (IGD) puts Safeway's June '96 marketshare at 7.7% - compared to Tesco's 14.2% and Sainsbury's 12.3% - Asda's marketshare comes in at the same mark. And this from a starting point of 4.9% in December 1987. While Safeway's own figures suggest its marketshare has grown over the past five years, the IGD's suggest it has remained static.

So much for the bad news, now for the good. As Smith points out, an increasing number of main shoppers have been attracted to Safeway stores. And crucial sales per square foot figures, such an issue back in 1993, are getting better: at £14.63, Safeway looks well on the way to meeting the three-year £15 per square foot target Smith set himself in May 1995. In fact, forget meeting the target in three years, the stores look likely to get there one year early. And that, says George Charters, managing director of marketing and trading, is just the beginning. Meanwhile Safeway brokers BZW estimate that, at 7%, Safeway will enjoy the highest operating margins among the big four in 1996/97. This compares with Tesco's 6.2%, Sainsbury's 6.3% and Asda's 5.4%.

It all amounts to something of a mixed bag, suggesting that the company's fortunes will depend more than most on what the competitors get up to over the next couple of years. Analysts seem fairly confident that, having seen the carnage of 1993, food retailers would be loath to unleash the dogs of an outright price war once again. A continued gradual erosion of margins appears more likely. McCarthy predicts that the real head-on battle will be between Tesco and Asda. 'It's where people have got Asda wrong,' he says. 'Asda and Tesco work very much to the same strategy, and Tesco is turning closer to Asda. Tesco, I think, regrets allowing Asda to recover (from the debt-laden disasters of the early '90s). Safeway,' he continues, 'is ploughing a separate furrow'.

Over at Credit Lyonnais Laing, Smiddy's predictions are based on his belief that Safeway's institution-shy managers have turned a corner, that they may at last be prepared to do something other than follow the leader. 'They have become more confident, and more aggressive,' he says, pointing to Safeway's recent announcement that it will launch a debit card and to the self-scanning technology to back up his argument. While for other observers, the jury is still out on the likely fruits of Safeway's programme of reform, Smiddy is reasonably positive. 'As a company, Safeway faces an exciting period of growth over the next couple of years and should start to reap the real benefits of the pain of Safeway 2000. It will still be number three, but not really vulnerable.'

For companies operating in other sectors, that last phrase could easily sound like damnation through faint praise; in the UK food retailing market, it is closer to a ringing endorsement.

TOTAL SHAREHOLDER RETURNS

1993-1996 average

Asda 103%

Tesco 57%

Safeway 25%

J Sainsbury -9%

FTSE 100 median 60%

Total shareholder return is share price plus dividends reinvested

Source: William M Mercer

SAFEWAY: FINANCIAL RESULTS AND STORE NUMBERS

Year end Year end Year end Year end Year end

Mar '92 Mar '93 Mar '94 Mar '95 Mar '96

Financial highlights

Sales £5,039m £5,539m £5,982m £6,218m £6,500m

Adjusted pre-tax

profit £365m £417m £362m £371m £392m

Earnings per share 24p 27p 22.8p 23.3p 24.7p

Margins 7.5% 8.1% 7.2% 7.0% 6.9%

Market share 6.7% 7.1% 7.2% 7.3% 7.5%

Store numbers

Safeway greater than

20,000 sq ft 147 176 200 222 234

Safeway 10-19,999

sq ft 148 144 138 131 116

Safeway less than

10,000 sq ft 27 25 27 25 20

Safeway total 322 345 365 378 370

Presto 212 216 205 169 109

Lo Cost 285 274 271 - -

Source: Safeway.

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