Lifestyle format continues to drive revitalized Safeway sales

PLEASANTON, Calif. —Safeway reported an 11 percent decline in profits for its second quarter, but the retailer still earned a robust $218.2 million in net income on the strength of its Lifestyle stores that now comprise more than half of the chain’s store base.

The 1,740-store grocer reported a 4.5 percent increase in same-store sales for the quarter and a 5 percent increase in total revenue of $9.82 billion. “We feel very good about our performance in the first half, and we feel equally good about our performance in the second half,” Safeway chairman Steve Burd told analysts during a July 19 conference call.

Safeway once again credited its remodeled Lifestyle stores for its strong performance. The store format, which debuted in 2004, now accounts for more than 50 percent of its base and has a proven track record that’s reflected in Safeway’s nine consecutive quarters of improved same-store sales.

The Lifestyle format features a more upscale look with wooden floors, better lighting and the addition of Starbucks coffee shops and flower stands near the store entrance. The format was in 46 percent of its stores at the end of 2006, and Safeway plans to remodel about 300 stores in 2007 to increase that percentage to 60 percent. By the end of 2008, the company expects to have 77 percent of its store base converted.

Like many supermarkets that operate food-and-drug combo stores, Safeway doesn’t release pharmacy sales. But they comprise close to 8 percent of its total revenues, with an estimated $3.7 billion in pharmacy sales in 2006 (second only to Kroger among supermarkets). And the numbers show the remodeled pharmacies with bright signs in Lifestyle stores definitely play a part in their success.

“There’s no doubt they’re important to the format,” said George Whalin, president of Retail Management Consultants in San Marcos, Calif. “In addition to the [prescriptions], the pharmacies have a broader selection of merchandise, and that helps bring people in.”

In addition to generating more store trips for consumers that need to fill a prescription, pharmacies are solid profit centers for Safeway. “The merchandise in pharmacies provides good margins, definitely better than food,” Whalin said.

The chain has pharmacies in 1,350 of its stores for a penetration rate of 77 percent. That number is increasing as Safeway includes pharmacies as a standard part of all its Lifestyle stores and adds them to nearly every remodel, excluding them only in stores too small to accommodate them. The pharmacies participate in all Medicare Part D plans, but have opted not to offer $4 generics.

Safeway enters the fall expecting sales to slow slightly in the second half of the year, but still expects annual profits of about $900 million. Fears about inflation prompted Safeway to lower its expectations for the remainder of 2007. A Goldman Sachs report noted that Tesco’s debut in California this fall also could be a factor.

The chain also reported good news in late July when it reached a new labor agreement with the United Food and Commercial Workers in Southern California. The four-year deal provides workers with better health benefits and staved off the possibility of a strike similar to one in 2003 that went on for four months and resulted in hundreds of millions of dollars in lost sales.