‘Lifestyle,’ payer solutions take shape

The turbulent economy has proven to be challenging for Safeway, as with most other retailers, but 2010 is looking to be on the upswing for the food and drug retailer as it has reduced everyday prices, forged ahead with its Lifestyle concept store and generated the highest annual free cash flow ever for the company.

The 1,725-store grocer has been cutting everyday prices—versus focusing on promotions—despite the recession to better compete with rivals and position itself for future growth.

According to Steve Burd, chairman, president and CEO, the company now is at full-price parity with its primary conventional competition and “well below” its secondary competitors in virtually every market. Burd told analysts during Safeway’s fourth-quarter conference call in late February that he believes this is “a major milestone that builds on a foundation for growing sales and market share in 2010.”

Safeway’s Lifestyle concept continues to take hold. The company has been embarking on this initiative for more than five years, whereby the stores are dramatically redesigned with earth-toned decor, subdued lighting, custom flooring and a number of special features to create an inviting ambience. Depending on the store size and local preference, some features include a sit-down sushi bar, a walk-in temperature-controlled wine cellar and a nut bar.

During 2009, the company remodeled 82 stores to the Lifestyle format, bringing its total Lifestyle count to just shy of 1,400 stores, or 79% of its store portfolio. Safeway has stated that it expected 88% of its stores to be Lifestyle stores by the end of 2010.

In looking at pharmacy—located within 77% of Safeway’s store portfolio as of year-end 2008—sales for 2008 totaled about $3.88 billion, or 8.8% of the company’s 2008 sales of $44.1 billion, according to Safeway’s most recent annual filing. In 2009, Safeway’s sales decreased to $40.85 billion, namely due to lower fuel costs, lower same-store sales and one less week versus the year-ago period. Safeway didn’t break out pharmacy sales in its fourth-quarter results statement issued in February, but—assuming pharmacy sales trended about the same as in prior years—it is likely that pharmacy sales totaled roughly $3.6 billion for 2009.

One aspect of pharmacy that Safeway has promoted is its immunization services. Safeway pharmacy offers immunization services for adults on a walk-in or appointment basis, and also provides immunization services for businesses, school campuses, senior centers or assisted living facilities. Aside from seasonal flu, immunizations offered also include, but are not limited to, the meningococcal vaccine, pneumococcal vaccine, Gardasil and travel medicines.

Meanwhile, the company is looking to share the success it has seen with its incentive-based health plan by establishing similar programs at other employers for a slice of the cost savings it generates.

During a keynote address in Washington at the Business Agenda 2010 sponsored by the National Business Group on Health, Safeway’s Ken Shachmut outlined the plan, according to reports. Shachmut serves as SVP and EVP of the newly formed subsidiary, known as Safeway Health.

Cigna administers Safeway’s health plan, but the incentive plan and several elements of it, such as greater transparency of drug pricing, were developed in-house with input from Cigna and other firms, Shachmut explained, according to reports.

Safeway Health will provide analytics, plan design or redesign assistance, and will be paid 25% of the savings generated over a five-year period. Safeway will not receive consulting fees.

As of late March, Safeway Health was in discussions with four potential clients, and in detailed negotiations with two of them, Shachmut was quoted as saying.

It also should be noted that the grocer generated free cash flow of $1.5 billion in 2009 during a significant period of deflation. This not only exceeded Safeway’s expectations, but also marked the highest annual free cash flow ever for the company.

“Our free cash flow more than doubled. In fact, our free cash flow was up 119% to $1.49 billion from last year’s $681 million,” Burd told analysts. “The big contributors to the increase were lower CapEx and lower tax payments.”

This helped the company lower its total debt on the year nearly $600 million.

“We’ve seen our volume improve steadily each quarter in the United States with no real improvement in the economy, and I think most of us think the economy will begin to see some improvement in 2010,” Burd noted.