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Case Study: Safeway’s Lifestyle format spotlights perishables

Strategy for seafood departments includes expanded product line and upgrade options

By Lisa Duchene
October 01, 2006

The 1,770-store Safeway supermarket chain may be starring in its own Cinderella story. Squeezed by Whole Foods on the high-end and Wal-Mart on the low-end, the once-struggling grocer's answer to the competition was a bold, new "Lifestyle" store format that has pulled customers b ack into its stores.

Safeway opened its first Lifestyle store in late 2003. By the beginning of 2006, it had converted 450 of its stores to Lifestyle. The strategy has been so successful that Safeway rolled out more than 280 remodels and 20 new stores this summer. Another 300 Lifestyle stores are expected in 2007. By 2008, the Pleas­anton, Calif., grocer will have converted 77 percent of its stores to the new format, which emphasizes perishables and promises a turnaround for the chain.

For Safeway customers, Lifestyle stores offer high-quality perishables, service and value. Décor in the 55,000-square-foot stores features cherry hardwood floors, warm colors, and an expanded perishables section.

Most Safeways are in the western United States and Canada. The company operates in Texas under the Randalls and Tom Thumb banners and in Chicago as Dominick's. In the Mid-Atlantic, it operates as Genu­ardi's and Safeway.

The new format represents many positives for the seafood category - volume, for one. Not all conventional Safeways include a seafood department. But every Lifestyle store has a service seafood department, says Tom DeMott, COO of Encore Associates in San Ramon, Calif., and a former Safeway VP of meat and seafoo d.

Newly opened Lifestyle stores typically ring up sales 24 percent higher than the Safeway stores they are replacing. DeMott suspects the seafood sales volume increase is at least that.

"The big difference with Lifestyle is that the seafood department has gone from stepchild to one of the regular kids at the table," says DeMott.

Safeway is putting more resources into its seafood department, making a greater effort to service its customers and make the department stand out, he says.

"They're more focused on [seafood] marketing and sales activity than Safeway's ever been," says DeMott.

The company is also working on improving its product offerings with a greater variety of sizes and species. Instead of carrying only a 20- to 30-count sea scallop, for example, Safeway added U-15s or U-10s and also offers dry scallops, says DeMott. "Seafood is well on its way to becoming an integral part of the success at Safeway," he says.

"The biggest thing they do there is sell service," says a West Coast distributor who supplies Safeway. "The people behind the counter do a very nice job of catering to the customer."

The product mix in a Lifestyle store is slightly different than a conventional Safeway store, he adds.

"They're not looking to the person who wants to buy a pound of whiting fillets, but to the person who wants to buy 2 pounds of king crab legs at $18 per pound," says the distributor. Life­style stores give shoppers both value options and upgrade opportunities, he says.

The conventional stores, for example, carry a 26-30 prawn, but the Lifestyle stores carry 26-30s plus U-15s. A greater variety of seasonal seafood, such as fresh Alaska king and sockeye salmon and fresh king and Dungeness crab, has helped the Life­style stores add about 20 to 25 percent more items overall, says the distributor.

Safeway has upgraded its quality specifications on newly added premium products like large king crab, U-10 dry scallops and fresh swordfish for its Lifestyle format, says the distributor. But those specification changes have not extended across the board. The chain is buying the same mid-grade oysters and rockfish as it has in the past, he says.

"They haven't become a boutique shop. They're still servicing the everyday customer. They're giving the specialty customer another purchase opportunity, so they don't have to go to Whole Foods," says the distributor.

Other seafood-industry observers echo that observation. They say the Lifestyle format represents an effort but falls short of being a transformation. For one, the chain's purchasing is still primarily price-focused, say insiders.

The chain's seafood philosophy has been to buy the most cost-effective product in "fairly good shape," says another West Coast distributor. "I have heard of no paramount shifts in their philosophy," he says. "It takes significant resources to upgrade seafood on that scale."

Whoever you choose to believe, seafood played a role in the first Lifestyle format tailored to a market.

In early 2006, Safeway opened a 77,000-square foot Lifestyle store - a footprint 40 percent larger than typical - in Boulder, Colo., targeting the local, health-conscious market. Within a few miles from both a Whole Foods Market and a Wild Oats store (and in Wild Oats' home city), the store included a 28-foot seafood case, doubling the number of fish and shellfish products of the store it replaced. The Boulder store also includes a culinary center equipped with a full working kitchen.

"The quality of our perishables, which is a key part of our strategy, continues to improve," Safeway CFO Robert Edwards told investors in early 2006.

Company officials have publicly touted Safeway's private-label perishable offerings, such as the Rancher's Reserve beef brand and O line of organic products, but have not yet talked about changes to the chain's Captain's Choice store brand for seafood.

Overall, consumers seem happy with Safeway's Lifestyle changes. "The current results of Lifestyle stores clearly demonstrate that Safeway has really hit a positive nerve with their customer base," says DeMott. "Lifestyle is generating great sales and profits for them as seen in the financial results. They can't produce these fast enough."

In 2005, Safeway's "turnaround" year, total sales increased 7.2 percent to $38.4 billion. The company grew market share in the U.S. supermarket channel 51 out of 52 weeks and grew sales in nine of its 10 divisions, Edwards told investors. In the first two quarters of 2006, Safeway also posted strong gains: a 3.2 percent sales increase to $8.9 billion in the first quarter and 6.4 percent increase to $9.4 billion in the second quarter. There is no sales 
data available for Safeway's seafood 
departments.

But sustaining those sales gains will take solid execution in categories like seafood that are merchandising- and quality-intensive, says Andrew Wolf, an analyst who covers Safeway for BB&T Capital Markets, an investment firm in Richmond, Va.

Wolf is not recommending Safeway because he is concerned about the company's valuation and its marketing strategy of emphasizing quality over price to consumers, a risky approach in his view.

"It's things like seafood and the commitment to it that will really determine the longevity to the sales lift [Safeway] is now experiencing," says Wolf. "It's hard to near-impossible to transform a huge company like Safeway. That's kept me on the sidelines. But so far they're proving me wrong."

SFlb Contributing Editor Lisa Duchene lives in Bellefonte, Pa.

 

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