Loyalty Programs Are Working for This Retailer

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Safeway (NYSE: SWY) has significantly outperformed the broader markets. Its shares are up 37.50%, as compared to 16% from the greater market. The company is making strides to increase sales through various loyalty program and fuel programs. It's also remodeling its existing stores and pushing private label in an effort to increase profitability.  Based on the data, Safeway is a solid buy.

New programs

Safeway focuses on its loyalty programs.  Just for U, fuel, and wellness have been big hits with customers. The “Just for U” program works because it uses relevant and personalized data for each and every shopper. It focuses on giving more offers to infrequent customers while also marketing to the loyal, more frequent, shopper.  

It rewards customers with free samples and big discounts on items they buy everyday.  Safeway has successfully implemented this program with the help of large data collected about customers’ taste, preferences, likes, and dislikes.  Currently, about 5.4 million customers have benefited from this loyalty program.  These customers have increased their spending and are starting to visit the stores more often.  In fact, almost 50% of the company’s supermarket revenue is coming from these types of shoppers.

Safeway also launched a fuel program with Chevron and Exxon in 2012, and it has been quite popular.  There is a 2% to 3% difference in sales from stores that have the fuel program versus the stores that don't.  Safeway is planning to cover 94% of its stores with fuel partnership programs by the end of the second quarter.

Store redesigning and private label


Safeway had invested $928 million last year for nine new or replacement stores, four lifestyle remodels, and eight other projects. The company is trying to gain customers from all ends of the spectrum. It has strategically clustered its store base in what it calls,  premium, mainstream and value categories.

The premium segment targets higher income customers, where the value segment pushes more affordable products to lower income groups.  Safeway has also been successful with its private label line. It's various private label brands contribute an extra 1200 basis points to its gross margin.  Obviously, private label stuff is much more profitable than the same item from a national brand.

Peer group

Kroger (NYSE: KR) and Supervalu (NYSE: SVU) compete with Safeway. Kroger has raised its market share in 9 out of 17 markets, even though its been facing tough competition from Wal-Mart. It believes customers who are digitally engaged with the company are more loyal, so it has been spending to try and connect digitally.

The company has enjoyed a 120% increase in app users and a 45% increase in Kroger.com visitors. It's also supporting fishery projects and seafood initiatives to gain consumer confidence and improve its fresh image.  And while Kroger is starting to see some positive return from these efforts, it may be some time before an investor sees any meaningful impact in its financial results.  As of now, Safeway is better positioned for positive returns.

Another competitor, Supervalu, has recently signed an agreement to sell 877 stores across the banners of Albertsons, Acme, Shaw's, and Star Market to AB Acquisition, an affiliate of a Cerberus Capital Management. The company has also sold its wholly-owned subsidiary New Albertsons Incorporated to AB.  Cerberus believes its expertise in retail can turn around these struggling stores.

Further, an investor group has purchased up to 30% of Supervalu stock for $4 per share. And while that offer sets the floor for the stock, Supervalu is more a special situation case, than a long term holding.  

Conclusion

Safeway is taking steps to implement specialized loyalty programs, invest in store remodeling, and push its private label brands. Thus far these programs are attracting traffic and increasing volumes.  You should be optimistic about the company’s potential, and given its cheap price, perhaps you should check out the stock.

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Gayatri Sharma has no position in any stocks mentioned. The Motley Fool owns shares of Supervalu. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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