Is it “Safe” to Walk this Way?
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Incentive is the key word for any successful retailer. In a weak economy, where customers are highly price sensitive, retailers find it difficult to survive unless they offer some kind of incentive to consumers. Hence, expecting a grocery chain to do well without using any tactic of lower prices or higher promotions or even new products is a foolish (small-f) thing to do. I am talking about Safeway (NYSE: SWY), a food and drug retailer that has been facing tough times in an uncertain economic environment.
It has been losing market share to discount retailers and dollar stores, which offer the lowest prices possible and snatch away all the attention and the market share. Even warehouse retailers such as Costco (NASDAQ: COST) are giving Safeway stiff competition, as consumers prefer buying in bulk thanks to the extremely low prices. Costco has been benefitting largely from its strategy of keeping a small markup on the goods and attracting customers galore. The warehouse retailer witnessed a jump of 14% and 29% in its top line and the bottom line, respectively, in its recent quarter, highlighting its strength in a weak economic environment.
On the other hand, Safeway posted a lackluster third quarter last week that failed to please the Wall Street, as well as its investors. Let us analyze what it has for us.
Analyzing In Detail…
With revenue almost flat at $10.04 billion, earnings dropped 17% to 108 million over last year. The unfavorable impact of 17 Genuardi stores affected both the top line and the bottom line. In Safeway’s drug operations, there was a large shift to generic brands, which are cheaper than the branded ones. This led to a further decline in revenue. Also, the rollout of its customer loyalty program involved huge costs, which pulled down earnings.
The grocer finally came up with an incentive for their customer that is very similar to peer Kroger’s (NYSE: KR) strategy. Its “Just For U” loyalty program provides discounts to loyal customers who visit the stores often. Kroger has recently rolled out a similar customer loyalty program, in which few loyal customers were sent discount coupons through mail, giving them reasons to come back again. This made customers feel special and had led to a 5.8% increase in Kroger’s first quarter revenue.
Though total sales value took a hit due to the shift to generic drugs, the same provides better margins. Something to look forward to is Safeway’s new fuel partnership deal with Chevron. This will be an added attraction to its stores, since it will have a Chevron fuelling station in all of its parking lots. The company will be adding 900 fuelling stations by the end of the month, providing more convenience to its shoppers.
Safeway is indeed making a large effort to lure customers to its stores. Another area of focus is to upgrade its stores and give them a fresh new look. This makeover might prove to be quite fruitful, since customers want variety and innovation.
The Bottom Line
The grocer has not been performing well, owing to its lack of efforts and problems such as cost inflation and weak demand. However, it is attempting to overcome such problems and attract more customers. Safeway has been disposing its unprofitable operations so that it remains focused on the more profitable ones. Its loyalty program, new fuel partnership and the makeover plans might help the retailer witness better days going forward. However, it will not be prudent to jump onto the stock so early. Investors should rather wait for the right time to make the most of the potential opportunities.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale. Motley Fool newsletter services recommend Costco Wholesale. 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.If you have questions about this post or the Fool’s blog network, click here for information.