Safeway gambles on no-frills stores

Since the arrival two years ago of chief executive Carlos Criado-Perez, Safeway has embarked on a turnaround programme that has delighted analysts and made rivals take note.

But last week’s announcement that the UK’s fourth biggest supermarket is planning to launch a no-frills discount chain in the country’s less prosperous areas has been greeted with scepticism.

Safeway has at the same time axed its online shopping service, Collect, claiming the money would be better invested in its core business. It also recently abandoned its online wine service, Wine Direct, after its partner, Madaboutwine, pulled out of the venture.

Speaking at Safeway’s half-year results presentation last week, Criado-Perez, a former Wal-Mart executive, hailed the discount sector as “an untapped opportunity for big retailers”.

The new discount chain will carry an as yet undisclosed name, as well as the Safeway brand, on its fascia. The group believes there is scope for up to 200 stores in less affluent areas of the UK, where competition comes mostly from local independent operators or the Co-op.

But Richard Perks, senior analyst at Mintel division Retail Intelligence, questions Safeway’s latest move on the grounds that in the early Nineties the group, then called Argyll (it was renamed Safeway plc in 1996), disposed of a chain of discount stores operating under the Locost brand.

Perks says the Locost chain was sold to Co-op Retail Services (now the Co-operative Group) because “it was being squeezed by discount stores such as Aldi on the one hand and mainstream supermarkets on the other”. CRS rebranded the Locost stores as Co-op Pioneer shops, but sold them off a few years later as part of a strategy to cut costs by focusing on small supermarkets and convenience stores.

“The management running the Safeway business has changed since then. But I don’t think it would be unfair to ask why it has decided to go down the discount route again,” says Perks.

He adds: “Retailers should stick to one format that they understand. It is not possible for one management team to have one philosophy for one chain and a completely different philosophy for another. It needs to concentrate on getting Safeway right, rather than putting capital into other projects.”

Criado-Perez has remodelled Safeway as a fresh food and takeaway meals specialist and restructured the chain to offer four formats: convenience stores, supermarkets, superstores and hypermarkets. The first hypermarket will this month open in Plymouth, with a further 29 planned over the next two years.

Some analysts have questioned whether Safeway will be able to sustain a strategy of matching Asda’s prices in its hypermarkets. They also claim it may have stretched itself too far by planning to increase capital expenditure on new stores and refurbishment by £100m – to £550m – next year.

But Sally Bain, a retail analyst at Verdict, believes there is a gap in the market for a “good discount format with a strong perishable offer” because the other main players in the discount sector (Aldi, Lidl and Netto) concentrate on frozen and ambient products.

Growth in the discount sector has slowed in the past five years. Even the biggest operator, Aldi, accounts for little more than one per cent of the grocery market, followed by Lidl (0.89 per cent) and Danish company Netto (0.36 per cent). The slowdown has forced Netto to scale back its expansion programme, with some analysts predicting that Netto’s UK stores will next year be bought by Lidl or Aldi.

An Asda spokesman claims the chain is not worried by new discount formats: “The UK discount sector has not had as much of an impact as elsewhere because players such as ourselves can offer comparable prices and much more choice.”

Safeway refuses to elaborate on plans to return to TV advertising after a two-year absence (MW November 29), except to say that it will not scrap its local marketing strategy in favour of national branding campaigns.

The supermarket, which once spent more than £35m a year on ads, has in recent times concentrated on flyers and local press work to compete on a local level and improve the performance of individual stores. A nine per cent increase in profits for the six months to October 13, taking the store’s pre-tax profits to £181m on sales of £5.02bn (up 5.9 per cent) on the same period last year, suggests this strategy is working. The company claims it gained 500,000 customers in the same half-year period.

Analysts are divided over Safeway’s decision to pull out of the online shopping market. One City analyst says that, although the online grocery market is “tiny”, it is important for supermarkets to at least keep a foot in the door. “If the online

market grows to become significant, Safeway could be at a disadvantage in the longer term. Tesco seems to have the right strategy, servicing the online business from its stores.”

Tesco dominates online grocery shopping in the UK and claims to have a two-year lead over its rivals, with sales last year of £237m. While Iceland is the only other company to have launched a nationwide Internet service, Waitrose, Asda and Sainsbury’s all offer a service in some regions.

But Verdict’s Bain believes Safeway is right to pull the plug on its fledgling online business: “It was not really a proper online service, in the sense that customers could order goods over the Internet but had to collect them from a store. The online shopping sector is so competitive and, while Tesco has been pretty successful, Safeway is sensible to take stock of its core business while it is still at turnaround stage.”

Bain adds there is still so much “churn and experimentation” in the online sector that Safeway would not be at a great disadvantage if it returned to it in the next couple of years.

But, despite releasing encouraging figures last week, Safeway still has some ground to make up if it is to catch the big three: Tesco, Sainsbury’s and Asda. Whether launching a chain of discount stores and closing its online division will help remains to be seen.