Critics of Safeway Stores Inc.'s management will undoubtedly point to distribution problems in the company's Washington division as a continuing failure to adjust to changes in highly competitive markets. While it's true that Safeway had been slow off the mark in modernizing the chain, that's hardly the case today.
Safeway's biggest problem is not so much an entrenched management as it is two other banes of American business: the hostile takeover attempt and the leveraged buyout.
Aside from having to overhaul a far-flung supermarket chain -- much of it obsolete -- Safeway faces a long and difficult recovery from a hostile takeover attempt initiated last year by Washington's Haft family. Oddly enough, the Hafts based their unsuccessful takeover try on a perception that Safeway's management wasn't performing up to par. Encouraged by criticism in the investment community of Safeway's performance, the Hafts contended that they could do a better job of running the nation's biggest supermarket chain, although there was little on which to base that claim.
Aside from failing to act quickly enough to revamp the sprawling 2,300-store chain, Safeway's management found itself having to defend a profit margin of only 1 percent at a time when the industry average wasn't much better. The industry's profit margin after taxes was only 1 percent in 1983 and 1984. It was only 1.12 percent in 1986, down from 1.19 percent in 1985, according to the Food Marketing Institute, the industry trade group based in Washington.
Some food chains, including Giant Food Inc. of Landover, have maintained net profit margins of 2 percent or better for several years. But razor-thin profit margins are considered the norm in the fiercely competitive retail food industry.
Thus, most major supermarket chains in the past decade have stepped up expansion programs, embraced technology and taken on one another in increasingly aggressive price wars. At the same time, the industry has been closing small, outdated stores that were built in the previous three decades.
Safeway's management got out of the gate much later than some of its competitors, to be sure. But the sheer size of the 2,300-store chain may have precluded it from moving as rapidly as smaller competitors. Nonetheless, two years before the Hafts went after Safeway, the Oakland, Calif., company opened more than 150 stores and closed nearly 100 smaller, marginally profitable supermarkets.
Like Giant, Supermarkets General and Kroger, Safeway tied its future to the prototype industry supermarket, the superstore. The larger stores of 40,000 or more square feet are crucial to the one-stop shopping concept. The larger stores not only enable the chains to stock more merchandise but allow them to carry more nonfood items, which have a higher profit margin.
Although saddled with an estimated $5 billion in debt stemming from the leveraged buyout, Safeway is proceeding with ambitious expansion plans in key markets such as the Washington division, which includes Baltimore and Richmond. Already it has opened seven new-generation supermarkets in the division this year and expects to open at least two more by the end of December. At least five more are scheduled to be completed in 1988 and a minimum of four in 1989.
Under ordinary circumstances, opening five stores a year would probably be regarded as a sign of progress and of a forward-looking management at work. But these aren't ordinary times for Safeway, and correcting old problems will be difficult. The recent warehouse snafu that caused a shortage of items in some local supermarkets, for example, may have cost Safeway precious public relations points and, indeed, a measure of customer loyalty.
The problems developed after Safeway closed a distribution center and 30 of 62 stores in Richmond, and merged the Richmond and Washington divisions. The reorganization necessitated an expansion of the company's warehouse in Landover, but distribution problems developed before the addition could be completed.
Detractors are likely to interpret developments such as this as a sign that Safeway's management hasn't gotten its act together yet or that the Hafts were probably justified in their abortive takeover attempt.
A Safeway spokesman offered assurances last week that distribution problems in the Washington division were only temporary and that they have been corrected. Not only has Safeway managed to reinstate a good delivery system but growth in the division is proceeding at a normal pace, according to Larry Johnson, a spokesman for the chain's Washington division.
It's likely, however, that the company will feel aftershocks from last year's costly takeover battle for some time, despite normal growth in the Washington division.