Safeway Inc. Business Information, Profile, and History

History of Safeway Inc.

With 1,368 stores in the United States and Canada, Safeway Inc. is the second largest food and drug retailer in the United States, trailing only The Kroger Company. About a dozen major Safeway distribution centers deliver thousands of food and nonfood items, both national and private-label brands, to the company's retail outlets, which are located in the western United States, Alaska and Hawaii, the mid-Atlantic region, and western Canada. The company also holds a 49 percent stake in Casa Ley, S.A. de C.V., which operates 74 food and general merchandise stores in western Mexico. Kohlberg, Kravis & Roberts Company acquired Safeway and took it private in 1986, after which the company radically downsized itself in the following two years. Safeway's streamlining efforts were so successful at reducing the debt incurred during the leveraged buyout that the company went public again in 1990.

Early History

In the early days of this century S. M. Skaggs saw that the grain farmers in his community of American Falls, Idaho, were poorly served by their local grocery stores. Without money except at harvest time, their buying power was considerably reduced by the heavy credit charges that store owners levied. Also, the variety and quality of goods was poor, causing much customer dissatisfaction. As a minister, Skaggs was interested in solving these problems. He talked a local bank president, D. W. Davis (later the governor of Idaho), into a loan, and then set himself up in an 18-by-32-foot store and opened for business.

Despite his zeal, Skaggs could not make his store particularly profitable, so in 1915 he sold it to his son, M. B. Skaggs, who at age 27 had already been involved in business for years. The younger Skaggs added energy and sound business sense to his father's sense of mission, and by 1926 he was running a chain of 428 grocery stores throughout California and the Pacific Northwest. People flocked to Skaggs's stores, not only for the cash-and-carry plan which his father helped to create, but because Skaggs used every inch of store space to stock a large variety of goods and worked hard to get quality meat and other perishables.

In 1926 Charles Merrill, one of the founders of Merrill Lynch, was looking to expand his investment firm's involvement in the retail chain store business. Seeing a huge potential for growth in the West, he purchased Safeway Stores, Inc., a chain of some 240 stores founded by Sam Seelig in 1914 that covered most of the West Coast. Merrill had the capital and the stores to do business; all he needed was experienced management. Merrill asked the president of Safeway, James Weldon, who the best man to run the new venture was. Weldon named M. B. Skaggs as his only choice, and soon Skaggs had been persuaded to add his chain of 428 stores to Safeway's 240. The newly expanded venture kept the Safeway name and Skaggs was made president of Safeway's operating subsidiaries in California and Nevada in addition to retaining control over his own stores.

Merrill had insisted his deal with Skaggs be profitable, so Skaggs expanded the business at a tremendous pace during its early years. By 1928 Safeway had expanded to 2,020 stores and its stock was listed on the New York Stock Exchange. All of this pleased Merrill so much that he made Skaggs president of the entire company. The following year Safeway even ventured into international expansion, establishing Canada Safeway Ltd. in Winnipeg. Noting the different distribution system used in Canada, Safeway acquired a Canadian wholesaling business to eliminate the usual high price markup there.

The Great Depression years decreased consumers' food budgets dramatically, creating difficulty in the low-profit-margin grocery industry, but Safeway was able to survive, thanks once again to Charles Merrill. In 1928 Merrill had sent Lingan A. Warren to run a string of about 1,400 grocery stores in the Pacific Northwest known as the MacMarr Stores. Warren had earned Merrill's confidence through his insight into the mechanics of store management. In 1931, with both the MacMarr and Safeway chains hurt by sliding profits, a deal was brokered to unite the two chains, and Lingan Warren became a part of Safeway; the merger helped Safeway Stores reach an all-time high of 3,257 stores that same year (this number would decline substantially over the succeeding decades as the company concentrated on larger stores, closing many smaller ones). Assuming the presidency of the company in 1934 and holding it until 1955 (Skaggs became chairman of the board), Warren exerted a huge influence on Safeway throughout his tenure with the firm. He helped to innovate policies that educated consumers about what they were getting, such as supplying scales to price fruits and vegetables by the pound rather than the piece. Warren pushed the idea of allowing customers to serve themselves whenever possible, cutting overhead costs, and he also involved the company in special merchandising campaigns that served more individual grocery needs. Together Skaggs's energy as chairman of the board and Warren's nuts-and-bolts insight gave Safeway the strength to weather the Great Depression.

Rapid Growth Following World War II

World War II brought much needed relief to the grocery business, as the general economic turnaround created by huge government spending put money back into consumers' hands. After the war, Safeway shared in the economic explosion that the United States, and particularly the West, experienced. Soldiers returning from the Pacific theater liked what they saw of the West Coast, and by 1947 they made up a third of Safeway's workforce and helped the firm reach $1 billion in sales. In 1949 Safeway launched a massive building campaign to replace more than 1,000 old stores with newer, larger models. The $200 million project brought many conveniences such as dairy sections, self-help meat stands, and frozen food cases into the Safeway mainstream.

Despite the Korean War, when wage and price controls as well as material rationing were still in effect, Safeway prospered enough to improve and expand its warehousing and distribution operations. The famous "S" insignia, adopted in 1952, could be seen on vast new warehouses in most western states. This extensive warehousing system quickly gave it a reputation for stocking high-quality meats, which meant that many consumers felt that Safeway was the only major grocery chain that could offer them the chance to fill all their food needs under one roof.

In 1954 Safeway joined the list of firms that offered their employees major medical coverage, a move that helped cement good labor relations. In 1955 an era ended at Safeway when Lingan Warren retired from his posts as president, general manager, and director of the company. The slight, bespectacled, reedy-voiced superclerk had been one of the driving forces in the firm for almost a quarter century. Warren was succeeded as president by Milton A. Selby, a longtime member of Safeway management. Robert A. Magowan, Charles Merrill's son-in-law, was named company director and chairman of the board, leaving his post as securities and marketing services director at Merrill Lynch.

Magowan took over Safeway completely when he was named president of the firm in 1957. That same year the company reached $2 billion in sales, a doubling of total volume in only ten years. Safeway was the only firm west of the Mississippi selling at that volume. Under Magowan, Safeway would expand at an even faster rate than ever before, becoming the first retail food chain to sell more than $10 billion worth of merchandise. Magowan's aggressive marketing strategy and hunger for expansion attracted national attention and greatly enhanced the public profile of the company. By 1959, under Magowan's leadership, Safeway had moved into Alaska and Iowa.

Overseas Expansion in the 1960s

At the beginning of the 1960s, Safeway's construction program had ensured that almost half of the firm's retail outlets were less than five years old and close to two-thirds were less than a decade old. In 1960 the company opened operations in Louisiana. Safeway's first overseas expansion campaign came in 1962, when the company bought a string of 11 stores in England. The following year Safeway crossed the Pacific to open stores in Australia--through the purchase of three Pratt Supermarkets in the Melbourne area--and Hawaii, and strengthened its presence in Alaska. In 1964 Safeway moved into West Germany--with the acquisition of several Big Bear Basar stores--and opened the first "international" supermarket in Washington, D.C. Stocking food products from all of the world's major cuisines, this store was built to be a kind of United Nations of food, offering Washington's shoppers everything they needed to prepare native dishes from around the world.

In 1965 the Amalgamated Meat Cutters and Butchers Workmen's Local 576 picketed Safeway's Kansas City stores. Most stores in the area were able to operate, but some were shut down and business was hurt at almost all local stores. This was one of several labor disputes that occurred in the 1960s and 1970s.

When the company reached its 40th anniversary in 1966 it proudly announced that it had achieved $3 billion a year in sales--and had paid a dividend through the Great Depression, World War II, and ten years of material shortages and price controls. During the same year, Quentin Reynolds succeeded Robert Magowan as president of the company.

In 1969 Robert Magowan resigned as CEO of the firm, phasing out his active involvement in the company. This created some uncertainty since his tenure as Safeway's lead manager had been spectacularly successful.

In 1970 Quentin Reynolds became Safeway's CEO and William Mitchell succeeded Reynolds as president; Robert Magowan kept only his post as chairman of the executive committee. Mitchell would lead the firm to yet more expansion--in 1972 Safeway surpassed the Great Atlantic & Pacific Tea Company (A&P) as the world's largest food retailing chain. In 1971 Safeway was among the first to adopt the now common practice of labeling ground beef by fat content rather than by weight alone, continuing the firm's tradition of supplying consumers with all the facts they needed to make a purchasing decision.

In the mid-1970s several legal issues surrounding the company came to a head. In 1973 a suit filed against Safeway by the United Farm Workers (UFW), led by Cesar Chavez, was denied class action status, a major victory for Safeway. The UFW, along with other groups, had wanted Safeway to pressure lettuce and grape growers to accept the UFW as the employees' collective bargaining agent. Safeway claimed that when it refused, the UFW undertook a campaign of harassment and sabotage, and countersued the UFW for $150 million.

Then in 1974 Safeway was named with most of its competitors in a $1.5 billion suit brought by a group of cattlemen for allegedly fixing prices in the purchase of dressed beef. Although Safeway only paid the cattlemen $150,000, in making the payment the firm agreed "to continue to comply with the antitrust laws."

Dale L. Lynch was named president of Safeway in 1977, taking William Mitchell's place. Lynch thought that Safeway needed to offer a greater variety of goods and services to maintain its position as the leading food retailer. Eventually Lynch's idea led to the execution of the one-stop-shopping concept.

Robert Magowan officially ended his active role in Safeway in 1979, serving only as honorary director of the firm after this time. He had resigned his post as a company director and chairman of the executive committee in the previous year. That year Safeway was involved in another legal case. A young shelf-stocker challenged his dismissal by the firm for violating a "no beard" policy and took his case all the way to the Supreme Court. The Court upheld Safeway's position, setting an important precedent regarding a company's right to regulate workers' appearances.

KKR Takeover and Streamlinings Marked 1980s

In 1980 Peter A. Magowan, Robert Magowan's son, succeeded William Mitchell as chairman and CEO of the firm. Peter Magowan's corporate strategy stressed state-of-the-art technology in retailing and merchandising, aggressive marketing campaigns, and incentive programs for employees.

Magowan, as part of his expansion plans, reached agreements to buy a chain of stores in Australia. In 1981 the company entered into a joint venture with Casa Ley, S.A. de C.V., after which Safeway held a 49 percent interest in the 13-store chain in western Mexico. This heightened internationalism helped to compensate for price wars with A&P and Giant Food Inc. Even though Safeway was selling about $16 billion worth of goods each year, any dip in consumer interest hurt profits because the profit margin in the retail food business is only about one percent.

In 1982 Safeway increased its appeal to customers by beginning to sell many health-oriented products, implementing Dale Lynch's concept of one-stop shopping. The firm also formed a joint venture with the Knapp Communications Corporation to create a string of gourmet food stores called Bon Appetit. Two such stores in the San Francisco Bay area offered such delicacies as truffles and rare cheeses in a supermarket setting.

James A. Rowland replaced Lynch as president and CEO in 1983. Rowland was known for his sensitive management style; his appointment heralded a new era of improved employee relations. One innovation Rowland introduced was the PAYSOP program, which linked employees' success to Safeway's by granting most workers stock in the company as part of their pay. At this time Safeway also began offering bulk food items and installed salad bars to keep pace with its customers' desires.

In 1985 Safeway merged its Australian operations with Woolworth's Ltd. amid increasing speculation that the chain would be the victim of a takeover bid. The merger between Safeway and Woolworth's gave Safeway a large pretax cash bonanza, leading to speculation that the firm might be trying to liquidate some of its assets to slim down and create a cash pool to buy its own stock and thwart any unfriendly bids (Safeway also gained a 20 percent stake in Woolworth's). Also in 1985 the company sold its operations in West Germany.

In June 1986 all speculation ended when the Dart Group Corporation, led by the Haft family, announced that it had acquired about six percent of Safeway's stock and would try to gain a controlling interest. Since the Hafts were known raiders and had no food retail experience, Safeway never believed that the takeover would be anything but unfriendly. Dart ultimately offered $64 a share for Safeway. Safeway management rebuffed the takeover bid with talk of breaking up the company. The matter was finally resolved in August 1986 when Safeway was acquired and taken private by Kohlberg, Kravis, Roberts & Company (KKR) for $69 a share or $4.3 billion. The Hafts ended their hostile takeover bid for an option to buy 20 percent of the holding company that was founded to buy Safeway.

Saddled with enormous debt after the buyout--$5.7 billion worth--Safeway was forced to streamline its operations and sell a large number of its stores to reduce the crushing interest burden it had assumed. In 1987 Safeway sold its Liquor Barn retail outlets to Majestic Wine Warehouses Ltd., its 59 grocery stores in Texas and New Mexico, and its entire Oklahoma division. The biggest sale of all--in a deal valued at close to $1 billion--was that of Safeway's British operations to the Argyll Group PLC (which in 1996 changed its name to Safeway PLC, a company with no relation to Safeway Inc.).

The streamlining of Safeway ended in 1988 when the firm divested its Kansas City and Little Rock divisions and part of its Richmond division; sold its 99 Houston-area stores to an investment group led by local Safeway management; and sold its 162-store southern California division to The Vons Companies, Inc., in exchange for a 30 percent stake in Vons, plus cash. The sale and trimming of unprofitable operations reduced Safeway's debt and increased its profitability so much that KKR announced in 1988 that Safeway might go public again within a year or two. Chairman and CEO Magowan claimed that the leveraged buyout of Safeway forced it to become more competitive than it had been, so much so that in 1988 the firm made a greater operating profit on $14 billion in sales than it did on $20 billion in sales in 1985. By selling a total of around 1,100 stores for about $2.4 billion, Safeway was able to slash its debts while losing assets that only created $50 million in profits a year after taxes.

1990s Brought New Era As Public Company

Safeway Stores, Inc. did in fact go public again, with the company emerging as Safeway Inc. in 1990 through a public offering, after which KKR still held much more than a majority stake in Safeway. Proceeds from the offering were earmarked toward a $3.2 billion capital improvement program that aimed to renovate existing stores and open new ones. Safeway, however, was still saddled with a fairly high debt load of $3.1 billion, and had to face a most difficult competitive environment in the early 1990s: an economic downturn and increasing pricing pressures from burgeoning discounters and warehouse clubs. Net income for 1992 was a minuscule $43.5 million on sales of $15.15 billion. In October of that year, Steve Burd--a longtime consultant to Safeway with experience at two other food chains with connections to KKR, The Stop & Shop Companies, Inc., and Fred Meyer, Inc.--was named president, then in April of the following year was named CEO as well. Magowan, who relinquished day-to-day control of Safeway in order to become president and managing general partner of the San Francisco Giants baseball team, remained chairman.

Over the next several years, Burd concentrated on three main priorities: slashing costs, increasing sales, and reducing debt. Costs were cut in part by taking a hard line with the employee's unions, which led to a number of protracted strikes and lockouts in the 1990s. Cost savings were used to lower prices in a successful attempt to increase sales. Same-store sales, which had fallen 1.6 percent in 1992, increased 5.1 percent in 1996. Sales hit $17.27 billion by 1996, a total achieved from 1,052 Safeway stores, 51 fewer than the 1,103 stores in the chain in 1992. Safeway was also significantly more profitable as well, as 1996 net income reached $460.6 million. Burd also succeeded in cutting debt by retiring some and restructuring some; the company's total debt had been reduced to $1.98 billion by 1996.

During this turnaround period, Safeway consolidated its private-label brands under the Safeway brand and a new Safeway SELECT brand; the latter was used for premium products, more than 650 of which were introduced from 1993 through 1996, from soft drinks to laundry detergent. At the same time, the company concentrated much of its capital expenses on modernizing numerous stores, with 320 stores receiving makeovers from 1994 through 1996 alone. In early 1996, KKR sold about 14 percent of its stake in Safeway through a secondary offering; following the offering, KKR held about 50 percent of Safeway stock.

Operating in an industry that had seen its share of marriages in the merger-crazed world of the mid-1990s, Safeway was now in a strong enough position to consider growing through acquisition itself. Its first target was Vons, already 34 percent owned by Safeway. In April 1997, in a $1.376 billion deal, the company completed the purchase of the rest of Vons and its 325 stores in southern California. As part of the deal, Safeway also repurchased 32 million KKR-controlled shares, leaving KKR with a stake of about 38 percent. With the acquisition--which made Safeway second only to Kroger in the U.S. grocery industry--sales increased 30 percent in 1997 to $22.48 billion, while net income increased 21 percent to $557.4 million. For the year, Safeway and Vons combined to invest $829 million in capital expenditures, including opening 37 new stores, remodeling 181 stores, and starting construction of a new distribution center in Maryland.

In May 1998 Magowan retired and Burd took on the additional title of chairman. As a new century loomed, Burd seemed likely to continue to concentrate on containing costs, growing sales, and spending capital wisely. Additional acquisitions also seemed certain to figure significantly in the company's future, with moves into new territory--or the reclamation of territory once held--very possible.

Principal Subsidiaries: Safeway Canada Holdings, Inc.; Safeway Australia Holdings, Inc.; Safeway Leasing, Inc.; Oakland Property Brokerage, Inc.; Glencourt, Inc.; Milford Insurance Ltd.; Pak 'N Save, Inc.; Safeway Trucking, Inc.; Photo Acquisition I, Inc.; Photo Acquisition II, Inc.; Safeway Southern California, Inc.; Safeway Denver, Inc.; Safeway Richmond, Inc.; Safeway Dallas, Inc.; Safeway Supply, Inc.; Safeway Corporate, Inc.; Safeway Stores 42, Inc.; Safeway Stores 43, Inc.; Safeway Stores 64, Inc.; Safeway Claim Services, Inc.; Safeway Stores, Incorporated; Safeway Warehouse, Inc.; Casa Ley, S.A. de C.V. (Mexico; 49%).