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Not Your Grandma's Private Label

April 1, 2008
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Not Your Grandma's Private Label

BY KATHIE CANNING

A huge rebranding effort - based on consumer and household insight - is re-energizing Safeway's private label program.

It wasn’t too long ago that Pleasanton, Calif.-based Safeway found itself a bit overwhelmed. Between the late 1990s and 2001, the retail giant acquired five regional retail chains throughout the country — each with a loyal consumer base that, in some cases, appeared less than overjoyed with Safeway’s tweaks and changes. (See the timeline on p. 22.)
For example, when the company took over Chicago-based Dominick’s stores, they removed some products that were local shopper favorites and brought in some centrally procured items that just “didn’t measure up,” contends Jim Hertel, managing partner for Barrington, Ill.-based Willard Bishop.
“It just really confused the Chicago shopper; I think, quite frankly, that they got off on the wrong foot with them,” he says.
Later, after concluding it could not reach a competitive labor contract with the local clerks union, Safeway says it began a search for a buyer for its Dominick’s stores. But a deal to sell them (which by then were losing money) fell through in 2003. At about the same time, Safeway was dealing with a bitter labor dispute in Southern California.
In the 2001 to 2003 timeframe, Safeway says it also undertook the difficult task of centralizing all of its marketing, merchandising and procurement functions. With its marketing sources directed elsewhere, Safeway’s private label program lacked focus. In fact, the company found itself with an overabundance of private labels — some 70 of them representing thousands of food and non-food products.
In 2003, Safeway executives formulated a game-changing new strategy that was designed to differentiate its offerings from other conventional supermarkets. This strategy, Safeway says, involved the renegotiation of labor contracts, the upgrade of perishable quality, remodeling of stores to the Lifestyle format (to create a very comfortable shopping environment) and revitalization of its corporate brands.
Safeway executives realized that, in addition to a resolution of the regional-chain shopper-loyalty and labor issues, a reassessment and revision of its private label program would be critical to the 1,738-store chain’s future.
Brand-Building 101
Safeway got a much-needed shot in its private label arm in late 2005, when it hired James White to serve as senior vice president of consumer brands. White — who oversees the marketing, manufacturing, finance, innovation, product development and outside sales for the company’s private label brands — previously worked for Nestle Purina and Procter & Gamble. His consumer packaged goods (CPG) background has helped him in a mission to get Safeway thinking a lot less like a private label retailer — and a lot more like a consumer brands producer.
“He thinks strategically,” Hertel says. “People who are thinking strategically about the roles of private label are thinking about the impact on the brand and are really approaching it as a brand marketer.”
A major accomplishment during White’s tenure is Safeway’s rebranding of its entire private label portfolio — or what the company calls its consumer brands. Over the course of two years, the chain whittled a cumbersome assortment of 70 consumer brands down to 10 “power brands” (see sidebar on p. 28). The rebranding effort — which also entailed the development of attractive new packaging — encompasses approximately 3,000 product items.
“All are clearly positioned based on consumer and household insights,” White told PL Buyer.
Such insights now are critical to Safeway’s corporate brand program, and White stresses that they drive consumer solutions such as the company’s recently launched Eating Right and O Organics for Babies lines.
“Both [lines] are driven by deep consumer insights and deliver multi-category lifestyle solutions,” he says. “Overall, we are in the brand-building business, not traditional private label.”
The revamped strategy is garnering praise from industry observers and suppliers.
“Some of the branding that they have done has been successful and has differentiated themselves from other grocery retailers,” notes a spokesperson with a Midwest private label manufacturer.
“Examples would be O Organics and Eating Right. I would guess that many consumers perceive these as somewhat of a national brand.”
A vice president with another private label manufacturing company agrees, calling the Eating Right line the “most impressive ‘consumer brand’ line” in which he’s participated during his 28-year career.
“It is meeting a true consumer need and is being well-communicated and funded, which will make it a very big success,” he adds.
From an investment standpoint, Hertel applauds Safeway’s ongoing efforts dedicated to the O Organics line.
“[O Organics] makes a statement and it’s very consistent with Safeway’s image, both internally in terms of the focus on food and health, and externally in what they’re doing with the Lifestyle stores and a lot of the other pieces in terms of branding the Safeway operation. ... So I think that’s an investment [in the company’s future].”
The O Organics and Eating Right portfolios also mesh well with Safeway’s growing reputation in the health and wellness arena. Among its many efforts here are a program that raises millions of dollars each year for breast and prostate cancer research and awareness programs; a “Good to Know” education campaign that disseminates nutrition and wellness information to shoppers; FoodFlex, an online nutrition tool available to Safeway Club Card members; pharmacies that offer flu shots and screening services for bone density, cholesterol and body mass index; and a plan in the works to offer employees health insurance discounts if they participate in a company-sponsored nutritional program linked to FoodFlex.
Only the Beginning
Safeway’s rebranding efforts appear to be only a hint of the good things to come on the corporate brand side. In a February 21 investor conference call, Safeway Chairman, President and CEO Steve Burd made it clear that consumer brands would continue to be growth drivers moving forward — especially as consumer concerns centering on the economy persist.
“I think that we are clearly observing a cautious consumer, and I think some of that caution stems from the fact that they are a little bit concerned about the economy,” Burd said. “We see some evidence of trading down, and as we look at the first seven weeks of the quarter, we see a very modest softening in our identical store sales. You see the trading down in items you might consider really discretionary, like the ultra-premium wine category, and then ... you see it in the growth of consumer brands not just for us, but for the industry in general.”
Burd went on to say that even if inflation were to continue to ramp up, it would favor a strong corporate brand program such as Safeway’s, giving the company “an opportunity to do well in spite of an inflation.”
Going forward, White says Safeway’s consumer brands program will continue to focus on “building consumer solutions that deliver great value [and] superior product quality and satisfy lifestyle needs.” The company’s approach provides a significant point of difference for the consumer, he says, and creates loyalty.
To accomplish that, Safeway will rely on a “highly capable” manufacturing team, White says, leveraged in conjunction with a reliable network of co-pack and supply partners. Corporate brand decision-making will continue to be driven by brand strategy and capability.
Although roughly 22 percent of Safeway’s corporate brand products are produced at one of 31 Safeway-owned manufacturing facilities, the company relies heavily on its supplier partnerships to build product success stories.
“We are working hard to build more integrated partnerships to drive better branding and faster innovation,” White explains.
Safeway not only is on the cutting edge of innovation and willing to do what it takes to communicate well with their customers, one manufacturing partner says, but also works well with key suppliers to “identify opportunities and bring ideas to life.”
But at least one exciting private label concept Safeway is testing (rather quietly) is tied to a restaurant instead of a manufacturing facility. Last summer, the company opened the Citrine New World Bistro — a casual dining restaurant located in Redwood City, Calif. — to test consumer acceptance of prepared entrées for sale in its stores, according to news reports.
Although Safeway executives have said very little about the restaurant or the entrées’ development, Burd did mention the products during the February 21 conference call.
“We are in test mode with the entrées; we actually have them in 10 stores,” Burd said. “We have proven that consumers will buy the product. In fact, we have beaten our internal estimates by a country mile in terms of the acceptance [by] consumers.”
The next step for the entrées? Burd said Safeway needs to “prove out the business models,” as well as perform a bit of SKU rationalization. It also needs to work out the supply chain. Some of the product has been sourced on the East Coast, and the company’s now shifting that over to the West Coast to lower costs, expand shelf life and improve shrink.
“We remain very optimistic that this will work well,” Burd said. “It’s really early at 10 stores, but we are beating our sales expectations roughly by a factor of three.”
Although Burd still terms the entrées an “experiment,” he said the company expects to have something “out of the ground” here during the first half of this year.
Whatever the experiment’s ultimate outcome, we’re betting that we’ll soon be seeing many more innovative consumer brand products that fit in with Safeway’s “Ingredients for Life” mantra, enhance the shopper experience and positively impact the company’s bottom line.
“Our approach provides a significant consumer point of difference and creates loyalty,” White says. “We are focused on building highly differentiated and relevant brand propositions that complement our overall strategy and provide excellent value.”
Lifestyle-Minded
Of course, consumer brands are only a part of the equation for Safeway’s current and future success. Another major piece of that equation — and an additional strong differentiator —is the Lifestyle store format, introduced in 2003 to showcase Safeway’s “commitment to quality, particularly in the perishables departments, with high-quality fresh produce, meat, seafood and floral departments.”
Last November, Safeway celebrated the milestone opening of its 1,000th Lifestyle store. By the February 21 conference call, that number had climbed to 1,024 stores — essentially 60 percent of the chain’s lineup.
“Our Lifestyle stores highlight our passion for innovation by delivering superb-quality perishables and outstanding proprietary brands, all displayed in an enhanced shopping environment,” Burd said in a statement. “Our customers continue to say we are providing them with much greater value.”
The format also is a profitable proposition for Safeway. During the past two years, the performance of Lifestyle stores exceeded Safeway expectations in terms of sales and internal rate of return, according to new reports. And the company anticipates that strong contributions from Lifestyle stores and product innovation will deliver identical store sales growth (excluding fuel) between 3 percent and 3.2 percent in 2008.
“I’ve always described the Lifestyle strategy as both a great defense and a great offense, so we’re well down that path,” Burd said in the February 21 conference call. “We’ve got two years remaining [to complete approximately 90 percent of the remaining stores].”
Weathering the Storms
Like just about every other major supermarket player, Safeway faces a few dark clouds mixed in with all the sunshiny news.
Although its overall sales increased 5.2 percent over 2006 sales to reach $43 billion — and the company provided a strong earnings forecast for 2008 — Safeway’s shares fell almost 10 percent following the February 21 investor conference call. According to Portfolio.com, investors chose to focus on slightly lower same-store sales. Other news reports suggest the drop relates to worries about a recession and rising food prices — and their affect on consumer purchasing decisions.
During the February 21 conference call, Burd pointed to cost-reduction initiatives the company began in October 2007.
“We began a very concerted effort to sort of return to some of our core strengths, which has been cost reduction over the years,” Burd said. “So we have put into place a very aggressive cost reduction effort for 2008. This effort is expected to provide additional pricing flexibility for us throughout 2008 and enable us to achieve our earnings target even in the event that the demand [softens] further.”
But the current environment of economic unease shouldn’t threaten Safeway’s plans for its consumer brands.
“Strong consumer and household insights will drive how brands will be built in the future,” White stresses. “We expect to be a leader in building superior brand propositions, working with co-packer and supply partners more closely.”
Acquisition timeline
During a five-year time span, Safeway embarked on an aggressive acquisition program, buying the following regional food and drug retailers:
1997 — The Vons Companies Inc., a Southern California- based food and drug retailer operating under the Vons and Pavilions names.
1998 — Dominick’s Supermarkets Inc., a Chicago food and drug retailer.
1999 — Carr-Gottstein Foods Co., Alaska’s largest food and drug retailer.
1999 — Randall’s Food Markets Inc., a Texas food and drug retailer operating under the Randall’s and Tom Thumb banners.
2001 — Genuardi’s Family Markets Inc., a food retailer with stores in Pennsylvania, Delaware and New Jersey.
Green Grocer
Health and wellness aren’t the only new initiatives on Safeway’s corporate agenda. During the past few years, the company has been stepping up its environmental sustainability efforts as well.
Safeway is a member of the U.S. Environmental Protection Agency’s (EPA) Green Power Partnership, making a commitment to purchase enough renewable energy credits to offset 100 percent of the electricity used at its U.S. retail gasoline stations, its corporate campus facilities, and all supermarkets located in San Francisco and Boulder, Colo. EPA says the company also is the first retailer and grocer in North America to join the Chicago Climate Exchange and commit to legally binding reductions of its greenhouse gas emissions.
But Safeway’s green initiatives don’t end with those partnerships — the company also recently converted its entire U.S. truck fleet to cleaner-burning biodiesel fuel. According to Safeway, the move will reduce carbon dioxide emissions by 75 million pounds annually, the equivalent of taking almost 7,500 passenger vehicles off the road each year.
And last fall, the company unveiled the first-ever solar-powered grocery store. Located in Dublin, Calif., the store boasts an acre-wide rooftop solar array.
POWER-PACKED
In 2006 and 2007, Safeway whittled a cumbersome assortment of 70 consumer brands down to 10 “power brands,” under the Wellness, Core, Expertise and Aspirational categories.
Wellness
O Organics
Eating Right
Core
Safeway
Basic Red
Expertise
Lucerne
Primo Taglio
Priority Total Pet Care
Aspirational
Safeway Select
Rancher’s Reserve
Signature
GETTING CREATIVE WITH AN OLD FAVORITE
Safeway’s Lucerne brand has graced quality dairy products for more than 100 years. In 2006, the company married this shopper favorite with an education-focused art program that invites thousands of students and classrooms across the country to compete for a monetary grand prize.
“The Art of Dairy” tasks the 12- to 19-year-old entrants to use cows as the focal point in designs that promote dairy products as healthy snack alternatives for kids. For this year’s “Cows & History” themed contest, Safeway received almost 6,000 entries. The grand prize winner will be announced at the end of April and will receive a $30,000 grand prize — $20,000 for his or her school’s art department and $5,000 for both the winner and his or her art teacher. That’s quite a lot of moo-la.

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