Safeway Stores Incorporated

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Safeway Stores Incorporated

4th and Jackson Streets
Oakland, California 94660
(415) 891-3000

Private Company
Employees: 130,922
Sales: $13.76 billion

With 1,118 stores in the United States and Canada, Safeway Stores is one of the largest food chains in the world. Safe ways ten major distribution centers deliver thousands of food and nonfood items, both national and private-label brands, to its retail outlets around North America. Acquired by Kohlberg, Kravis & Roberts Company and taken private in 1986, Safeway was radically downsized in the following two years. Yet Safe ways streamlining efforts have been so successful at reducing the debt incurred during the leveraged buyout that the company may soon go public again.

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 fathers sense of mission, and by 1926 he was running a chain of 428 grocery stores throughout California and the Pacific Northwest. People flocked to Skaggss 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 firms involvement in the retail chain store business. Seeing a huge potential for growth in the West, he purchased Safeway Stores, a chain of some 240 stores founded by Sam Seelig in 1914 that covered most of the Pacific 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 Safe ways 240. The newly expanded venture kept the Safeway name and Skaggs was made president of Safeways 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 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 Warren to run a string of about 1,400 grocery stores in the Pacific Northwest known as the MacMarr Stores. Warren had earned Merrills 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. 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 Skaggss energy as chairman of the board and Warrens nuts-and-bolts insight gave Safeway the strength to weather the Depression.

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 America, 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 Safeways work force 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 Selby, a longtime member of Safeway management. Robert Magowan, Charles Merrills 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. Magowans aggressive marketing strategy and hunger for expansion attracted national attention and greatly enhanced the public profile of the company. By 1959, under Magowans leadership, Safeway had moved into Alaska and Iowa.

At the beginning of the 1960s, Safe ways construction program had ensured that almost half of the firms 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. Safeways 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 and Hawaii, and strengthened its presence in Alaska. In 1964 Safeway moved into West Germany and opened the first international supermarket in Washington, D.C. Stocking food products from all of the worlds major cuisines, this store was built to be a kind of United Nations of food, offering Washingtons shoppers everything they needed to prepare native dishes from around the world.

In 1965 the Amalgamated Meat Cutters and Butchers Workmens Local 576 picketed Safeways 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 reached $3 billion dollars a year in salesand had paid a dividend through the 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 Safeways lead manager had been spectacularly successful.

In 1970 Quentin Reynolds became Safeways 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 expansionin 1972 Safeway surpassed the Great Atlantic & Pacific Tea Company (A&P) as the worlds 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 firms 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 Mitchells 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 Lynchs 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 Safeways position, setting an important precedent regarding a companys right to regulate workers appearances.

In 1980 Peter Magowan, Robert Magowans son, succeeded William Mitchell as chairman and CEO of the firm. Peter Magowans 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. 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 1%.

In 1982 Safeway increased its appeal to customers by beginning to sell many health-oriented products, implementing Dale Lynchs 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 offer delicacies like truffles and rare cheeses in a supermarket setting.

James A. Rowland replaced Dale 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 Safeways by granting most workers stock in the company as part of their payment. 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 Woolworths Ltd. amid increasing speculation that the chain would be the victim of a takeover bid. The merger between Safeway and Woolworths 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.

In June, 1986 all speculation ended when the Dart Group Corporation, led by the Haft family, announced that it had acquired about 6% of Safeways 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% of the holding company that was founded to buy Safeway.

Saddled with enormous debt after the buyout, 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, its entire Oklahoma division, and announced plans to sell 172 stores in southern California to the Vons Companies. The biggest sale of all was that of Safeways British operations to the Argyll Group PLC.

The streamlining of Safeway ended in 1988 when the firm sold its 99 Houston-area stores to an investment group led by local Safeway management. The sale and trimming of unprofitable operations reduced Safeways 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.

The leveraged buyout of Safeway became a lightning rod for discussion about the merits of corporate takeovers in general. The firm itself feels that the experience has led to a smaller but more efficient company. Safeway has shown unusual flexibility for a giant in its field. Its success in weathering a takeover would seem to promise no shortage of buyers when the company does go public again, demonstrating as it does that Safeway should be able to maintain its remarkable success in the future.

Principal Subsidiaries:

Safeway Holdings, Inc.; Glencourt, Inc.; Casa Ley, S.A. Mexico (49%); Controladora de Empresas del Noroeste, S.A. de c.v. (49%)(Mexico); Brentway, Inc.; Salvage, Inc.; Safeway International Disc. Inc.; Oakland Property Brokerage, Inc.; H.J.M. Properties; Hobbiton Holdings, Inc.; Safeway Foreign Sales (Virgin Islands); Safeway Netherlands (Antilles) Finance Corp. N.V. (Netherlands).