Shares in US supermarket group Safeway have fallen 7% to a 52-week low. The battering came as Safeway’s 16% Q2 earnings growth fell short of expectations. Webvan’s demise also didn’t help, since a new online grocery joint venture with Tesco is a major part of Safeway’s future strategy.
However, online grocery is still expected to boom over the next few years, and following Tesco’s low-cost model looks like the best way to cash in. Safeway, Inc., the third largest US food retailer, has reported a 7.7% increase in Q2 overall sales to $8 billion from $7.4 billion in the same quarter in 2000. Excluding a $30 million charge related to its online subsidiary, GroceryWorks.com, Safeway recorded profits of $325.1 million, or 63 cents a share, compared with $280.9 million, or 55 cents a share, one year ago.
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However, Safeway failed to meet its forecast same-store sales growth of 2.5-3%. Identical-store sales grew a mere 1.7%, forcing the company to lower its forecast for Q3 comparable-store sales growth to just 1%. Chairman and CEO Steven Burd attributed the shortfall to weak Memorial Day sales and over-expansion in three of the chain’s ten major markets.
Safeway has had a busy half-year. At the end of March, it said it would open up to 95 new stores, although this plan is likely to be postponed in light of the recent financial performance. In April, it began a major overhaul of GroceryWorks, closing two distribution centers. The online grocer will instead use a ‘store-picking’ method to fulfill online orders. To this end, it has struck a deal with Tesco, which has built the largest online grocery service in the world using store-picking. Tesco will pay around $22 million for a 35% stake in GroceryWorks, which will be relaunched under local Safeway banners.
While Webvan’s recent demise has led many to doubt the potential of online groceries, Datamonitor expects US revenues to reach $32.3 billion by 2005. What is clear is that the pureplay model with fulfillment based on distribution centers doesn’t work, and that massive capital spending without the revenues to justify it is a bad idea.
GroceryWorks should finalize its reorganization quickly, to capture former Webvan customers. At the same time, it should learn from Webvan’s mistakes and preserve capital while launching an aggressive mass education campaign. With Safeway’s shares already under attack, the success of GroceryWorks will be crucial to the future health of its parent.
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