Safeway bets that loyalty program will pay off

CANDICE CHOI, AP Food Industry Writer

NEW YORK -- Safeway Inc. is betting that its investment in a new customer loyalty program will eventually pay off, as the supermarket operator looks to fend off big-box retailers and other competitors that are expanding their grocery aisles.

The Pleasanton, Calif.-based company, which also owns Vons, Dominick's and other grocery chains, said the cost of launching its "Just for U" program continued to eat into its profit margins in the third quarter. But the program is already showing signs of boosting results, Safeway said, with its market share up and sales in the current quarter running up 1 percent.

Safeway also noted that the launch costs are now in the past.

The loyalty program, which offers personalized discounts based on past purchases, is intended to help Safeway hold onto shoppers in an increasingly competitive environment. In addition to competition from retailers such as Target, traditional supermarkets are increasingly competing with drugstore chains and dollar stores.

For the quarter, however, Safeway said that revenue at locations open at least a year edged up just 0.1 percent. The measure is a key indicator of a retailer's performance because it strips out the impact of newly opened and closed locations.

The company said the tepid increase was primarily because it raised prices less than expected. That was offset by improvement in volume from the new loyalty program.

CEO Steve Burd said "Just for U" is getting customers to "come to the store more often and to buy more when they're there."

The program has about 4.5 million registrants so far, representing about 40 percent of sales. By the end of the year, the company expects those figures to edge up to 5 million users and 45 percent of sales.

"It's really our marketing platform for the next decade," Burd said.

About a quarter of the registrants are regular users, he said, meaning they are frequent customers and spend significant amounts when they visit.

Safeway stood by its forecast for the year, with earnings per share expected to be between $1.90 and $2.10. Analysts expect $1.99 per share.

For the quarter, the sale of the Genuardi's stores lifted its profit by 21 percent. The company earned $157 million, or 66 cents per share, for the three months ended Sept. 8. That compares with $130.2 million, or 38 cents per share, a year ago, when there were more outstanding shares.

Excluding discontinued operations, the company earned 45 cents per share. That was higher than the 43 cents per share analysts expected.

Total revenue declined to $10.05 billion, from $10.06 billion, primarily as a result of the Genuardi's sale and an unfavorable exchange rate for its stores in Canada. Analysts had expected sales of $10.24 billion, according to FactSet.

Shares of Safeway fell 58 cents, or 3.6 percent, to close at $15.71 Thursday.