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Will Triple 'Lifestyle' Format Stores; Launches $100 Million Ad Campaign

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COLUMBUS, Ohio ( -- Embattled supermarket chain Safeway is set to launch an unprecedented $100 million advertising campaign that includes spot TV buys on prime-time shows such as The Apprentice and CSI -- but utters nary a word on price.
Safeway has opened 183 new locations since 2000 but simultaneously closed 214.

“What we are doing is very different,” said Brian Cornell, chief marketing officer at the Pleasanton, Calif.-based chain of 1,802 stores with $35.8 billion in sales. “We are moving from the traditional price/item advertising, which is the norm of the supermarket industry, to a more brand-focused identity.”

More than just a tagline change, from “Giving Our Best” to “Ingredients for Life,” the campaign launches April 18 with TV, radio, print and Web elements.

CMO is former Pepsi exec
“We are trying to take a page out of the consumer package industry,” added Mr. Cornell, who joined Safeway in April 2004 after serving as president of Pepsi-Cola North America’s Food Services division.

The campaign, created by Interpublic Group of Cos.’ Dailey & Associates, Los Angeles, represents a significant shift away from print advertising for the chain.

“The shift is fairly dramatic; it’s much more balanced and is not so heavily weighted toward print,” said Michael Minasi, senior vice president of marketing at Safeway.

Even so, print is still Safeway’s biggest single line item and it still runs weekly newspaper circulars in all its markets.

Growth has stalled, profits plunge
Safeway’s growth has stalled within the last five years. Although the company opened 183 new locations since 2000, it has closed 214.

The chain posted sales of $35.8 billion in fiscal 2004, up from $32 billion in 2000. Meanwhile, profits have plunged, with net income dropping to almost half of that earned in 2000, $560 million

Safeway is moving dramatically away from its old price comparison strategy to a brand campaign stressing it stores as the place where consumers can find the 'Ingredients for Life.'
compared with $1.1 billion. Last year’s $560 million in net income follows two consecutive years of red ink –- losses of $169 million in 2003 and $828 million in 2002.

Safeway spent $126.5 million in measured media in 2004, up from $106.2 million in 2003, according to TNS Media Intelligence.

The upcoming ad campaign highlights the tough choice traditional grocery retailers stuck in the industry’s so-called middle face: Battle Wal-Mart on price or stake out a “lifestyle” or “quality” positioning, where niche operators like Whole Foods are still managing to find growth.

“Retailers like Safeway are stuck in a shrinking and unsustainable middle ground,” said Jon Hauptman, vice president of Willard Bishop Consulting, a Chicago-based firm focused on the grocery industry. “Safeway is being outflanked on all sides.”

On the price side, Safeway must battle with Wal-Mart and limited-assortment retailers such as Aldi, Sav-A-Lot and, increasingly, the so-called dollar stores, which have beefed up food offerings. On the quality and lifestyle side, Safeway competes with upscale regional operators and growing national, high-end retailers such as Trader Joe’s and Whole Foods.

Rivals must tackle price
Safeway’s closest peers and rivals -– Kroger Co. and Albertson’s -– have opted instead to tackle price, yet still promote a differentiated shopping experience. Safeway’s direct avoidance of price is a luxury Kroger and Albertson’s don’t enjoy, industry watchers say, because their stores overlap geographically much more with Wal-Mart than Safeway’s store footprint.

For Cincinnati-based Kroger Co., the nation’s No. 2 grocery retailer, the tagline is “Right Store, Right Price.” Boise-based Albertson’s, with 2,500 stores, tells consumers it “Helps make your life easier,” but it has also invested heavily in a shelf tag program dubbed “Compare.”

John Heinbockel, an analyst with Goldman Sachs who has covered the grocery industry for 15 years, said the Safeway campaign reminded him of a research report released a decade ago by Goldman Sachs titled “Can the nicest stores in town really have low prices?” Yes, the report argued.

Is the new message relevant?
“Today, the world has changed,” he added. “If you improve the look and feel of the store, how do you guard against customers feeling your prices have increased, even if they haven’t? That’s why this campaign has its limitations. It doesn’t speak to price. For the person who is price driven, this campaign is not going to resonate. That’s the challenge of the middle. How do you put together a message that is deeply relevant for all groups in the broad 80% of the population? That’s a lot of different lifestyles. That’s been the tough part and no one has really figured it out yet.”

Mr. Cornell thinks Safeway has figured it out with the “Ingredients for Life” positioning and the shift to branding an experience.

“We are going to build share from the conventional players while appealing to certain shoppers who have migrated to the discount channels or the niche players,” he said. “We are not focusing on price as the answer. There’s a consumer who want and appreciates quality.”

Unionized workforce
Avoiding price may be a necessity for Safeway in the long-term. Unlike Wal-Mart, 77% of the company’s workforce is unionized. A strike at 289 of the chain’s Southern California stores cost Safeway $254 million between 2003 and 2004.

'Lifestyle Store'
Yet Safeway has been spending big -- $1.2 billion in 2004 -- on capital expenditures. The chain has been investing heavily in a new format, called the Lifestyle Store, that is 55,000 square feet of earth-toned decor, subdued lighting, custom flooring and unique display pictures. Safeway opened 33 new Lifestyle Stores in 2004 and remodeled 115 stores, with 94 adapted to the new format.

The company plans to spend $1.4 billion in 2005, opening between 30 to 35 new Lifestyle stores and completing the renovation of 275 to 285 others to the format. By the end of the year, Safeway plans to operate 450 Lifestyle Stores, three times the current total.

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