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Essay on Safeway

Safeway was competing in imperfect competition. Because of the structure of monopolistic competition Safeway had to look for new and improving ways to be able to compete with new chains.

Another challenge for the firm was its old and outdated stores that needed major renovations. Because of negative financial situation Safeway was not in a position to be able to remodel all of its stores. My recommendation would be to start with most profitable stores in urban areas where the competition is the highest and then to move to less profitable stores.

Safeway was highly unionized and it didn’t have enough room to squeeze out enough cost savings to offset the higher cost/wage structure. To compete with nonunion shops, it had to either trim labor cost or jobs. In my opinion, Safeway’s management was not persuasive enough when it came to negotiations with unions, and because of that had to close many more stores than were planning.
In the pre-LBO stage management was able to realize that changes are needed to be part of the best in the industry; however, in my opinion, the strategy that was used was not completely appropriate. Instead, of selling some stores right away, I would recommend first to take a closer look at the reasons why the stores were not performing to the standards; then I would have the real estate to be appraised before making sale.

In my opinion Safeway’s management did a good job looking into different options before selecting LBO as its final decision.

When it comes to selling assets I disagree with the management and it sales of the U.K. division. My criteria for selling assets would include wage premium, higher cost structure, age of stores, difference between market and book value of assets.

From the economic structure Safeway Inc, competed in imperfect competition. Monopolistic competition combines the features of a competitive market structure (many small buyers and sellers, similar cost, no significant entry/exit cost, no information costs) with product differentiation. In this model all firms compete equally for all consumers.

Safeway was an example of monopolistic competition; it was one of many existing with many new potential entrant stores. It had very similar or sometimes even identical cost of products as its competitors.

In 1980s it was not easy to be a part of monopolistic competition. With low entry barriers competition was increasing rapidly. To keep its customers Safeway had to look for new ways to improve consumer service. In 1980, Safeway’s strategy revolved around superior quality, superior selection, superior service, and competitive prices. The four pillars strategy was good before 1980 but was not enough in 1980’s, with increasing numbers of new chains and new stores coming to the market Safeway had to reevaluate its current situation. In my opinion, Safeway’s management was not aggressive enough and was too afraid to make radical changes. With its long tradition Safeway already had high number of customers but too keep them coming back Safeway’s management job was to look for new product and service innovation. Of course, there are always some consumers that shop at this same store for years and are afraid of trying new products; however, it is people’s nature to be able to expand and to see “the world”, for them it is very easy to change their shopping habits especially if they could find better selection of products and better price somewhere else.
Market trends that were affecting Safeway in 1980 were de-unionization, store modernization and increased competition from regional chains.

Many of Safeway’s stores were old and outdated. Incorporation was not able to upgrade all of its 2600 stores and management’s role was to decide which stores should have been updated with new equipment and technology. Because of changes in the work force location of stores was also very important. Before 1980 many more women were stay home mothers who had time to drive to their favorite grocery store. With many more women going to work in corporate world in 1980’s their priorities and habits had change. Many people were shopping on their way home. It was important for Safeway to be able to focus on stores location and starts any innovations with stores with the highest number of customers. In my opinion, first they should have upgraded most profitable stores in high urban areas where the competition was the highest, then focus on stores that are profitable and have a good future. I would not have touch stores in the country with small number of customers until the last to make sure that the firm is not wasting its money on something that was not needed. Instead of remodeling it could have been much more profitable to sell the real estate.
Another market trend that affected Safeway at that time was increasing number of new stores that were non-unionized which help them reduce labor cost and higher additional employees to increase customer’s service. Safeway by being highly unionize was in a great disadvantage. The only solution to this problem was to negotiate with unions on wage issues and productivity increase.
When it comes to competition from regional chains Safeway was also loosing at that time. The Robinson-Patman Act prohibited national chains from discounts that were available to regional chains. The Act was passed back in 1936 when the situation in market place was much different than situation in 1980s. Solution here would have been to try for legislatives body to revise the Robinson-Patman Act. Safeway could have also tried to take products from vendors on consignment- in other words, not pay for goods until they have been sold to consumers. This strategy would have free up some short term cash.

As a key performance measure in the preinitial restructuring period Safeway management used growth in sales, profitability, and number of stores. In my opinion, measures used by management were appropriate. It allowed them to realize which stores and divisions were profitable and should have been kept open.

By comparing its operations to operations of other national grocery chains it helped Safeway to find out that the average of net income as percentage of sale was way below national average for Safeway. This showed the management that changes were needed and Safeway will not be able to exist in this situation for much longer. I think that it was great that Safeway was looking at 10 best chains in the USA by doing that the management was able to come up with few ideas to improve their situation. What I would have recommended for them at that time was to take a closer look at the best two chains in the market and see what they were doing to make them the best. Was it new products, location of their stores, management, etc.? In my opinion, it would very helpful to have a strategy in place that would have reflected Safeway goals. Was it to be the best of the best or was it to be one of 10 best chains in the US?

Safeway pre-LBO mission was to increase income as a percentage of sales and be able to pay dividends to its shareholders.

Safeway’s strategy was to close some of its poorest performing stores and consolidating U.S divisions which helped managing geographical dispersion. When it comes to pricing strategy Safeway goal was to keep prices within 5% of its major competitors and also used selective discounts. By opening its own bakeries, new delis and pharmacies management was able to increase income and safe on cost. New updated scanning system attracted customers and helped earning growth.
The pre-LBO strategy was effective for Safeway, net income increased from .79% in 1980 to 1.17% in 1985 with dividends increased five years in a row. Safeway was able to achieve its goal; however, in my opinion the goal was set too low. There were stores in 1980 with net income as a percentage of sales with as high as 1.33 and 1.39.

In general, firm’s initial response to poor performance was appropriate. With over 2439 store in 1980 it was hard for Safeway to manage and upgrade all if its stores. By looking at performance the firm was able to determinate stores with low profitability and sells the ones that were loosing money.

The overall plan was good; however, they should have paid more attention to operating and administrative expensed. Wages and benefits were made over 60% of the expenses.

In my opinion, speed of the changes could have been better. Of course, it takes time to come up with good strategy and implement changes; however, once Safeway, was done with the pre-LBO strategy its financial situation was well know in the business world which made Safeway loosing profit on some of sells from its real estate because buyers already knew that the firm would need to sell it anyway.

When it comes to performance of different divisions, the one that were underperforming were closed. I’m not sure if the management spent enough time trying to find out why they were not performing. What I would recommend instead of selling them right away is to take a closer look at the regions potential. If there were any potential that the price of real estate could go up because of building new neighborhoods or potential new corporations coming into region I would try to lease those stores instead of selling them. It is hard to believe it that management did not schedule any appraisals before selling many of its stores. By not doing that many of them were sold below their market price.

The current cost/wage structure was not economically sustainable in view of the market structure and new market trends even with substantial productivity increase. For unionize Safeway it was very hard to compete with non-unionized chains with lower labor cost. For Safeway labor cost was approximately two-thirds of a store’s non-merchandise operating expense. Between 1980 and 1985 Safeway average hourly cost increased from 13.3% to more than 33% in 1985. With the cost increasing in this speed Safeway would not have been able to compete with other chains.

With Safeway competing in monopolistic competition there was not enough room to squeeze out enough cost savings to offset the higher cost/wage structure. To compete with nonunion shops, the choice was between trimming labor cost or jobs. And cutting jobs would mean long waits at the checkout. With plenty of alternatives for cost- and time-conscious shoppers, that was the last thing Safeway needed. The only option was to negotiate with unions. Some of the ideas that could save Safeway money would have been to stretch out periods between raises, lower percentage of wage increase, and offer lower hourly rate for new hire. For higher paid clerks offer other benefits as store gift certificates instead of hourly increases. Also cross training for employees could have benefit the firm by saving money; however, unions were not concerned with financial situation. Unions leaders were looking at increasing profits and dividends being paid but was did not understand the firm economic and financial problems. In December of 1986, the meat cutlers union in Huston TX agreed to $1.50 pay cut to Kroger but refused to Safeway. In my opinion, Safeway’s management was not persuasive enough when it comes to negotiations with unions. It should have follow Kroger’s steps and just as Kroger did Safeway’s management should have also threatened to close stores unless unions agreed to concession. By extending in to longer hours and lower pay. Those wage roll backs would have add up to an annual savings on million of dollars that’s why if management interest was too keep profits up they should have been more aggressive. Sometimes even if you status quo incorporation it is hard to survive without making changes.

Alternative tactic strategies:
Safeway management was looking at different strategy to reorganize the firm. The first that was considered was “white Knight.” They were willing to be bough put in positive friendly way; however, all of potential buyers were interested only in picies of the corporation and its land. Safeway s management was willing to close some of the stores but in general it wanted to keep the business together that’s why “white knight “was not an option for Safeway.

Second option that was considered was to pay “greenmail” to Haft family. By buying back Haft’s family shares it would have only prevented Haft family of buying more hares but it could not have stopped takeovers attempts by other investors. In addition, Standstill agreement was very costly.
Third option was to do a recapitalization by borrowing money and/or selling assets to finance larger dividends to shareholder. It was a good option for some companies but not for Safeway. On one hand process of a recapitalization make the company unattractive to hostile takeover because the hostile company would need to pay of debt first, and of course Safeway’s management wanted to prevent hostile takeover. However, this is very risky process and that’s why not too many companies choose to do so.

Fourth options, was possible spin-off between West Cost and east cost; however, this was not an option because management wanted the company to be national chain.

The final option for Safeway was the leveraged buyout and was option that the management decided to go with. The expectation of the LBO was to increase firm value under private ownership. By changing ownership structure Safeway was able to save on administrative cost. LBO also allowed the firm to increase managerial incentives and flexibility as well as shareholders participation. Negative side of the LBO was that it was financed mostly through debt which needed to be paid off and this required management to start selling assets.

Safeway’s management was faced with many obstacles in asset sales. Market knew that Safeway has to sell assets to meet debt service so they have an incentive to bid low and delay the process. It was in the buyer’s interest to delay the process as much as possible to get the best price for them even if the assets were attractive. When it comes to Safeway they had to move as quickly as possible or it will face financial distress. In my opinion, Safeway’s management even with knowledge of it financial situation was not moving fast enough. They were concern about their employees and wanted to make sure that they find good buyers who would provide jobs for its employees. I was good to know that management cares about future of stores that were going to be sold but on another hand there was no time especially with unions not being willing to cooperate.

Safeway after LBO sold 132 its stores in U.K to the Bormans at a lower overall price than selling the division piecemeal. This division not only was sold undervalue but it was the most profitable of Safeway’s divisions. I completely disagree with sale of U.K division. In my opinion, Safeway management was too much pro quo and too concern about its people. There intentions were too show U.S. employees that they would do everything in their power to keep stores open in U.S. If I was a part of that management team I would not have sold the U.K division. It was not only very profitable but international unions were willing to work towards wage reduction where American unions did not care. By looking at different companies in 1980 there is a beginning of globalization trend with corporations moving off shore to save on labor cost, and at this same time Safeway was closing its profitable operations oversees only to “fight” with labor unions in U.S.

Sale of the Dallas division was probably much better for the community than keeping old Safeway stores open. With Safeway position not being able to remodeled all of its stores, sale of this division would allowed potential buyer to not only remodeled them but also but not being unionize lower prices which would have positive impact on entire community. Safeway knew that it would not be able to offer lower prices because unions were not willing to cooperate even at the time when stores were already on sale.

My criteria for selling assets would include wage premium, higher cost structure, age of stores and their locations. By looking at table 7 I could tell much about location of the divisions; however, location is very important if most of the stores were located in the country with low profits I would probably sell those stores first especially if then needed remodeling and I did not see future for any business in the area.

By looking at wage premium with $4 Division Alpha and Psi would next with their operating profit around 6millions annually and negative trend in rank of market share. The I would sold PHI with $3.00 wage premium, only 1 million in annual operating profit, apprised assets value 10 million below book value, and negative trend in rank of market share. After that, I would sell Beta with negative annual operating income and appraised asset value lower than book value of assets.

For any financial restructuring to be successful is important that managers understand the fundamental business and strategies problems as well as opportunities that their company faces. Safeway’s management was able to realize that there is a need for restructuring and was able to implement some solutions.

In my opinion, Safeway’s top management was lacking from a good financial and operation analyst, person who would be not afraid of changes. By looking at some of their decision that were made I would say that Safeway’s top executives included more “food” people than “money” people. Some of the stores and real estate was sold without appraisal which made the company to loose its money. The firm was undervalued because its assets were not representing true market value. Then, they sold most profitable chain way under value only to show American unions that they would keep the U.S stores open which did not make too much sense, especially that union in the U.S. was not willing to cooperate.

When it comes to wage negotiations, Safeway’s management was not persuasive enough, which cost them profits. By looking at unions attitude at that time Safeway needed someone more aggressive to convey negotiations. Employee’s morale was also down. In my opinion, to boost employee morale it would be helpful to set up “roundtable” meetings to solicit suggestions and ideas which wasn’t done.

Safeway management did not look into moving some of its costs onto vendors. Example could include paying for shelf space or asking vendors to put its own tags on fruits to free produce clerks for other tasks.

When it comes to restructuring alternatives Safeway management did a good job by looking into different options before making its final decisions. Most of the alternatives did not fit Safeway’s management style.

By choosing LBO management was expecting to increase firm value under private ownership with increasing financial leverage and decreasing administrative cost savings. When it comes to selling assets I would focus on wage premium with labor cost being 60% of a store’s nonmerchandise operating expense; then look into age of store and cost structure to upgrade them; after, that on annual operating profits, appraised and book value of assets. After LBO being done, Safeway’s management did not have too much to say when it came to the sale price of its assets. Potential buyers knew that Safeway had to sell its assets to be able to pay off its debt that’s why many of the buyers were not willing to pay asking price.

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