US grocery retailer Safeway Inc has had to cut its earnings guidance for the full year, following the release of its second-quarter results, which revealed a 40% drop in profit.
The group cited deflation and heavy competition as it tries to hold onto shoppers in a weak economy.
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The initial forecasts were based on the company’s expectation that food prices would start to rise again, but instead found retail deflation was “much greater than anticipated”.
CEO Steve Burd said that for the second-quarter, the company predicted that it would start seeing inflation, expecting 0.5% inflation, but instead there was 2.4% deflation.
Burd said that the 2.5% decrease in same-store sales could nearly be entirely attributed to the 2.4% deflation, admitting it had been “over-optimistic about inflation”.
Prices declined on store items, at least in part because of a campaign by Safeway to slash everyday prices on a wide range of items. Burd said most of the cuts took place in the third quarter of 2009, it has taken customers a while to understand its improved price offer, and now it is starting to reap the benefits of increased volumes and traffic.
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By GlobalDataBurd chose to focus instead on improved traffic and higher volumes. “Our volume is building against all competitors in a down economy,” Burd said. “So we’re starting to build market share,” he said.
This quarter has been the “single-best by volume in four years,” he added.
However he described the company’s pent up demand for things to return to normal from a retail perspective, but affirmed Safeway’s commitment to maintaining its price position.
He believes the improved price perception combined with improved volumes and traffic will set the company up once inflation turns around. “With our cost-reduction efforts in high gear and volumes steadily improving, we think we’re going to be well-positioned for 2011 and beyond,” Burd said.
