News that Safeway’s long-standing CEO, Steve Burd, is to retire in May has spawned greater uncertainty among some analysts about the retailer’s competitive position.
Safeway said this week that Burd will draw the curtain on 20 years of service, having joined the retailer as president in 1992.
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It lauded the outgoing CEO as having spearheaded an industry-leading customer service platform and having helped the unionised retailer outperform the S&P 500 during two decades of price pressure from lesser-unionised rivals.
There are optimistic and pessimistic ways of viewing Burd’s departure. On the one hand, it’s understandable for the loss of such a figure to cause jitters. On the other hand, some may feel that a fresh start is what Safeway needs in an increasingly competitive marketplace.
Safeway’s share price had an initial wobble but is 3% up for the week, suggesting many investors have adopted a wait-and-see approach.
Ajay Jain, analyst at Cantor Fitzgerald, sees the potential for disruption. “Given that Mr. Burd has had such a hands-on role in shaping Safeway’s strategy and operations for so long, we think his departure leaves behind a great deal of uncertainty over Safeway’s near-term financial performance and its longer-term outlook,” he said in a note.
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By GlobalDataRightly or wrongly, some investors might see Burd’s departure as an opportunity to de-unionise Safeway. There are those who have argued in the past that this would make the retailer more flexible to compete with the likes of Wal-Mart.
Jain said Burd’s absence from Safeway’s board “could set the tone for some very meaningful changes down the road, particularly if an outside candidate is selected as the new CEO”.
However, he said: “While we believe many investors welcome the prospect of a leadership change at Safeway, we think fundamentals could get worse in the near-term before they get better.”
In particular, Jain highlighted concern about Safeway’s balance sheet, sales trends, the firm’s health and wellness initiative – which was strongly associated with Burd – and also the group’s ability to raise value from real estate across North America.
Yesterday (3 January), a report by Bloomberg cited a Veritas analyst as saying that Safeway’s Canada unit could be open to a takeover by Loblaw.
There is, then, plenty for the new CEO to chew on, whoever that will be. Safeway has already endured a turbulent end to 2012, having been forced to defend the health of its business.
In October, the company booked a 12.1% drop in third-quarter operating profits, with sales essentially flat on the same period of the previous year. The group insisted it was gaining market share, particularly thanks to its Just for U loyalty programme.
Yet, this was not enough to prevent ratings agency Fitch from downgrading the retailer’s outlook to “negative” later in the same month.
There remain concerns that Safeway is simply falling between the cracks of the US grocery market, undercut by the likes of Wal-Mart and not able to compete on the top-shelf with Whole Foods Market.
Safeway’s share price might be up for the week, but it is down 13% versus one year ago; outperformed by rivals Kroger and Whole Foods, not to mention an S&P 500 that is up 14% over the same timeframe.
Not everyone has been so trepidatious about Safeway’s prospects. Back in October, BB&T Capital Markets analyst Andrew Wolf agreed with Burd that Safeway has seen sales gains in stores where ‘Just for U’ has been fully rolled out.
What is clear, for the time being, is that Safeway needs to do more to quell uncertainty in the market. To do that, it obviously needs results, but it also needs strong leadership. That means installing a new CEO sooner rather than later.
