Written off by sector rivals as a dead loss following a 30% profit slump last year, Britain's fourth largest supermarket group, Safeway, has today (23 November) posted strong H1 pre-tax profits of £166m, up 10% on last year despite, or perhaps because of, a substantial investment in the new commercial strategy aimed to turnaround the store's fortunes. Since 1999, operating profit also increased 11% to £208m, reflecting a well-managed cost base and a discount-focused sales drive.

One million more customers are now regular visitors to the store, increasing year-on-year sales by 5% and delivering H1 sales of £4,739m (in increase of 8%), prompted an investment in staff training and the employment of an extra 6,000 staff. The group generated net cash of £38m during the period and reduced net debt to £1,183m. For the stockholders, earning per share increased by 13% to 11.8p and the dividend has been increased by 5% to 2.77p per share. The Safeway board intends to recommend a comparable increase in the final dividend.

Importantly, the group's revival plan has increased its share of the highly competitive UK supermarket trade by 0.2% to 9.7%. In Scotland, market leadership was strengthened significantly, and in the key fresh food categories Safeway gained share faster than rival retailers.

Didn't it do well? The drive to increase sales

In the thirteen months since the accession of Carlos Criado-Perez as CEO, fresh from leadership at discount retailer Wal-Mart, Safeway's sales have increased dramatically. The popularity of the store appears largely to be a result of the somewhat Wal-Mart inspired discount drive, which saw deep-cut promotions and in store prices fall by an average of 5.6%. Safeway also leaflet-dropped 9m homes weekly over the last year.

New distribution capacity was included to deal with the increased product volumes, which guaranteed a 96% on-shelf availability of products. New merchandising displays and the introduction of a "best" premium range of products also prompted increased consumer interest.

"Safeway has turned around"

Criado-Perez expressed his confidence in the group: "Safeway has turned around and we are now laying the foundations for strong growth in our second half and beyond. This next phase is on schedule and will deliver the new formats, design innovations, ranges and services which, coupled with the faultless execution of the four pillars of our strategy, are key to achieving Safeway's full potential."

Next stage for Safeway: a four model strategy

In this next stage towards this full potential, a four-model strategy has been employed to segment the outlet portfolio into supermarkets, superstores, convenience stores and, more recently, hypermarkets, where customers can take advantage of services such as dry cleaning and photo processing.

Innovation with store design, fittings, lighting and layout is the main focus of the group's bid to create "an exciting store environment," and 25 superstores will be upgraded over the next year, funded primarily by a broadly balanced cash flow. The first new-design hypermarket will be open to customers during the beginning of 2001 and Safeway also revealed its intention to continue to develop the four pillars of its commercial strategy; "Product and Price," "Best at fresh," "Best at availability," and "Best at customer service."

The group is also planning to strengthen its position in Northern Ireland, where its 12 stores made an operating profit for the first time this year. In this area, Safeway has a comfortable 13% market share and this year witnessed a 13% increase in like-for-like sales.

But is the growth sustainable?

Safeway's next trading update is expected at the end of Q3, on 16 January 2001, but growth comparisons are set to become tougher under the weight of expectation piled on by Criado-Perez when he reiterated his commitment to restoring group annual profits to the 1997 peak of £420m by 2002. Analysts remain sceptical as to whether the current rate of growth within the company is sustainable.

Safeway PLC - Middlesex, England 6 Months Oct 14:

2000
1999
Pretax Profit
GBP166.1 mln
GBP150 mln
Sales
4.7 bln
4.4 bln
Earnings Per Share
11.8p
10.4p
Dividend
2.77p
2.64p