Kroger v. Safeway

I covered in yesterday’s Kelly Letter several stock ideas for 2011, one of which was Safeway (SWY). From the letter:

Finally, a stock that I literally walked into while thinking about good stock ideas: Safeway. The lowly grocery store doesn’t compete well against the high-tech and exotic financial plays on the table, but it’s a business few of us would want to live without. Both Safeway and Kroger (KR) maintain wonderful stores with closely-monitored margins in a bid to keep pace with Wal-Mart’s (WMT) entry into the grocery business.

I’ve found, however, that our choice of grocery stores has about as much to do with their locations as it does with coupons or specials or much of anything else. When we say we’re going to the grocery store, we generally mean the one in our neighborhood or at least our usual one. Both Safeway and Kroger have done a good job staying that way even while facing the daunting price competitor of Wal-Mart.

Besides, Wal-Mart offers some things cheaper but not all things and not all the time. Most people eventually conclude that the pennies saved are not worth the inconvenience of going to a more distant store, which is why location is about the most important part of a grocery store’s plan. With the population growing and not being able to opt out of eating even in hard times, especially with some 43 million Americans receiving food stamps now, grocery stores are a good play on government bailouts that are not usually considered to be such.

Second only to location is a grocery store’s atmosphere. Here, Safeway shines over its peers, in my view. Wal-Mart tends to attract people who look like they really, really need a bargain and that’s not always a fun crowd to be around. Safeway, by contrast, has invested in converting almost 80 percent of its stores to its “lifestyle” format since 2003. Now that it’s done, the company is scaling back its capital expenditures and thereby boosting free cash flow. What’s it doing with the cash? Buying back shares to the tune of more than 40 million per year.

Safeway’s internal brand development team is top-notch, and has so successfully managed the O Organics and Eating Right store brands that most analysts think they’d be worth $4B each on their own. Another recent move has been putting in gas stations that offer a discount to Safeway card holders. That’s an excellent hook to get people to the store for gas and then inside to shop as long as they’re there. However, other grocery stores offer gas stations, too, so this angle may go the way of the point card itself in no longer exerting much retention power after every store offers one.

Overall, I think food is a good bet in this economy and that Safeway is a good bet within the food sector. After peaking last April at $27, the shares bottomed at $19 in August, shot to $24 in November, and closed Friday at $21.13. Morningstar thinks they’re worth $30 but should be held to $42. It suggests buying at $21. I added Safeway to our watch list at $20. From there, the implied upside to Morningstar’s fair value and suggested sell price is 50 percent and 110 percent respectively.

Subscriber Roger wrote in reply: “Peter Lynch once said when looking for investments ‘follow your money.’ A lot of my money goes to the grocery store. However, I asked the three important women in my life — wife, daughter, and daughter-in-law — where they would shop, Safeway or Kroger? The unanimous and very strong sentiment was Kroger. The ladies said Safeway does not have the selection and their prices are way too high. To quote all three ladies, ‘I would never shop at Safeway.’ It is the lady consumers that make or break a grocery store.”

Roger’s anecdotal observation made me think this is a fine time to try crowd sourcing. Via the comments section below, please let me know whether you prefer Kroger or Safeway stores, and why. Here are snapshots of each stock:

Kroger
One-year stock price chart for KR
Market Cap: $14B
Forward PE: 11
PEG Ratio: 1.4
Price/Sales: 0.2
Profit Margin: 1.4%
Dividend Yield: 1.9%

 

 
Safeway
One-year stock price chart for SWY

Market Cap: $9B
Forward PE: 12
PEG Ratio: 1.1
Price/Sales: 0.2
Profit Margin: -3.1%
Dividend Yield: 2.2%

 

 
What say ye?

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43 Comments

  1. Laurie
    Posted January 16, 2011 at 7:40 am | Permalink

    I’m in Northern California and have never heard of Krogers. The Safeways I’ve visited in the last couple of years hare very upscale and are trying hard to compete with Whole Foods; their prices are much better than WF, which makes them a good choice for us.

  2. Posted January 21, 2011 at 4:46 pm | Permalink

    Jason,
    NIA just wrote another article covering food price increases and grocery stores.
    http://inflation.us/obamamisinformingpublic.html
    They also have a food price inflation report they came out with a few months ago. I can send you a pdf. Let me know if you want it. Or, it’s on their website still I think…

  3. Sad at Safeway
    Posted February 13, 2011 at 12:17 pm | Permalink

    You didn’t say much about Safeway’s customer service program. It is over-the-top and makes working there a miserable experience. I regret that I chose to work there instead of any other grocery company.

    Safeway spends millions in training (and probably loses as much in productivity due to the amount of time and energy it takes to indoctrinate the employees from store manager down to courtesy clerk) to enforce its customer service program, believing it’s what makes them successful. If it’s all about customer service, why did they have to lower prices? Another question is if the customer service program is the key to success, why have none of the other chains adopted a similar plan?

    • Posted February 13, 2011 at 5:46 pm | Permalink

      This is a double-edged critique. On the one hand, companies should have happy employees. On the other, they should have happy customers. A successful business needs to have both. I don’t understand from your comment why Safeway’s customer service program is so hard for employees to endure. What’s the “indoctrination” exactly? Please provide examples of what the company wants you to do and why you think it’s unnecessary.

      • Sad at Safeway
        Posted February 14, 2011 at 2:13 am | Permalink

        Thanks for responding! We agree that customers should be well treated and leave happy. That’s easy to do. What’s not easy is doing it at Safeway (& Vons, etc.). The company employs mystery shoppers, nine per quarter, who grade each dept. and one employee in each on a list of TWELVE different things, ranging from the displays to the employee’s actions. And they take names. In fact, at the store where I now work, employees must wear TWO name tags, one on the apron and one on the cap, in case the mystery shopper can’t read one of them.
        When I started working at Safeway less than four years ago, there were five things every employee had to do right to receive a perfect score on the “shop.” They were known in shorthand as “greet, anticipate, offer sample, escort to item and parting comment.” I had one store manager who would visit each department several times a day just to say “greet anticipate escort,” lest you forget.
        A couple of years ago, the service program was changed to something called “Sales Force.” All of us had to be retrained through videos and countless hours ( and I am not exaggerating the amount of time the company invests in this) of daily “service huddles” and occasional “service meetings,” which is what I mean by indoctrination.
        When a service huddle is announced, you must stop what you are doing (unless you’re helping a customer) and leave your dept., walk across the giant store to get to the break room or someplace like the floral dept., which is usually a less busy area of the sales floor, and listen to a store manager or assistant rehash the service program. It’s the same thing you’ve heard a thousand times before, but in case you didn’t get it the first thousand times, here it is again. They also go over the latest mystery shopper report and call out people who missed something. When you “miss on a shop,” that’s when you may get to go to an hour-long “service meeting” during your shift.
        All employees had to be retrained when Sales Force was implemented a couple of years ago. We sat through hours of videotapes and lectures instructing us on how to “engage the customer” – for example, look in the customer’s shopping cart and say things like, “Oh, it looks like you’re having a party…” or “how many children do you have?” All to find out what else we could sell them. We were instructed in how to “close the sale” by saying something like, “How many can I wrap up for you?” As a customer myself, I want to run from this kind of aggressive sales tactic and I feel very uncomfortable doing it to our customers. In fact, half of them try to shut you down right from hello.
        But you may be saying what’s wrong with all of that? Maybe nothing, under different circumstances. Don’t forget these stores are deliberately under-staffed to begin with, and many of the people you see working there are under-employed, working as little as 20 hours a week. The stores are enormous and it is all you can do to keep up with what you thought you were hired to do, meaning stock shelves, cut meat, bake bread, whatever. Turns out, though, how well you do those things matters far less than what the mystery shopper says about you, and of course, the shoppers don’t know or care about that part of your job.
        Recently, a script was devised for us to repeat by rote with every customer. It’s designed to meet the mystery shopper’s demands as far as Sales Force procedure. It goes like this:
        Hi! Our (blank)s are on sale this week for (price). It’s great price and it’s 100% guaranteed fresh. Can I pick one out for you?”
        The statement “it’s a great price and it’s 100% guaranteed fresh” supposedly meets the requirement of providing two pieces of information, except that it doesn’t provide the answer to the customer’s most FAQ, “But what is it?”
        Your department manager will ask you to make the statement each week when the sale item changes and you then have to sign off on it! In addition, there is a person in the district who comes around to check, exactly the way the mystery shoppers do, except that she or he works for the company, and, again, names are taken and reports are written.
        There is much more I could say. Grocery work is low-level, dead-end and unrewarding and that’s why the turnover rate is as high as it is. At this company, at least, we are treated like children and not very bright ones, at that. The managers, especially the assistant managers, are sometimes condescending bullies. I hope this begins to explain why I regret my decision to join this company. The happiest day of my life will be the day I give notice.
        But my two questions remain: if it’s all about the service, why did they have to lower prices and if it’s all about the service, why aren’t any of the others copying Safeway’s over-the-top ideas?
        I’d really like to hear what you think and thanks for listening.

  4. Sad at Safeway
    Posted February 18, 2011 at 12:05 pm | Permalink

    Jason, if you tried to respond at the other e-mail address, try this one instead.
    Another question – when you shop at different grocery stores, do you really notice a big difference in any of them?

    • Posted February 21, 2011 at 10:38 am | Permalink

      I’ll be responding in detail soon. Please check back in later this week, and thanks for the excellent discussion!

  5. Posted February 19, 2011 at 4:29 am | Permalink

    Hi there – I just wanted to chime in to leave a comment on a benefit that Kroger has over all other grocery retailers in the U.S. (Let me also disclose that I work for i-wireless).

    Kroger offers its customer the chance to earn free wireless service when they shop. If you are familiar with the fuel program, FREE MINUTES works a lot like that. For every $100 spent in-store on qualifying purchases (not fuel, tobacco, liquor or lottery), i-wireless customers earn a FREE MINUTES reward. This is based on the plan, but to simplify -either 20 FREE MINUTES or a $1 credit to the account balance. Best part -it doesn’t take away from your fuel discount, so you can use both.

    Again – I work for the company, but it is a competitive advantage that Kroger has over Safeway.

    • Posted February 21, 2011 at 10:39 am | Permalink

      Thanks, Kelly! I didn’t know that. It sounds like a cool program, very contemporary, and something to consider when choosing between the two. So far, they’re running neck-and-neck in the stock market.

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