Monday, April 28, 2008

Marketing Memo: Safeway Stores, Inc. to Market its 'O' Organics' and 'Eating Right' Organic and Healthy Brands to Other Retailers in U.S. and Globally

Safeway Stores, Inc. has formed the "Better Living Brands Alliance," a marketing consortium that will market its O' Organics organic food and grocery brand and its Eating Right health and wellness category brand across all retail channels in the U.S. beginning this year.

Through the "Better Living Brands Alliance," Safeway will market the two natural and organic food and grocery brands to various U.S. retailers, including supermarket chains, mass merchandisers and independent grocers through grocery wholesale houses.
Safeway also will expand its international distribution of the O' Organics brand and include it's Eating Right brand in its expanded international marketing and distribution program.

As we reported in December, 2007, Safeway signed a deal with international retailer Carrefour to distribute the O' Organics brand in its stores in Asia and South America. Carrefour, which is based in France, is the world's second-largest retailer after number one Wal-Mart, Inc.

We've learned Carrefour will not only expand the number of its stores in Asia and Latin America which currently carry the O' Organics brand, but will probably add the Eating Right healthy food and grocery products brand in those stores as well.

Safeway also plans to go beyond its relationship with Carrefour in Asia and Latin America and market both natural and organic foods' brands in Europe and elsewhere around the globe.

Back in the U.S., Safeway has put together a strategic alliance of manufacturing, marketing and distribution firms as the brand licensees in its "Better Living Brands Alliance." Among those partners will be the food and grocery brokerage firm Crossmark, which will handle new item introductions, headquarters' sales calls and retail merchandising for the brand nationally and internationally for Safeway.

EMAK Worldwide will handle U.S. and global consumer marketing and communications for the O' Organics and Eating Right brands for Safeway.

Safeway Stores, Inc.'s Lucerne Foods Inc. subsidiary, which already markets Safeway products to external customers, will manage the overall licensing of the O' Organics and Eating Right brands and is a key member of the "Better Living Brands Alliance."

As we reported before in Natural~Specialty Foods Memo, Safeway's O' Organics brand is a major success story for the retailer. Although the brand has only been in Safeway's 1,740 stores in U.S. and Canada for less than two years, it's already the number one organic food and grocery products brand by total sales volume in the U.S. Sales of the O' Organics brand in the U.S. last year was over $300 million dollars, and that's with distribution in just the 1,740 Safeway-owned supermarkets.

The health and wellness category Eating Right brand has only been in Safeway stores for about a year. However, last December Safeway CEO Steve Burd told analysts that the brand's first year sales were poised to be even higher than the first year sales for the popular O' Organics brand were.

Safeway has been extending both brands throughout all categories, from the dry grocery, perishable and frozen categories, to fresh meat and poultry, fresh produce, prepared foods and deli categories.

In addition to marketing the two brands to food, grocery and other retail formats in the U.S. and internationally, Safeway also will sell items under both brands in the foodservice class of trade domestically and globally through it's "Better Living Brands Alliance," Safeway spokesman Brian Dowling told Natural~Specialty Foods Memo.

We've learned that a number of major U.S. supermarket chains are interested in selling the O' O' Organics and Eating Right brands in their stores. This is particularly the case in those regions in the U.S. where Safeway doesn't operate its supermarkets.

We've also been told numerous large wholesale grocers who distribute to regional chains and independents will take on both the O' Organics and Eating Right brands for distribution to their retailer customers.

Internationally, look for both brands to appear in European supermarkets for the first time before the year is over.

Safeway operates stores in California, Oregon, Washington State, Nevada, Arizona and Colorado in the Western USA. The retailer also operates stores in parts of the Midwestern USA, in Alaska, Texas, the East Coast, and in the Washington D.C/Baltimore/Virginia tri-state area, as well as in Canada.

We expect this U.S. and international mass-marketing of the O' Organics and Eating Right organic and healthy category brands to easily double sales of both brands in the next year.

In terms of the O' Organics brand, the increased number of new skus Safeway has been creating, combined with growing sales and aggressive promotion in its stores, plus the initial international marketing agreement with Carrefour, has led some analysts to predict sales growth in the 30-40% range by the end of this fiscal year compared to last for the organic products' brand.

We knew this move--the mass marketing in the U.S. and globally-- was coming based on the fact we were the first industry publication in the U.S. to report on the Carrefour international licensing deal last year.

Our analysis is that with increased new product development, more aggressive in-store promotions at Safeway stores--both which are coming for both brands--combined with the new U.S. and international mass-market program through the "Better Living Brands Alliance," it's likely that by the end of this year combined sales for the O' Organics and Eating Right brands could easily reach $1 billion in gross sales.

By taking the two proprietary brands national and international and marketing them to competitors--something that's almost unheard of in the U.S. supermarket industry--Safeway is proving its a creative and nimble marketer, which is something we've been arguing is the case for the past nine months or so.

For example, Safeway has built its own in-house natural and specialty foods department over the last few years, the result of which is bringing the retailer gross margins of 50% and higher on category items sold in its stores.

Additionally, Safeway has grown its Blackhawk gift card business into the largest marketer of gift cards to other retailers in the U.S. The business started out a few years ago as an in-house venture designed to market third-party gift cards to Safeway's stores. It's now grown into a full-fledged business far beyond an in-house operation.

Now, Safeway is becoming a brand marketer with its creation of "The Better Living Brands Alliance," which will take its O' Organics and Eating Right brands nationally to various classes of trades and retail formats in the U.S. and internationally.

We also expect to see a couple other Safeway proprietary brands join the alliance down the road a bit. In particular, might be some of the new fresh, prepared foods' brands Safeway is currently working on and testing at a restaurant it owns called Citrine in Redwood City, California, in the San Francisco Bay Area's Silicon Valley region.

If you think about it, Safeway has the perfect national test market for a brand marketer--1,740 supermarkets located across the U.S. If a brand--like O' Organics has done--does well in its stores after a year or two, Safeway can then make it a candidate for the alliance and national and international distribution to other food and grocery retailers and wholesalers.

Some will suggest Safeway could lose its competitive advantage by selling the two brands to other retailers. After all, they might say, that's why they are called proprietary brands, to give a retailer that competitive advantage.

However, we disagree. Number one, Safeway will still maintain a competitive advantage in that it can choose which retailers to license and market the brands to. Number two, Safeway still will be able to sell the branded products for less than other retailers can in its own stores, while also making a higher gross margin while doing so because it's the producer and marketer of the products.

Lastly, we tend to belong to the rising tides lift all brands' boats' school. In other words, the stronger the O' Organics and Eating Right brands become in the marketplace, the more we think Safeway will actually sell in its own stores--not to mention the more of the branded products it will sell to other retailers.

It all about leverage at that point. For example, does Safeway sell less Clorox bleach or Best Foods mayonnaise just because every supermarket, drug store and mass merchandiser in America also sells it? We don't believe that's the case.

While the bulk of Safeway's retail sales will likely always come from it's supermarkets, the company's diversification into also becoming a major third-party gift card marketer and now and organic and health and wellness food and grocery products category brand marketer, is a smart and savvy move in our analysis.

Doing so helps the grocer diversify beyond the volatile food and grocery retailing space. It also gives Safeway synergies which complement its grocery retailing base.

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