Retail Memo: Safeway CEO Burd Says Shoppers Buying Store Brands Over National Brands By As Much As Six -to- One in it's North American Supermarkets

Safeway Stores Inc. CEO Steve Burd says he's seeing clear signs, based on the grocery chain's most recent sales numbers of its corporate grocery brands vs. national brands, that consumers are feeling the pinch in the worsening U.S. economy and trading down at the supermarket by switching from national brands to store brands, especially Safeway's value brands like Lucerne dairy products and the retailer's Safeway value brand grocery product line, among other store brands.

Burd says overall sales of Safeway's store brands--even its more upscale Safeway Select brand and its O' Organics organic and Eating Right healthy foods' brands--are outpacing national brand sales by an overall category ratio of 4 -to- 1, and by a whopping 6 -to- 1 in the core-of-the-store dry grocery category.

In fact, according to Burd this shift from national brands to store brands helped increase Safeway's net income for the first quarter, which ended March 22, 2008, to $193.4 million on same store sales of $10 billion for the quarter, which is a 7.3% increase over the same period last year. The sales numbers exclude fuel sales. The first quarter sales numbers also include Easter this year, while last year Easter sales were recorded in the second quarter.

We aren't surprised at the growth in Safeway's store brand food and grocery products, although the magnitude of the ratios, especially in the core-of-the-store grocery categories, are much higher than we anticipated.

However, Safeway has been aggressively promoting all of its store brands in its weekly advertising circulars and in-store, especially for the last six to eight months. This is particularly the case with its value line items like Safeway brand in the dry grocery category and Lucerne brand in the dairy products and perishables categories.

The retailer also has been heavily advertising its premium Safeway Select store brand at lower prices then it normally has in the past. It's also lowered many of the everyday retail prices on its O' Organics brand of organic food and grocery products, especially relative to what similar national brand organic brands are retailing for in the stores, and promoting the products weekly in its store advertising fliers.

Earlier this year, Burd told Natural~Specialty Foods Memo and other industry publications that Safeway planned on implementing its long-planned everyday low-price value program in all of its Lifestyle format stores earlier than originally planned in order to deal with the severe economic downturn in the U.S. and the need for consumers to cut back on their overall spending, which is a trend he said the grocery chain saw coming.

Safeway currently has about 70% of its 1,740 North America stores converted to the Lifestyle format. The grocery chain is in the process of converting the remaining 30% and hopes to be near-completed with the huge project by the end of this year it says.

Although Safeway is still in the midst of fully-implementing its everyday values program, we can see the results of it already, along with the consumer search for values, in the soaring increase in store brand sales relative to national brands just reported by Burd.

Ironically, Burd says sales of its O' Organics organic food and grocery brand and its Eating Right healthy foods brand also are increasing considerably even in the down economy. This tells us Safeway shoppers are likely buying the store brand--which will soon be national and global brand as we reported here--organic and healthy foods items rather than national and regional product brands in the respective categories in greater numbers.

Since Safeway is the fourth largest seller of food and groceries in the U.S.--after Wal-Mart, Kroger Co. and SuperValue, Inc.--the dramatic shift across the board in national brand vs. store brand sales should be a wake-up call for national and regional food and grocery brand marketers.

Both mainstream grocery product marketers and natural and specialty foods manufacturers and marketers need to step-up their marketing and sales promotional activity not only at Safeway but at other chains and independents as well. We doubt this is a Safeway-only trend. In fact, other grocery chains are reporting similar increases in store brand products compared to national brands.

What we know from history is that consumers who switch to store brands during an economic downturn or recession often stick with those brands when the economy--and the status of their pocketbooks--improves.

Further, since store brands are of such a higher quality and even better value today than they were a mere ten years ago, it's likely even more consumers who switch to the proprietary brands during an economic downturn will stick with them when the economy and their personal financial condition improves.

This situation could be extremely troubling for national and regional grocery brand marketers in both the mainstream grocery categories as well as in the natural, organic and specialty segments.

Meanwhile, as we reported earlier today, Safeway is taking its O' Organics and Eating Right brands national in the U.S. and globally. The retailer will sell the brands to other supermarket chains, mass merchandisers and independents, competing directly with national and regional natural, healthy and specialty foods companies and their brands.

This fact is an additional reason those companies in the natural, organic and specialty foods space better ramp-up their marketing and sales promotion efforts and closely examine their everyday pricing on the items they sell to supermarket chains and independents in the U.S. and Canada, in our analysis.

Both the Safeway O' Organics brand and the Eating Right brand are going to exert lots of competition in the natural, organic and healthy foods categories as the alliance Safeway has formed starts rolling out the brands across the U.S. and globally in just a few months.