Safeway Plans To Expand By Acquiring Rivals Grocery Chains Battling For ‘Share Of Stomach’

Safeway plans to follow the lead of rival grocer Fred Meyer Inc. when it comes to expansion - just shop for another supermarket chain.

Portland-based Fred Meyer Inc. announced last week it will acquire Salt Lake City-based Smith’s Food & Drug Centers Inc. in a $2 billion deal pending approval of shareholders.

The next day, Safeway president and chief executive officer Steve Burd told shareholders at their annual meeting in Portland that the Pleasanton, Calif.-based chain already is hunting for takeover candidates of its own.

Last month, Safeway completed its $2.55 billion acquisition of Vons Cos., one of the biggest supermarket chains in Southern California with 325 stores.

“It was the first of what we expect to be a series of mergers for Safeway,” Burd told stockholders Tuesday.

He added that Safeway could improve the profit of any rival it buys.

“Our cash flow will be such that we’re going to want to do another acquisition after we get the Vons deal absorbed. What we want to buy are assets that are in good market positions, No. 1 or No. 2 in their market.”

Burd said Safeway didn’t expect a formidable new challenge to its position as the top grocer in the West from the new, expanded Fred Meyer. He hinted that Fred Meyer could face problems of its own in absorbing Smith’s.

“It’s an event for Fred Meyer,” he said. “To the extent it’s an event, we’ll try to take advantage of that.”

The Fred Meyer deal is the latest in a series of big mergers that are transforming the grocery business in the Northwest and across the nation.

Local and regional grocery chains rapidly are evolving into potential national franchises. Industry experts say the spate of mergers will create lower costs for companies and lower prices for consumers.

“It’s eat or be eaten,” said J’Amy Owens, a consultant for The Retail Group, based in Seattle.

“Each deal increases the pressure on others to do deals. If you sell more, you can lower your costs and your prices. You have to keep up, or you fall behind.”

Louis W. Stern, a professor of marketing at the Kellogg School of Management at Northwestern University, said the mergers are part of a battle for what retailers call “share of stomach.”

It pits traditional grocery stores against specialty food stores, fast-food restaurants and “superstores” that sell everything from canned soup to take-home hot meals.

Stern said grocery store operators hope they can cut costs by spreading costs of new technology, distribution, marketing and management over more stores and more customers.

In addition to economies, big chains want the ability to command lower prices from suppliers.

Owens said prime candidates to buy other companies include Ohio-based Kroger Inc., the nation’s top grocery chain, with $25 billion in sales, and Safeway, the top chain on the West Coast and No. 2 in the nation, with $22.6 billion in sales.

“I can see the chess moves already,” she said. “You would only need to bring together a couple of the big chains, and you would be close to a national chain right there.”

Steve Weinstein, an industry consultant and former editor of the Progressive Grocer newsletter, said the creation of huge grocery chains should still leave room for independents and specialty stores if they find strong market niches, special products and customer service.

Gary G. Michael, chairman of Albertson’s Inc., said mergers help grocers to cut costs, but warns there’s danger in getting too big.

“We’ve got to remember that supermarkets have historically been family-run and regional,” he said. “Independents are a big part of the industry.”