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Safeway strategy unravels in aisles

Safeway Inc. is leaving Chicago, apologizing in Philadelphia and losing market share in Texas.

So much for the heralded national expansion and consolidation strategy set in motion five years ago by the nation's fourth-largest supermarket chain, based in Pleasanton, Calif. Safeway operated 1,759 stores last year with sales of $34.3 billion.

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In the late 1990s, Safeway led the consolidation of an industry facing the expansion of Wal-Mart Stores Inc. into the grocery business. But Safeway's strategy is unraveling as the company finds that its methods aren't working with longtime shoppers of its acquired chains, which include Tom Thumb in Dallas, Randall's in Houston, Dominick's in Chicago and Genuardi's in Philadelphia.

After four years in Chicago, Safeway said last month that it plans to sell the 113-store Dominick's chain because it couldn't extract wage concessions from 9,000 unionized workers.

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Each chain's market share has dropped since it went under Safeway's umbrella. Safeway's stock price and its earnings outlook likewise have fallen.

For several months, there's been speculation that the Texas stores are for sale, which Safeway denies.

"It's clear that Safeway has to think about its long-term direction, given that they are clearly struggling with their long-term strategy of making acquisitions," said Meredith Adler, a supermarket analyst at Lehman Brothers.

New market problems aren't driven by competition, analysts say, but by changes forced on shoppers when Safeway's own brands replace locally preferred ones. For example, a dispute in Dallas between Safeway and Boar's Head led the popular deli meat company to switch to Kroger.

"As they've Safeway-ized stores, it's been difficult for them and for consumers in Chicago, Philadelphia and Texas," said Jonathan Ziegler, a supermarket analyst and principal of Pups Investment Management. "They've gone into markets where their store just doesn't stand out."

In Dallas, Tom Thumb's share of grocery dollars fell to 19.2 percent in a midyear report from 20.8 percent at the beginning of this year, according to data from Market Scope 2002, a publication of TradeDimensions.

The company's market share has since fallen to below 19 percent, according to analysts who track unpublished monthly numbers.

In Philadelphia, where Safeway purchased Genuardi's Family Markets last year, it is publishing ads apologizing for changes it made and asking customers to return.

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Persistent industry rumors among suppliers have Safeway selling its Tom Thumb chain in Dallas and Fort Worth to H.E. Butt Co.

Melissa Plaisance, Safeway's senior vice president of finance, said the company's problems in its new markets are all unique and there's no basis for the rumors in Texas.

"I would hate for an unsubstantiated rumor to create anxiety for our 12,000 Texas employees going into the holiday season," she said.


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