business news in context, analysis with attitude

Safeway said yesterday that is plans to get out of the Chicago market, saying that its Dominick's division has been a "noticeable drag" on company profits. It hopes to be out of the market by early 2014.

The company said that it has received "considerable interest" in its 72-store Dominick's chain, and has already sold four of them - two in Chicago, one in Homer Glen, Illinois, and one in Glenview, Illinois - to New Albertsons Inc., which operates Jewel-Osco in the market. Terms of the deal were not disclosed.

Safeway has owned Dominick's for 15 years, and has turned it from a 116-store chain that it bought for $1.2 billion plus debt into a 72-store chain that likely will be sold for considerably less than the company paid for it.

Safeway, which sold its Canadian stores earlier this year, has indicated that it wants to focus on markets where its competitive position is stronger. Chicago has become ever more problematic for the company as it has been invaded by competitors that include Mariano's, Whole Foods, Aldi, Target and Walmart.

The Chicago Tribune writes that "Safeway said it's trying to sell as many of the stores as quickly as it can, adding that it's likely to fetch multiple buyers as opposed to a single grocer that would take over every location. Most of the real estate behind the Chicago stores is leased, not owned. Only about 15 to 20 of the buildings are owned by Safeway, the company said ... Safeway, the country's second-largest grocery chain, said the move will save it between $400 million and $450 million. It said it will use that money to buy back stock and invest in other growth opportunities."



UPDATE, 10:15 a.m.

Here is the text of CEO Robert Edwards' message to employees:

All Safeway Companies Employees:

Earlier today we announced the company’s plans to exit the Chicago market. We made this difficult decision after long and careful consideration. However, we believe it is clearly the right long-term move for Safeway.

Over the years we have worked hard to strengthen Dominick’s position in the Chicago market. We have made substantial investments in the store system, with an extensive remodel program and with the opening of a significant number of new stores in the region. We did so in the face of dramatic change in the competitive landscape. While we made some progress, it was not enough to justify further investment, despite the dedicated efforts of our retail and backstage teams to improve the business.

At this stage, here is what I can tell you about the planned exit. One small group of stores has been sold, with the details to be announced shortly. We are working to identify buyers for the remainder of our operations. The company anticipates having plans in place for the other stores by early 2014. We understand this raises concerns and apprehension among our Dominick’s work force. We are asking the prospective buyers of the stores to interview and consider our people for employment. While we can make no guarantees, it is our intention to facilitate continued employment for as many team members as possible.

Thank you for your cooperation as we work through this process in the months ahead. We will keep you informed as we move forward.  We are deeply grateful to our Dominick’s team for all they have done, and will continue to do, in a challenging environment. This is a difficult step, but part of an important strategic process designed to ensure that Safeway remains a strong company for many years to come.

KC's View:
I've always thought that Safeway would be willing to sell the Dominick's division, but would not do so if the price it could get was so much lower than what it paid for the division. But now, with a new CEO, that inhibition seems to have gone away.

I was talking with a number of food industry folks yesterday, and the broader question that they were asking was how long Safeway itself would be around as a company, and whether it seems likely that the whole thing could get sold.

I don't see that happening anytime soon, but I do think that it seems clear that the merger and acquisition activity seems to be picking up, and Safeway certainly does not seem to be a buyer.