Green Grocer : Safeway Bid Is Fresh Evidence of Vons’ Newfound Success

Vons is value, at least to Safeway Inc.

Safeway’s $1.7-billion bid Wednesday for Vons Cos. is dramatic evidence of Vons’ successful three-year turnaround.

Under the leadership of Chief Executive Lawrence Del Santo, it has slashed costs, dumped losing divisions and lowered prices--bringing the bloated grocery chain into the austere 1990s.

In doing so, Del Santo boosted profit at Vons while increasing the company’s attractiveness to Safeway, which owns slightly more than a third of Vons’ stock.

“I don’t think I’ve seen as dramatic a turnaround in our industry,” said Jack Brown, chairman of Vons rival Stater Bros.

Del Santo joined Vons in 1993 after serving as chief operating officer of American Stores, the parent of Lucky. A hands-on executive who worked his way up the ranks at Vons in the 1960s before leaving for stints at other chains, Del Santo is expected to retire if a merger goes through.

Analysts said Del Santo’s formula for revitalizing Vons went beyond belt-tightening. He developed preferred-shopper programs and private-label lines to give consumers incentive to shop at Vons.

“He positioned Vons as a good value and stabilized the company,” said Mark Husson, a supermarket industry analyst at J.P. Morgan Securities in New York.

Many of the changes at Vons mirror those made at Safeway, which has also moved to cut costs in recent years. Analysts said the two chains make a great match because they have similar management styles and a long history of working together since Safeway sold its Southern California operations to Vons in 1988 and acquired a stake in the company. The two chains have shared store brands, and several Safeway executives sit on Vons’ board.

Moreover, analysts said the differences between the companies provide an opportunity to share expertise. Vons, for example, has a well-developed preferred-shopper program in which customers using electronic checkout cards receive special discounts. The program is designed to build customer loyalty.

Analysts say Safeway has been more effective in cutting labor costs--though not without some pain. Denver-area employees struck the company for 42 days this year before signing a contract. In British Columbia, 14,000 employees struck when Safeway locked them out of its Canadian stores.

During the 1980s, Vons acquired a reputation as an innovator. Seeking to be all things to all shoppers, the company started three separate chains in addition to its flagship Vons markets: one for upscale shoppers, one for Latinos and one for bargain hunters. The moves were hailed by analysts at the time. But the built-in costs of running such divergent operations left Vons ill-prepared for the recession of the early 1990s.

The company’s image as a high-price store took its toll with shoppers as well. Annual sales fell 12% between 1990 and 1994.

When Del Santo joined Vons in 1993, he began dismantling many of Vons’ innovations. In 1994, he shuttered the Tianguis chain, which had failed to catch on with the region’s Latino shoppers. Prices at Tianguis were higher than at competing stores, including Vons. Vons closed nine poorly performing stores with 350 employees and significantly trimmed the staff at its Arcadia headquarters.

In 1995, Del Santo closed the Expo warehouse chain, which was designed to lure bargain hunters from Costco and Sam’s Club. Though Expo prices were competitive, the stores were a drain on Vons, which had a higher overall cost structure than the club stores.

“He realized that Vons was at all the wrong prices. They were living yesterday’s dream in a high-service environment,” said analyst Husson.

With Vons President Richard Goodspeed, who also joined the company from American Stores, Del Santo invested in the Vons chain and its Pavilions chain of upscale large markets. In doing so, he took Vons down a different path from Safeway, which operates a separate chain catering to bargain-conscious shoppers.

However, analysts do not expect Vons to adopt Safeway’s strategy if a merger is completed.

“I don’t think you will see any changes that are visible to shoppers,” said Salomon Bros. analyst Jonathan Ziegler. “If it ain’t broke, don’t fix it.”

* SURPRISE MOVE

Safeway dropped a bombshell on the grocery industry with its bid to return to Southern California. A1