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Safeway profit drops amid growing competition
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PLEASANTON (AP) — Safeway Inc. said Thursday that its net income fell 16 percent in the second quarter, as the grocery store operator spent more on advertising and rolled out a new loyalty program to stave off growing competition.

The Pleasanton, Calif.-based company says expenses related to the program's launch — along with its repurchase of company stock — offset a modest bump in sales and market share. Going forward, Safeway is betting that the "just for U" program, which offers personalized deals based on past purchases, will help build customer loyalty.

In a conference call with investors, CEO Steve Burd noted that the program will also let Safeway more nimbly fend off competitors by tracking customer buying patterns.

"We can see what business we're losing and we can look at the competitor and see what might be attracting them," he said. By the end of this year, he expects 35 percent of Safeway's business will be from customers signed up for "just for U."

Shares of Safeway fell 69 cents, or 4.2 percent, to close at $15.80 Thursday.

Safeway and other grocery store operators have been struggling to hold onto shoppers at a time when big-box retailers such as Target Corp. and Wal-Mart Stores Inc. are expanding their food offerings. Traditional supermarkets now account for 51 percent of grocery sales, down from 66 percent in 2000, according to UBS Investment Research.

Making matters worse, supermarkets are facing rising costs to keep their shelves stocked as a result of higher prices for corn, fuel and other commodities. But they're afraid to pass on those costs, lest customers decide to shop elsewhere. Instead, Safeway and other grocers are looking to control costs by expanding and improving the image of their store-label products. Unique, higher-quality store-brand products also help boost loyalty.

Although personalized deal programs like "just for U" are relatively new in the industry, Safeway isn't the first to do it. Discount club Sam's Club, for example, also has a program that offers premium members personalized discounts based on past purchases. And Burd noted that Safeway's competitors will likely adopt similar strategies in coming years. Still, he said that Safeway will have a significant head start by the time it becomes more commonplace.

"The survivors in retail will be about personalization," he said.

For the three months ended June 16, Safeway said it earned $122.7 million, or 51 cents per share. That's compared with a profit of $145.8 million, or 41 cents per share, in the year ago period, when there were more outstanding shares. Not including one-time items, the company said it earned 50 cents per share.

By that measure, analysts polled by FactSet on average expected a profit of 49 cents per share.

The company spent $240.4 million during the quarter to repurchase 11.6 million of its shares.

Total sales for the period rose 2 percent to $10.39 billion, which also topped Wall Street expectations. Sales from stores open at least a year edged up 0.8 percent, when excluding fuel costs. The metric is a key gauge of health, because it strips out the impact of newly opened and closed stores.

For the year, the company expects to spend about $900 million on capital expenditures, such as the opening about 10 new Lifestyle stores and the remodeling of another 10. Safeway stood by its full-year guidance of $1.90 to $2.10 per share.

Safeway operates about 1,700 stores in North America under names including Vons in Southern California and Nevada and Randalls in Texas.