The company had lower performance in various operational areas, but these tended to be offset by increased savings elsewhere. For example, identical-store sales decreased by about 2%, because of lowered prices, but this loss was offset by reduced spending on advertising and improved inventory control.
However, these offsets can only go so far before margins start to feel the pressure. Deflation was the main source of worry in the quarter, as Safeway sought to get an edge on other value-based competitors like Wal-Mart
Fortunately (for the retailers, not the consumer), Safeway believes its own price cuts have already given sales volume the spur it needed. The company believes that by 2011, wages will start to increase again and it will be able to pass any further cost increases on to consumers, without endangering demand.
Personally, I'm skeptical. CEO Steve Burd is expecting wage increases of 3% to 3.5%, but a recent report from the Social Security Trustees predicts only a 3.1% increase in 2010, followed by a 2.2% one in 2011 and a 2.4% increase in 2012. The report's predictions are already markedly worse than those in the Trustees' 2009 report. If wage increases fail to keep up with price increases, Safeway may have to continue eating higher costs to hold demand steady -- either that, or consumers will find a new source of pain as inflation hits their already weak earnings.
So how do you play this dilemma? My Foolish colleague Mike Pienciak has a few suggestions.
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Fool contributor Jacob Roche hopes Safeway never ends its buy-two, get-three-free deal on 12 packs of Diet Coke. He holds no position on any of the stocks mentioned. Wal-Mart Stores is a Motley Fool Inside Value pick and the Fool owns shares of Wal-Mart. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Fool has a disclosure policy.