Safeway 2005 Annual Report Download - page 29

SAFEWAY INC. AND SUBSIDIARIES
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Corporate Governance, and Executive Compensation committees. We will provide a copy of any such documents to any
stockholder who requests it. We do not intend for information found on the Company’s web site to be part of this
document.
Item 1A. Risk Factors
We wish to caution you that there are risks and uncertainties that could affect our business. These risks and uncertainties
include, but are not limited to, the risks described below and elsewhere in this report, particularly in “Forward-Looking
Statements.” The following is not intended to be a complete discussion of all potential risks or uncertainties, as it is not
possible to predict or identify all risk factors.
Competitive Industry Conditions We face intense competition from traditional grocery retailers, non-traditional
competitors such as “supercenters” and “club stores,” as well as from specialty supermarkets, drug stores, dollar stores,
convenience stores and restaurants. Some of our competitors are larger than we are, have greater financial resources
available to them and, as a result, may be able to devote greater resources to sourcing, promoting and selling their products.
Increased competition may have an adverse effect on profitability as the result of lower sales, lower gross profits and/or
greater operating costs such as marketing.
Our ability to attract customers is dependent, in large part, upon a combination of price, quality, product mix, brand
recognition, store location, in-store marketing and design, promotional strategies and continued growth into new markets.
In each of these areas, traditional and non-traditional competitors compete with us and may successfully attract our
customers to their stores by aggressively matching or exceeding what we offer. In recent years, many of our competitors
have increased their presence in our markets. Our responses to competitive pressure, such as additional promotions and
increased advertising, could adversely affect our profitability. Also, we cannot assure that our actions will succeed in gaining
or maintaining market share. Additionally, we cannot predict how our customers will react to the entrance of certain of our
non-traditional competitors into the grocery retailing business.
Because we face intense competition, we must anticipate and quickly respond to changing consumer demands more
effectively than our competitors. In April 2005, we launched a $100 million marketing campaign to reposition our brand. For
this campaign to be successful, we must achieve and maintain favorable recognition of our unique and exclusive private-label
brands, effectively market our products to consumers in several diverse market segments, competitively price our products
and maintain and enhance a perception of value for consumers. Finally, we must source and market our merchandise
efficiently and creatively. Failure to accomplish these objectives could impair our ability to compete successfully and adversely
affect our growth and profitability.
Labor Relations A significant majority of our employees are unionized, and our relationship with unions, including work
stoppages, could have an adverse impact on our financial results.
We are a party to approximately 400 collective bargaining agreements, of which 35 are scheduled to expire in 2006. These
expiring agreements cover approximately 4% of our union-affiliated employees. In future negotiations with labor unions, we
expect that rising health care, pension and employee benefit costs, among other issues, will be important topics for
negotiation. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable
contracts with labor unions, it could result in strikes by the affected workers and thereby significantly disrupt our operations.
Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreements, we
may experience increased operating costs and an adverse impact on future results of operations.
Profit Margins Profit margins in the grocery retail industry are very narrow. In order to increase or maintain our profit
margins, we develop strategies to reduce costs, such as productivity improvements, shrink reduction, distribution center
efficiencies and other similar strategies. Our failure to achieve forecasted cost reductions might have a material adverse
effect on our business. Changes in our product mix also may negatively affect certain financial measures. For example, we
continue to add supermarket fuel centers, which generate low profit margins but significant sales. As a result, we expect to
see our gross profit margins decrease as fuel sales increase. Although this negatively affects our gross profit margin, fuel
sales provide a positive effect on operating and administrative expense as a percent of sales.