Safeway Enters the Development Game

While “traditional” developers all over the place are cutting back the development plans, grocer Safeway has decided to get into the shopping-center building enterprise, a Reuters report says.

The supermarket operator has 36 developments underway, and Chairman and CEO Steve Burd says there are “pretty extraordinary” opportunities out there to develop centers without spending a lot of capital.

So our question is: What year is it? Did we miss something here? Sure, grocers seem to be positioned better than any sector because of their necessity nature, and Safeway’s strong sales and earnings are a reflection of that. But we thought a lot of their success also had to do with conservative store-opening plans and a concentration on renovating their core portfolios.

But development? Now?

Or is this just the beginning? Will we start seeing some well-positioned companies like Safeway take advantage of the recession and get into the game while others are pulling back?

19 Responses to “Safeway Enters the Development Game”

  1. 1 David Kell December 5, 2008 at 9:56 am

    Sounds to me you are playing “Chicken Little”. You know “The sky is falling” chicken. There are areas that could use some new competition and the real estate prices are very affordable now or in the near future, so why not invest if you have the money.

  2. 2 James December 5, 2008 at 11:14 am

    Many of the largest mansions in the United States were built during the great depression, than as now, the Dollar will by more snd that buying power will increase over the near term. This is a great time for retailers to lock up future development sites, and when warranted by sales projections, to build. I have been promoting these ideas to investors, but many are frozen by fear and uncertainty.
    Safeway has the right idea, their boldness now will pay huge dividends in the future.

  3. 3 Brad Baskin December 5, 2008 at 12:07 pm

    Safeway’s money would be better spent on reinvesting in their core business rather than trying to play developer. If they are able to earn a better return on their money in development than they earn in their core business, they are in the wrong business. The focus of all companies should be on maximizing shareholder value.

  4. 4 Joe The Lender December 5, 2008 at 12:18 pm

    Anyone know who’s financing the developments, and at what terms?

  5. 5 Larry December 5, 2008 at 12:50 pm

    Sounds like Safeway stock will soon be good for shorting.

  6. 6 Fred December 5, 2008 at 12:58 pm

    Safeway is on the right track, best time to capitalize on good locations and very affordable development costs.
    We should be buying safeway stocks.

  7. 7 bill December 5, 2008 at 2:23 pm

    it’s a smart strategic play. if they can cut their utility costs 35% by becoming a registered participant in the utitlty business, i’m sure they can do at least that well in the next 3 years on the real estate side. they are increasing free cash flow over the next 10-12 quarters and there will be great buying opportunities.

    they can buy hold and flip these within 10 years for a 2-3x return, (which by the way is better than their core biz) and redue near term real estate opex by at least 20%.

  8. 8 ColnagoMan December 5, 2008 at 2:58 pm

    I call it Leadership. Rather than simply being the proverbial 400 pound gorilla, sitting in a room, Safeway is taking an active role to become the tenant-developer. If this gorilla can learn to be a successful developer, we may see other gorillas follow suit–“Monkey see, monkey do.”

  9. 9 GaryL December 6, 2008 at 4:55 pm

    I was around when Safeway filed bankrkuptcy in TX and NM and I was around when Albertsons thought it more important to sell stock than groceries, Safeway should do what they do best..sell groceries.

  10. 10 MallMaven December 7, 2008 at 12:09 pm

    Well, it wouldn’t be the first case of grocers who morphed into shopping center developers: i.e. Harris Weingarten of Weingarten Realty and Martin and Matthew Bucksbaum of General Growth Properties. I’m just curious if Safeway picked the right century to do it in….

  11. 11 MallMaven December 7, 2008 at 12:16 pm

    P.S. I’m especially concerned for Safeway given the volatility of oil. Grocers have been recently experiencing huge profits as the price of oil skyrocketed last summer. Now that oil is back down to $40, will their profits hold? I don’t know, future inflation that has not kicked in yet, but will, will decimate those who are holding real estate.

  12. 12 Jodi Summers December 8, 2008 at 2:14 am

    Safeway recently opened the first grocery store in downtown Los Angeles in more than 30 years…to tremendous success. Perhaps their land acquisitions person sees this as a great way to build the company’s assets.


    Jodi Summers
    The SoCal Investment Real Estate Group
    Sotheby’s International Realty
    He who has not Christmas in his heart will never find it under a tree. –Roy L. Smith

  13. 13 Jon W December 8, 2008 at 11:18 am

    Grocers and other large retailers have been getting into the development business for decades and many times finding that it is more profitable than their retail stores.
    So are we suppose to be happy that Safeway just realized this, or dissapointed, because they just now realized this?
    It is alot easier to do a Retail Development when you have the Anchor tenant in your pocket, or even better, you are the Anchor Tenant. Good Luck to them, and hopefully they can find some good corners and get a step up on their competition.

  14. 14 Billy Bob December 8, 2008 at 11:48 am

    It’s tough enough to get deals done due to the historically unprecedented conditions prevailing in the financial markets, but now retail developers have to compete with their own tenants!

    Of course, when you have the clout as Safeway does, it’s hard to blame them for not passing up such a tremendous opportunity.

    Because of their access to capital and the fact that they know exactly where they want to locate a store, they can get deals done without having to deal with all the typical developers’ roadblocks/problems and delays associated with tying up a site, putting together a deal and then trying to find someone to finance it (no mean feat in today’s economic climate).

    Not to mention the fact that they will have dozens of new stores “at cost” without having to pay a developer’s mark-up. Not a bad move for their bottom line, thus benefitting their shareholders substantially…

  15. 15 r December 8, 2008 at 12:24 pm

    Sears is now basically a real estate holding company with dismal sales, poor customer service, and store closings. Those who fail to learn form the experience of others are doomed to follow the path that others have taken

  16. 16 Wooster December 8, 2008 at 6:10 pm

    Might be a good idea, but I just can’t imagine that they are getting the best deals yet. Perhaps they are securing $3/ft land on the outskirts of the suburban sprawl and they think it sounds like a huge deal.

    I wouldn’t put my money out there just to lock up some “strategic” sites while broad industry sectors crater one by one. And if what I see here in California is any indication of a national market, the sites worth of locking up under the guise of strategic ownership are not close to their bottom in pricing. I’ll probably be able to purchase their neighbor’s land at half the cost, obtain cheaper construction costs, and lease to their competitor. Perhaps being a tenant-developer is the right move for Safeway, but in no way would I rush into that right now.

  17. 17 James December 9, 2008 at 1:17 pm

    Joe the lender, Safeway could easily self-fund these deals, that’s another reason why they should go ahead with this.

  18. 18 Anne December 10, 2008 at 9:58 am

    If Safeway has the capital to fund the development and the returns are attractive, they should move forward. This will position them well against Whole Foods, particularly in a recession. Also, controlling their own real estate is a smart move.

  19. 19 Mike Retail December 10, 2008 at 6:05 pm

    This is not news.Safeway has been developing stores for about 50 years and their wholly owned division,Property Development Associates,LLC has only been resting on the sidelines for a few years because the market values went beyond their understanding.Now that the market hit the fan,they can see acceptable returns around the corner. They have an entire developemnt division in place for years.Where as Safeway Corp is quite polished and refined,PDA has a reputation that is quite different.Their new stores equal Whole Foods and Safeway has the best locations since they have been around for eons.If they would only get a good butcher shop in their stores…..

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