The Maclean’s Food Guide

How Safeway Won The West

Yankee Doodle came to town, And set up scads of shops. His rivals claimed Their market was maimed And whistled for the cops

Walter Stewart April 1 1974
The Maclean’s Food Guide

How Safeway Won The West

Yankee Doodle came to town, And set up scads of shops. His rivals claimed Their market was maimed And whistled for the cops

Walter Stewart April 1 1974

How Safeway Won The West

The Maclean’s Food Guide

Yankee Doodle came to town, And set up scads of shops. His rivals claimed Their market was maimed And whistled for the cops

Walter Stewart

Charlie Murphy was a stubborn old man; some even called him ornery. He used to turn up at City Hall to complain about the roads around his Ranch Discount supermarket in east central Calgary; he frequently

gave the wholesalers who supplied him a hard time; he wrote strong letters to government officials with monotonous regularity. And so. when Charlie Murphy formed the notion that Canada Safeway Limited, the dominant food-selling firm in Alberta, was out to crush his supermarket, he fought back. Charlie had built that supermarket up from nothing; it was financed by earnings from the Ranch Gas station which he had operated for years in successful competition with the big oil companies. Every dime Charlie could wring out of the gas station or his other business ventures — flutters on the stock market, wholesaling, anything that looked as if it might turn a profit — was ploughed into the supermarket, which Charlie saw as the cornerstone of a burgeoning financial empire. When that empire-to-be was threatened, he took strong steps.

For example, Charlie would distribute a printed flyer in the neighborhood advertising, let’s say, roast beef at 69 cents a pound (this was in the 1960s). Charlie’s flyer would come out on Monday; by Tuesday or Wednesday, Safeway would have out its own flyers, meeting Charlie’s prices — not in every Calgary Safeway, of course, that would have been too expensive — but just in one store close to Ranch Discount. Charlie would hire school kids to go around the neighborhood and gather up the Safeway flyers; he would drive to a Safeway store across town and stand outside, handing out flyers. “Better check the prices inside,” he would tell the customers, “and make sure you’re getting the same deal.” After a while, the Safeway people would come out and shoo Charlie away, but it was fun while it lasted.

For a time, the Calgary stores got into a loss-leader war. You could buy a pound of butter at Safeway for 29 cents; you could buy coffee for well below cost. Incredible bargains. So,

late every afternoon, Charlie would raid the till of Ranch Discount and give every employee a fistful of money; they would fan out to nearby Safeways and buy up the bargains, and the next day Charlie would sell them — still at a low cost to the customer, but at no profit to himself. It couldn’t last, of course. Charlie was a little guy fighting a giant; he was trying to bring down an elephant with a peashooter. Ranch Discount lost money year after year. Charlie wrote letters; he complained to provincial officials about unfair competition (he got some action from them, at least on the loss-leader war; provincial officials sat down with Calgary supermarket officials and told them to lay off the below-cost sales or the province would pass a law to make them illegal; the loss-leader war stopped soon afterward); he tried to form an ad hoc committee of other independents in a like fix; he made two trips to Ottawa to tell the Combines Branch of the federal Department of Consumer and Corporate Affairs (which is charged, under the Combines Investigation Act, with maintaining “a competitive environment” and guarding against “predatory practices”) about an alleged Safeway monopoly; he complained to anyone who would listen that he was being driven out of business.

In 1967, Charlie died (not in penury; let’s get that straight, the gas station business was still booming; Charlie died of a heart attack at the age of 67 while on a holiday in Hawaii), and his son Graham took over the business. The unequal struggle with Safeway continued until 1970, when Ranch Gas could no longer afford to subsidize the supermarket, and Ranch Discount went into voluntary liquidation (it reemerged, after a distress sale, and is back at the old stand with a new owner who has a connection with a chain-store wholesaler).

But one of Charlie’s little peas had, in fact, pierced the hide of the elephant. The Combines Branch had taken up his cause; it launched an investigation and later a criminal action, charging Safeway with operating a monopoly. The government was not acting solely on

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SAFEWAY from page 30

Charlie’s complaint, of course, but his continuous, dunning letters, with their long recitation of facts and figures, dates and incidents, could not be ignored. In addition, there were two other factors. During the mid-1960s, the high and swiftly rising prices of groceries on the Prairies (yes, even then) had provoked such alarm that a royal commission was set up jointly by the provinces of Manitoba, Saskatchewan and Alberta, under the chairmanship of Judge Mary Batten of Saskatoon. In 1968, after two years of study, the Report Of The Royal Commission On Consumer Problems And Inflation (that was the official title; it’s always called the Batten Report) was published, and it said flatly that “the dominant positions of Canada Safeway and the Weston companies [the other large Prairies retailer] has led to the currently unsatisfactory performance of the retail grocery industry on the Prairies.” The companies should be investigated under the Combines Act, the report said, and if by any chance they couldn’t be nailed under that act, why, the law should be changed until they could. Strong stuff. D. H. W. Henry, who was then Director of Investigation under the Combines Act, was not much impressed by the Batten Report — a straightforward and sometimes brutally frank document, with none of the soothing circumlocutions so savored by the mandarins — but he launched his own investigation, just in case.

The second factor was a series of reports by an agricultural economist at the University of Alberta. Dr. Murray Hawkins sent his students out to comparison shop at Safeway stores in Edmonton, and they found a definite pattern; people in the poorer areas of town were paying more for their groceries than those in the richer sections. This was not because of any inherent wickedness of Safeway; where there was competition, Safeway met it, but grocers are not anxious to locate in the poorer areas of town; hence there was less competition, hence higher prices. Kind of neat, when you think about it; unless you happen to be poor.

With these three prods, the government descended on Canada Safeway (nothing dramatic, no shoot-outs at the cash register; Safeway cooperated fully when court officers arrived bearing writs and began hauling away cartons and files), seized nearly 10,000 documents, interviewed squadrons of witnesses, and hired a special prosecutor, Patrick McCaffery of Calgary, to press the charge, in October 1972, of operating a monopoly. Protracted negotiations followed and eventually, last September, Safeway accepted a court injunction laying down a number of limitations on its future in Calgary and Edmonton, and the criminal charge was withdrawn.

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So Charlie won alter all. Well, no, not quite. The reason Safeway accepted the injunction was, according to Eric Brackman, Advertising, Pricing and Merchandising Manager for the company, that “we could live with it,” and “to fight the thing out in court would have been disruptive to our business.” Or, to put it in blunter, layman’s terms, Safeway’s position atop the western food market is already so strong that it can hardly be dislodged, and it was easier to accept a mild curb on growth than to spend two years or so in a court hassle whose outcome was uncertain.

1 am setting all this down not merely in tribute to Charlie Murphy (although I rather admire the old geezer), but because of the light the Safeway case throws on some of the practices of grocery retailing in Canada.

Take Eric Brackman, Safeway’s merchandising chief, for example. Brackman wants to make one thing perfectly clear, and that is that “What they were charging us with was standard business practice, and nothing immoral or illegal.” And again, “We grew from bugger-all to a significant operation by this kind of merchandising operation. Isn’t that the aim of private enterprise, to grow and make money? If you do a better job than the rest, you should end up as top dog.” And, “In the first place, the government was going to charge us with forming a combine to drive up the prices, but they couldn’t prove that, so they changed the charge to one that we were driving out competition and said, ‘Now we’ve got you buggers.’ ”

Brackman makes some arresting points. Here’s another. Graham Murphy had told me that, while he was running his father’s store, he had an arrangement with Broder’s, a canning company in southern Alberta, under which he could buy large shipments of canned goods at a substantial volume discount, which helped him to compete with Safeway. For example, if Ranch Discount bought 2,000 cases of peas, corn or canned potatoes, the store got a discount ranging from 50 cents to one dollar a case, depending on the market, because of the quantity bought, a saving of anywhere up to $2,000 on a single order. But Broder’s was bought out by another company called Kingsway Foods, and Kingsway Foods turned out to be owned by Safeway. Overnight, Graham Murphy said, his volume discount disappeared and his competitive position worsened. I put this example to Brackman as a suggestion that perhaps the Calgary battle had not been a fair one. He replied, “I frankly don’t give one goddam whoop in hell what he [Murphy] says and thinks.” But were the facts true? It was true, said Brackman, that Safeway had bought the canning company, but as to cutting off the volume

discount; he wouldn’t know. “I’m not interested in defending or affirming it; if you print it, that’s up to you.”

I have some sympathy for Brackman; after all, here is the economic system telling him — as he sees it, anyway — to get out there and fight, stomp down the competition, take over the market and rake off maximum profits — but as soon as you get really rolling, along they come with criminal charges, and you find yourself in untold trouble. My sympathy is somewhat checked, however, when I look back on the history of Canada Safeway.

Canada Safeway Limited is a whollyowned subsidiary of Safeway Stores Inc. of Oakland, California, the second-largest food retail chain in the U.S. Canada Safeway was set up in 1929 in western Canada, and immediately began to grow, mainly by purchasing not only other retail stores but wholesalers and food processors. During its first 16 years of operation, it bought nine retail businesses (including Piggly Wiggly (Canadian) Ltd.), four wholesalers and two food processors. With this running start, Safeway grew to a huge, fully integrated grocery business, with control not only over its own supermarkets but over its suppliers as well. Its wholly-owned subsidiary, Macdonalds Consolidated, operates a wholesale grocery business, bakeries, a fruit and vegetable plant, a coffee-roasting factory and a jam and jelly plant. Safeway has its own canners, its own frozen foods operation, its own fluid milk plants, ice-cream factories, tea-packing firm, cheese-cutting operation and its own beverages and egg suppliers. It even has a company, Wingate Equipment Lessors Ltd., which owns and leases the furniture, machinery and appliances used in Safeway stores and warehouses.

Today, Safeway runs 269 supermarkets in Canada — 91 in British Columbia, 92 in Alberta, 25 in Saskatchewan, 40 in Manitoba and 21 in Ontario, new territory for the company. Safeway policy has been to have its various subsidiaries pass on products at or near their own cost to the supermarkets, and that policy provided an enormous advantage. Canada Safeway grew and grew, while much of its competition waned and withered away. A & P cut back in the west, Weston’s (under its various western labels, Loblaws, OK Marts, L-Mart, Econo-Mart, Supervalu, etc.) came away badly clawed; Dominion, Canada’s largest supermarket operating under a single name (the Weston empire is greater, but uses more names) was driven out. In going, Dominion paid Safeway’s a high compliment, one aggressive capitalist to another. “We were clobbered by Safeway in no uncertain terms,” said Thomas J. McCormack, vice-chairman of Domin-

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ion. “They did it through saturation. We put in a store at point X and they simply bracketed it in five places and took 10% from each right off the top of the cream ... It was the worst mistake I ever made, and the best deal I ever made was to sell the stores back to Safeway.”

Safeway’s techniques in its scramble to primacy are set forth in loving detail in a document filed with a Calgary court on August 7, 1973, a bill of Particulars arising out of the monopoly charge.

The crown contended that Safeway “substantially controlled” the retail grocery business in Calgary and Edmonton, selling between 56.8% and 65.5% of the total combined supermarket sales in Calgary and between 59.9% and 68.5% of the total combined supermarket sales in Edmonton for the period January 1, 1965, to October 10, 1972. It used its market position to drive out competitors. Safeway was able to surround other stores and meet their prices — as in the Ranch Discount case — locally only; the competition couldn’t hold on as long as the food giant. It kept other stores out of shopping centres by restrictive leases (anyone building a shopping centre naturally wanted Safeway, the dominant supermarket chain, to open a store there; Safeway would agree only on condition that no other large food store be allowed in the same shopping centre). It worked under higher discounts than its competitors, sold products at below cost (the Particulars list more than 150 items, from Alpha Evaporated Milk to Zero detergent, which were all sold, at one time or another, below cost in Calgary), refused to handle the products of even an indirect competitor (Safeway wouldn’t sell bathroom tissues made by E. B. Eddy, which is owned by Weston’s); it used “excessive” advertising, preempted positions in new areas by putting in stores before they made economic sense, thus freezing out the competition, and generally made life hell for everyone else in the business.

The end result was not a bargain bonanza for the consumer, since, the crown says, “After a period of severe price competition lasting from the late part of 1969 to May of 1970, during which period the accused made little profit and sustained some losses, the accused, through advertising and pricing techniques, succeeded in causing retail grocery prices ... to return to a position where the accused was again making a substantial profit.”

In fact Safeway is, on a comparative basis, the fattest supermarket in the land; in the period 1966 through 1972, it made a return on its sales dollar of between 1.92% and 2.62%, about double Dominion’s rate. The return on sales dollar is the figure supermarkets always quote, because it looks so low; what it means is that for every dollar’s worth of

goods that crosses the counter, Safeway makes more than 2%; the secret is that a supermarket’s shelves are loaded and emptied several times in a year, and every emptying returns a profit. The company’s return on equity — that is, the profit compared to the money invested — ran to 24% in 1972, before taxes, or 12.63% after. Between 1969 and 1972, Safeway increased its sales by about 41% and its profit about 71%.

Safeway admits some of the allegations, including those that it preempted shopping centres, signed restrictive leases, met competitors’ prices only in nearby stores and “used significantly more” newspaper and television advertising than its competitors, but says that the reason it has done so well has nothing to do with controlling the market. “They tried to prove we were gouging customers, and they couldn’t,” said Eric Brackman. Instead, the company says, its remarkable efficiency allowed it to bring goods to customers at low rates and still return a handsome profit. But what about the poor people of Edmonton. who were paying, according to Dr. Murray Hawkins, an average of 2.4% more than the rich? “It wasn’t that they were being chiseled,” said Brackman. “They were getting very good prices indeed; it was just that other people in other areas got an even better deal.”

Safeway owns 42 stores in Calgary and 35 in Edmonton, more than all its competition combined; it is the price setter, the trend leader, the big shot. One Calgary food executive told me he dreaded industry gatherings; they were “wall to wall with Safeway guys, and everybody kowtowing to them.” The court injunction will not change things much. Under its terms, Safeway will have to cut back its advertising, to limit its growth to one new store in each city during the next 3‘/2 years, to adopt uniform pricing across each city for six years, and to stop signing restrictive leases with shopping centres.

Safeway’s Eric Brackman was quick to point out that the restrictions apply only to the municipal boundaries that now exist. If the cities expand — as both are doing at a record rate — why then, the wraps are off. That’s what Brackman meant when he told me, “Frankly, we would not have agreed to the restrictions if we didn’t think we could operate under them okay.” Or, as Ken Quinn, president of Horne and Pitfield Foods Ltd. (which supplies IGA stores in Alberta), put it, the restrictions were “like throwing a bone to a dog ... I can’t see much meat on it.”

The Safeway saga is instructive from a number of points of view. It tells us, first of all, what priorities a large supermarket chain lays down for its guidance. Canada Safeway, in accord with classical economics, saw its first duty to be to

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take control of the market, and it did so. Why? Well, here the economists start to differ. Under the theory of monopoly pricing — which is obviously what the government had in mind when it first drew its charge — Safeway’s logic should have been to knock off the competition, jack up its prices and then walk off with the loot. But the crown was not able to show that that had happened; although Safeway did very well indeed at profit-taking time, it did not charge all the traffic could bear. So the original indictment, which had read that Safeway was “party to a monopoly ... to the detriment or against the interest of the public,” was changed to read “to the detriment or against the interest of competitors or others.” But if Safeway didn’t do all that pushing and shoving to squeeze up profits, what was it all about? According to Brackman. the motive seems to have been mere reflex, to become top dog. But once it had become top dog, why go on?

Perhaps Safeway was obeying the dictates of what J. K. Galbraith, the distinguished economist and sometime Canadian, calls “the planning system.” In his latest book. Economics And The Public Purpose, Galbraith argues that the major concerns of most large corporations are for security, growth, promotion and affluence, in roughly that order. If the company stops growing, the promotions will disappear, the kudos will wither, and the executive will find himself shunted aside. If Galbraith is right, Canada Safeway had to secure its line of supplies — which it did — secure its market — which it did — and ensure a safe, but not necessarily the maximum, rate of return. Constant growth was the key. and since not even Safeway could make people eat more, that growth had to come at the expense of competitors. The prices charged were simply instruments in that policy; had they been too high, competitors might have flourished despite Safeway’s other precautionary measures; had they been

too low, the U.S. bosses might have been on the scene, asking rude questions. (It is a matter of corporate pride to Canada Safeway that it runs its own show, and makes a higher rate of profit than its U.S. parent.)

What all this suggests for the consumer is that the cutthroat competition which supermarkets so anxiously tell us about is not likely, in the long run, to bring food prices down. In the shuffle for position among the food giants, the chief casualties are the independents.

The grocery chains spend a lot of money — just how much is the subject of fierce debate — battling each other. They do this through expensive promotions; they build more stores than they need, install fancier equipment than we want, and tack on free parking, cheap credit and a host of other extras. In the end, most of these campaigns tend to be self-canceling; as soon as one chain does it, another follows, and no advantage accrues to anyone. Most of us would be happy to forgo the exercise. If Loblaws can convince us that “By gosh the price is right,” we will shift our shopping to that store. Then Steinberg’s will try to convince us that Miracle Prices are better than By Gosh Prices, and Dominion will campaign to promote the virtues of Deep Discounting and all the costs wind up, eventually, on the food bill.

Occasionally, the competition flares into a price war. such as the one that rocked Canada in 1970, but we gain little in the end. A study done by the University of Waterloo showed that while prices went down about 4% during that price war, by March, 1971, they were back to. or above, their former levels. Professor R. E. Olley, vice-president of the Consumers’ Association of Canada, drew the moral: “Advertising by food chains and price wars are a sign of oligopoly, not competition. These rivalries result in . . . self-canceling advertising. They result in an almost exclusive emphasis on very shiny well-located retail store premises, whose costs

are borne by the consumer.”

The chain-store share of the market is increasing steadily; according to Canadian Grocer, the bible of the industry, independent stores and voluntary groups accounted for 54.8% of the market, and chains for 45.2% in 1962; ten years later, their positions were reversed; the chains had 54.5% and the independents 45.5%. Put another way, in 1972, 2,817 chain stores accounted for more than half of our supermarket bill, and left less than half to 23,399 other stores. The trend is continuing; preliminary estimates for 1973 show the chains up another percentage point, and the independents down. At this rate, before long the independents will be only a minor force in the market. If prices have come down as a result of this increasing chain dominance, word hasn’t leaked out to consumers yet. The net result of price wars appears to be to cripple the independents and transfer the costs of the campaign against them onto everyone else’s grocery bill.

Canada Safeway represents the ultimate working out of this trend, the situation where a single chain comes to dominate the market. Other grocery store executives are impressed by Safeway’s accomplishment; most of them would probably like nothing better than to emulate it.

Safeway’s market battle in western Canada is likely to be repeated in the east, as the company flexes its muscles for expansion in Ontario. Anyone who regards that as good news hasn’t been paying attention, because another lesson of the Safeway story is that the legislation designed to regulate competition is largely misdirected or inoperative. According to the lawyers who drew up the charge against Safeway, that company was in a monopoly position as long ago as 1965; it took eight years to bring it into court, and the end result was an injunction that probably won’t have much lasting effect. Either Safeway was innocent of the charge — in which case it was subject to needless harassment, the cost of which will turn up, as always, on the food bill (not all of it, of course, but all of Safeway’s considerable legal expenses), or else it was not, in which case the law is nearly useless. There have only been two convictions, and one guilty plea, on a charge of operating a monopoly in Canada, although the law was enacted in 1923.

I put this argument to an Ottawa official connected with the Safeway prosecution recently, and suggested that attempts to protect Canadian consumers against soaring food prices were bound to fail because the essential legislation was “ridiculous.” The Ottawa official looked hurt. “Not ridiculous,” he said, “merely futile.”^