Safeway's profit falls 16 per cent as company fights to hold onto customers

The Pleasanton, Calif.-based company says higher costs offset a bump in sales and improving market share. Going forward, the company is hoping its new "just for U" loyalty program will bolster its market share furthermore.

Safeway and other grocery store operators have been struggling to hold onto market share at time when big-box retailers just as Target Corp. and Wal-Mart Stores Inc. are expanding their food offerings. Traditional supermarkets nevertheless account for 51 per cent of grocery sales, down from 66 per cent in 2000, according to UBS Investment Technology.

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. Now they're afraid to pass on those costs, lest clients decide to shop elsewhere.

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