Store brands often are viewed not as a unique product line, but merely as a lower-priced alternative to national brands.

That’s not how the folks at Safeway look at their in-house labels. “We’re looking to be a premium product where it’s the best product offering in the marketplace,” says David Nelsen, vice president of dairy manufacturing supply operations for Safeway. “That really extends to all of our products. We aren’t looking for ’me toos.’”

Whether that’s a new Safeway Select Great Escapes superpremium ice cream flavor or a Select Primo Taglio cheese, the Pleasanton, Calif.-based supermarket giant is into dairy sales and manufacturing in a big way. Safeway offers 879 SKUs with its Lucerne dairy label and more than 1,300 SKUs under the Safeway Select banner, sold at its supermarkets across the country — Safeway, Vons, Dominick’s, Randalls, Carr-Gottstein and Genuardi’s.

With $35.6 billion in total sales for 2003, Safeway operates 33 manufacturing facilities in the United States and Canada. Of those, 14 are dairy plants. The company’s manufactured volume is more than 260 million gallons of fluid, 256 million pints of ice cream, 15 million dozen frozen novelties, 40 million pounds of cottage cheese, 34 million pounds of sour cream and 150 million half-pints of yogurt.

“We will continue to develop new products along with innovative new flavors which respond to our consumer needs,” says Nelsen. “In addition, we recognize that the dairy category is an absolute necessity to a successful grocery and to provide a competitive advantage for our company.”

Safeway Stores Inc. was incorporated in 1926, and within two years had more than 2,000 stores. Canada Safeway was established in 1929, and by 1931 the store count had passed 3,200. The 1960s brought the company’s entrance into the grocery markets in the United Kingdom, Australia and West Germany, and by 1971 the company was the world’s largest food retailer.

In 1977, Safeway launched its first super stores with specialty departments, laying the groundwork for the look of supermarkets today.

Listed on the New York Stock Exchange since 1928, Safeway was taken private in 1982, and the company sold several of its retail divisions over the next six years. “We transformed Safeway into the great company that it is today,” says Craig Fullmer, director of dairy supply operations.

The company returned to public status as Safeway Inc. in 1990. Between 1997 and 2000, it acquired several regional supermarket chains across the United States, among them Vons in Southern California (including stores it had sold in the ’80s), Randalls in Texas and Dominick’s in the greater Chicago area.

Safeway launched online shopping in 2002 with Safeway.com. “It continues to operate in many divisions, in major metropolitan areas,” says Fullmer.

Currently, Safeway is the third-largest retail grocer in the United States, operating more than 1,800 stores in 21 states plus five Canadian provinces and Mexico. Despite a widely publicized labor dispute impacting several major grocery chains, and criticism from some financial circles of its chief executive, Safeway and its brands remain strong and the favorites of consumers across North America.

The Lucerne brand dates back further and is celebrating its 100th anniversary this year. “A group of dairy farmers in the San Joaquin Valley of California banded together to form a cooperative they called the Lucerne Cream and Butter Company, and built a little plant in Hanford, California,” explains Fullmer.

The creamery sold butter and sweetened condensed milk to Safeway’s Southern California division until 1929, when the grocer acquired it and made Lucerne its dairy label. “Beginning around 1930, we started acquiring fluid milk plants, so we were the first retailer to have internal supply of fresh fluid milk to our store base,” says Fullmer. “Most of the early plants came through acquisition of small bottlers.”

Then in the late 1930s, Safeway started building new plants to support its various divisions. “One of the big differences of those days versus today is each dairy plant would report to their respective division. Fresh milk being a local product, it made sense in those days,” says Fullmer. “Unfortunately, it got in the way of best practices and consistency across all plants. So in 1945, the Lucerne Milk Company was established within Safeway, and the plants all began reporting through corporate headquarters.”

According to Fullmer, this move spawned numerous innovations in the dairy industry. “We were one of the first companies to have paperboard cartons. We pioneered cleaning-in-place systems. We began the proportional sampler for raw receiving in milk sampling,” he says. “And an item that’s not around anymore — one of our facility engineers developed a defoamer, where we take foam off the top of the cartons. You don’t see that anymore because other technology has replaced it.”

Ice cream production began in 1951 through acquisitions in Seattle and Denver, then in Canada in 1958, both bulk ice cream operations. Production of frozen novelties began around 1966.

“Along the way, these innovations have all been about driving better product to the consumer,” says Fullmer. “Lucerne has meant quality since it began. As a result of that, Safeway’s private label really has become a national brand. It’s widely recognized for its quality, and that’s exactly what we work toward every day.”

By the early 1980s, Safeway had as many as 30 dairy plants; today, it operates 14. “Through driving efficiency and productivity throughout the plants, we were able to consolidate some of the operations,” says Fullmer. “Quality initiatives have driven the pull dates out to where we can ship geographically across the country. I think the key thing about what Lucerne means is the consumer is going to be able to count on what they’re going to get out of the product. It’s a quality product, always.”

Safeway’s strategy of marketing its products side by side against national brands has been to offer selections that are unique and innovative.

“The marketing approach has focused on providing an innovative variety of flavors,” says Nelsen. “Along with our extensive development activities, our products are consumer-tested to ensure that we meet or exceed our customer expectations. We tend to focus consumer communications on our new products in order to generate excitement in the category and for our new products.”

Frozen desserts have been a particular area of excitement. “Select Ice Creams continue to be a point of differentiation in the marketplace, and that’s really been a great success,” says Nelsen. “The Great Escapes line has increased our product offerings and given our consumers an award-winning selection of products. In addition, the co-branded products have gained great acceptance with our consumers and have continued to surpass our expectations.”

According to Nelsen, Safeway doesn’t have any low-carbohydrate dairy offerings ready for release, but it’s something that’s being investigated as this diet trend continues in popularity. “As we look at the carb trend and other things, a wide variety of new products, including whipped yogurt, and new ice cream flavors are being introduced,” he says. “That includes a variety of products that we’re introducing in 2004, including pints and half-gallons, ranging from Majestic Matterhorn to Tin Roof Sundae — a real potpourri of new flavors that we’re excited about.”

Offering products that are exciting and new, along with freshness and quality, is how Safeway will convince shoppers to turn toward its products rather than nationally branded alternatives on the shelves of its own stores. “The strategy at Safeway is to continue the product differentiation versus competitors, coupled with providing premium quality products in order to drive growth in the market share,” says Nelsen. “A great example of this is the fact that freshness is the single most important attribute to consumers when purchasing milk. In addition to our daily dairy deliveries to stores, we will continue to work with our raw milk suppliers and reduce manufacturing cycle times to differentiate our products with our freshness dates.”

Because of Safeway’s nationwide reach, its brands have broader consumer exposure than most private labels. “We are in a unique position in that consumers view Lucerne as a national brand,” says Nelsen. “We have national surveys for brand awareness, and when you take a look at brand awareness from a Lucerne name standpoint, it compares very favorably with the nationals.”

According to Nelsen, quality will remain the pre-eminent driver as Safeway strives to make Lucerne, Select and its other marques better than other brands, rather than just a lower-priced counterpart. “We’re looking for the most innovative flavors along with the best quality of products, whether it be the ingredients we use or the freshness dates. The Great Escapes line was introduced in the last three to four years, and when you look at the new and innovative flavors, they’ve really had a big impact on expanding our product offerings. We definitely are committed to that.”

The company does all of its own product and flavor development. “We have a full product development group at headquarters and technical services for quality assurance at corporate, and each plant has a quality manager in house to ensure we’re meeting strict guidelines we establish,” says Fullmer. “We adhere to the strictest guidelines and we’re serious about it.”

Part of building and maintaining a strong position for Safeway’s brands is developing products that appeal to all consumers. “Growth is expected by targeting new products that respond to emerging marketplace trends,” says Nelsen. “We actually have a number of different areas we’re looking at in regards to that.”

Fullmer adds, “Continued growth is going to drive the equation of quality, service and value through the kinds of things you see come out of our plants, as well as continue to develop new and innovative products to add to our lines.”

Another high-growth area for Safeway’s dairy manufacturing business, according to Nelsen, is foodservice and outside private label work. “Outside sales for dairy over the last five years have doubled. We continue to expect to see growth in that area,” he says.

Ed Olivero, director of dairy manufacturing, explains how Safeway’s sales team, known as OmniBrands, represents the company’s processing plants. “The individual managers of the 33 plants also act as sales managers for their own facilities, trying to sell line time for their products or a customer’s formula product in that area,” says Olivero. “The main focus of the public sales side of the business is to fill capacity. As we increase our efficiencies, we also increase our ability to raise capacity and have line time available.”

Safeway plants produce goods for a wide range of outside customers, in addition to its own brands. These products are sold domestically and for export. “We work to build long-term relationships with our customers. These relationships are built on the foundation of quality, service and value. Some of our customers have been with us for more than 10 years,” says Olivero. “Shipments to customers other than our parent company represent over 15 percent of our total dairy shipments. These shipments are spread over 50 customers worldwide. In many cases, we’ve been successful on the public sales side because companies are familiar with our quality. More so they come to us than we go to them.”

But as opportunities for revenue broaden, economic challenges continue. “We invest in capital and continue to invest in capital,” says Nelsen. “We will spend seven figures over the course of the next year on a proprietary line, a sour cream line. We produce other national labels as far as cultured products. Whether it’s the Safeway side of the business or the outside side of the business, if it’s right for our customers, then it’s right for our customers and we’ll make those investments.”

Of course, commodity costs continue to be a major challenge. With milk and butter prices at historic highs, it’s difficult to churn out high-quality products at the price points consumers have come to expect from Safeway-branded products.

“Private label packers don’t have the luxury of huge margins, so when commodities get out of hand, as they are now, we’re really squeezed,” says Fullmer. “Anybody that’s packing private label is suffering right now.”

According to Fullmer, the volatility in commodity costs is a stumbling block in dairy’s attempts to compete against other beverages. “For example, at the first of the year, our costs dropped significantly on a per gallon basis — the cost of our raw materials — and now come April and May, they’re going to rise significantly,” he says. “When you have a volatile market, it’s pretty hard to convince the average consumer that you’re really shooting straight with them. I think they’re wondering what’s going on with these dairy guys.”

Plus, companies as large as Safeway are beset by vastly different and often conflicting regulations governing how they do business. “Some areas have federal orders, some have state regs, some are unregulated. It creates an imbalance when everyone is going for the same customer,” says Fullmer. “We have a diverse situation with our 14 plants as
it relates to regulation. Thus, we have the opportunity to see how each
system works. We’re not alone in that game, so it’s not like we’re crying about ourselves. It’s the state of the industry.”

Beyond cost and regulations, the challenge for dairy continues to be per capita consumption, particularly in the fluid arena that’s up against the deep marketing pockets of soft-drink giants.

“We as an industry have got to continue to be creative and innovative, and come up with these new value-added products in order to maintain that share of stomach,” says Fullmer. “The trendy beverages out there are spending a lot more money on advertising than dairy does. We all know that milk and dairy products are good for you, but that only goes so far with the new generation. So we’ve got to make sure we’re in that game.”

Innovation will play a key role in staying in the game. “We’ve got to make sure we’re not so foolish to think that the consumers 10, 20, 30 years from now are all going to be picking up a plastic gallon of milk,” says Fullmer. “They’re going to look for something to put in a cup holder in a car, they’re going to look for fancy flavors, they’re going to look for probiotics. Value-added products are going to be a big thing.”

Meanwhile, the industry’s new marketing push — linking weight management with dairy consumption — is gaining momentum. “With the challenge of making sure folks choose dairy, continuing to educate and promote the health aspect of dairy products is an important need we see for the industry,” says Nelsen. “Part of the challenge is continuing to get the word out on the benefits of calcium and the relationship with weight loss. Ultimately we view helping consumers make the right choice for their families as a shared responsibility. We’re actively working with IDFA and MilkPEP, and we’ll be using various marketing materials to promote the health aspects of dairy.”

Behind the scenes, Safeway makes sure its manufacturing side has the latest technology to make all the rest possible.

“On the ice cream side of the business, a big area of focus has been control systems,” says Nelsen. “Control systems link all the process systems, from receiving through palletization. We have real-time production reports posted to a Web site that provides management with a window to production. Dedicated high-speed data lines provide access to outside consultants who service systems remotely.”

Safeway’s Phoenix ice cream plant uses PLC-based process control systems, and the company has achieved a high degree of success with automated process batching systems. “They enabled us to reduce process variation in both butterfat and solid levels without operator involvement,” says Nelsen. “The last ones under control systems are the PLC-based refrigeration controls used to monitor storage temperatures and stage compressors on and off for efficiency gains. Certainly one of the goals in putting this facility together was really to take advantage of the latest technology and be an innovative leader in the ice cream industry.”

That extends across the board among Safeway’s plants, notes Fullmer. “It’s not just this plant. Obviously we tried to get on the cutting edge with this plant as it pertains to ice cream, but we were already there in some aspects, so we just copied what we were doing at the other plants,” he says.

Specifically to ice cream are process improvements like reclaim systems to reduce waste of high-value interphase mix. “We have state-of-the-art ice cream freezer centers, which integrate freezers, fruit feeders and variegate feeders, which allow lines to ensure control of variegates and inclusions,” says Nelsen.

Material handling is also state of the art, including robotic palletization. “From the robots, products are discharged from the palletizers and they’re conveyed into storage warehouses which are serviced by forklifts with enclosed operator cabins,” says Nelsen. “Safeway began using the freezer forklifts in 2003 and is finding improved operator availability as a result of that — basically a work-life improvement.”

Newer technology is still on the horizon. “One of the visions of the Phoenix plant in particular was to set it up so that we might be able to go to RFID (radio frequency identification) eventually,” says Fullmer.” We’re not there yet, but we have the capability of tracking products now. We just aren’t tagging them and rolling it out to the customer base.”

The fluid end of the business also has been the beneficiary of modernization. “Over the last couple of years, key aspects of the manufacturing process have been engineered to improve reliability and repeatability. A great example is innovation in homogenization measurement coupled with the process controls in place at all of the dairy plants. We’ve also made considerable investments at our California plants with a truly state-of-the-art in-line standardization system to control butterfat and nonfat solids,” says Nelsen. “Certainly the most significant plant improvements are the result of the world-class manufacturing process which heavily involves our most important resource — our people. A deliverable from the process improvements is overall double-digit improvements in line efficiency. Increasing throughput by more than 20 percent on the same lines has been a key to giving our customers the best value in the markets we serve.”

When they’re not helping to create and market high-quality products, many of the folks at Safeway are helping out in the community. The Safeway Foundation was formed in 2002 to support a range of charitable causes in the company’s operating areas. The foundation was funded by an initial company start-up grant and replenishes its coffers with an annual employee giving campaign.

“Safeway and its employees donate personal time and raise money for a variety of charitable purposes and organizations, including educational institutions and local charities,” says Nelsen. “Some of the big areas of focus for the Safeway Foundation are hunger relief, education, health and special needs-related charities. The company is a major supporter of food banks through product recovery centers, store bread donations and a range of special fund-raising events. Safeway continues to be one of the largest food bank contributors in the United States.”

Safeway has been a corporate sponsor of Easter Seals since 1985 and sponsors a variety of cancer-related organizations, including CaP CURE and the Susan G. Komen Foundation. Stores are allocated budgets to address diverse community needs and are encouraged to work with local schools, youth organizations, social-service groups and civic organizations.

So, from among product and production, innovation and investment, company and community, what is the most unique aspect of Safeway and its dairy operations?

“Our name,” Fullmer says definitively. “Safeway, Lucerne — our name and our brands. That’s who we are and it’s what we stand for, and it’s what we have to protect.”