Safeway profits see slight drop

Safeway Inc., wrestling with competitors nationwide and struggling for a new labor agreement in Northern California, reported a drop in profits Thursday.

The Pleasanton supermarket chain, which has stores in Modesto, Turlock and Manteca, said second-quarter profits fell to $122.7 million from $145.8 million a year earlier.

Revenue grew nearly 2 percent, but profits were depressed as Safeway spent more heavily on advertising and the nationwide rollout of a customer-loyalty program.

Safeway's chief executive, Steve Burd, said he was pleased with the results, but investors disagreed. Safeway shares dropped 4 percent to $15.80 on the New York Stock Exchange.

Industry analysts said Safeway is feeling competitive pressure from nonunion stores, which has led to a gradual decline in profit margins in recent years.

"That's a lot of money that's not coming in the door," said Bob Reynolds, an industry consultant in Moraga and former Safeway official.

Competitive pressures are driving the Northern California labor negotiations, now in their 10th month. Safeway and another unionized chain, Raley's, have yet to make a deal with the United Food and Commercial Workers on a new contract that would pare the companies' labor expenses.

The third union chain, Save Mart, has reached a tentative agreement. Details haven't been released, but both sides said the contract includes concessions by workers.