THE rapid recovery at Safeway took the market by surprise yesterday, with like-for-like sales growth of 6% achieved in the first six weeks of the financial year, writes Andrew Wilson.

Increased investment in the ABC customer loyalty card scheme has contributed strongly to Safeway's performance as the group moved from fourth position to sales growth market leader.

Share price reaction was a 12.5p jump to 376p. Although profits for the current year will show no improvement over last year's #375m, there was no profits warning.

That figure was a 13% decline from the preceding year's #430m, excluding the closure and redundancy programme and property losses amounting to #35m.

However, the profits are in line with the forecast made at the time of the warning statement in

February after the company had experienced a traumatic period due to poor stock availability, which at one time in November had fallen well below 90% but is now up to 96%.

Overall sales in 1997-98 increased by 6% to #7494m, of which like-for-like volume growth was 1.7% with inflation at 0.5%.

The poor trading further increased speculation that there would be a merger with Asda, but that now looks to be much less likely, with Safeway showing all the signs of being in a strong recovery phase, even if there is a short-term cost.

Philip Dorgan at broker

Panmure Gordon is expecting a profits fall in the first half from #230m to #200m as the company invests further in staff and distribution, but he is looking for a #30m bounce back in the second part of the year.

Chairman David Webster was in an upbeat mood, saying that

Safeway had a clear and simple objective at this time to build sales momentum that would generate an additional #1000m of sales over three years.

Webster added that, while there were pressures in the industry, merger was not on his agenda at the moment.

He said that some #25m of the #60m cost savings pledge would be achieved this year and that there would be #600m returned to shareholders through dividends or share buy-back.

The ABC card scheme will enjoy #20m of investment this year while the company takes lower margins. These fell from 7% to 6.1%. A fall to 5% in line with the competition is anticipated.

The card has attracted 300,000 new subscribers since the reward element was significantly increased, to bring the number of holders to around eight million.

For customers who spend more than #240 in a month, the discount can be as high as 4.5% if goods are taken rather than the 3% available as a cash reduction.

This pushes the cost of the Safeway shopping basket below that of Asda, which offers only a very restricted loyalty card distribution.

ABC enables Safeway to discover which items are most in demand by various types of customer, and the company claims that it has a better knowledge of individual requirements than its

competitors.

The sales appeal has been helped by the concentration on the family shopper and the complete revamping of product areas such as bakery where there are now more than 100 lines available.

There are 115 stores in

Scotland, with five more scheduled to open this year. As a result, Safeway leads the Scottish market with a 20% share and annual sales of around #2000m. Its UK share is just 8%.

There will be 18 openings this year across the UK, including nine superstores, with the cost similar to last year's capital expenditure

of #440m.

As the vast proportion of the group's properties are actually freehold, the balance sheet considerably understates their total value, but it is more than the group's market capitalisation of #4100m.

Safeway will not follow Asda and Tesco into the textiles market.

In banking, the link-up with Abbey National has attracted more than #400m of deposits and, unlike the competition, is already profitable.

The expansion into Ireland has proved more expensive than expected with a #9m loss in the joint venture with Fitzwilton. Webster has ruled out expansion beyond the British Isles.

The dividend total has been held at 14.1p with a 9.7p final payment.