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Ahead of the Bell: Analyst cuts Safeway rating

NEW YORK (AP) — Jefferies & Co. believes the success of a Safeway's new loyalty program appears limited and downgraded his rating for the grocer.

Safeway Inc. last month introduced "just for U," which offers personalized deals based on past purchases. Safeway is betting big on the success of the program to offset the impact of increased competition and higher commodity prices. By the end of this year, executives expect 35 percent of Safeway's business will be from customers who signed up for "just for U."

For now though, Jefferies analyst Scott A. Mushkin said the program hasn't pushed Safeway out of the way of trouble. Expanded offerings from big-box retailers such as Target Corp. and Wal-Mart Stores Inc. are drawing customers away from traditional grocery stores. And higher prices for fuel and corn — which is used to make everything from graham crackers to baking powder — are hurting grocers as well. Grocery chains have been hesitant to pass those costs on to customers in this economy, for fear that they will bolt to competitor stores.

Gas prices have increased rapidly since early July. In Safeway's core California market, the price at the pump is already over $4 a gallon on average. As Mushkin notes, that's a "significant psychological breakpoint" that will assuredly cause some consumers to spend less on other things.

Adding more pressure, Wal-Mart has announced it will open 95 to 100 stores in the coming quarter, Mushkin said. He expects Wal-Mart to open up to 40 new grocery-only stores in Safeway's home turf of California by the end of the year.

Although the stock is relatively cheap, it's not a good enough value for the analyst to recommend it for investors, especially with the expected limited revenue boost from "just for U."

Shares of Safeway Inc. slipped 22 cents to $15.75 in premarket trading Thursday, closer to its 52-week low of $14.73. It has traded as high as $23.16 in the last 12 months.

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