SAFEWAY INC, 424B1, 1999-02-12

SAFEWAY INC
424B1, 1999-02-12
GROCERY STORES

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<PAGE> 1

FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION STATEMENT NO. 333-71231
PROSPECTUS

SAFEWAY LOGO
19,750,000 Shares
Safeway Inc.
COMMON STOCK

------------------------

THE SELLING STOCKHOLDERS ARE OFFERING ALL OF THE SHARES, WHICH INCLUDE
19,650,304 PRESENTLY OUTSTANDING SHARES AND 99,696 SHARES
WHICH WILL BE ISSUED UPON THE EXERCISE OF OUTSTANDING WARRANTS.
------------------------

SAFEWAY INC.'S COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE
SYMBOL "SWY." ON FEBRUARY 10, 1999, THE REPORTED LAST
SALE PRICE OF THE COMMON STOCK ON THE NEW YORK STOCK EXCHANGE
WAS $52 11/16 PER SHARE.
------------------------

PRICE $52 11/16 A SHARE
------------------------

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS STOCKHOLDERS
-------------- ------------- --------------
<S> <C> <C> <C>
Per Share.................................. $52.6875 $1.3700 $51.3175
Total...................................... $1,040,578,125 $27,057,500 $1,013,520,625
</TABLE>

The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

None of the proceeds from the sale of the shares will be received by Safeway
other than $49,848 representing the exercise price of the warrants.

One of the selling stockholders has granted the underwriters the right to
purchase up to an additional 2,000,000 shares to cover over-allotments. Morgan
Stanley & Co. Incorporated expects to deliver the shares to purchasers on
February 16, 1999.
------------------------

MORGAN STANLEY DEAN WITTER
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
ING BARING FURMAN SELZ LLC
LEHMAN BROTHERS
J.P. MORGAN & CO.
SALOMON SMITH BARNEY
WARBURG DILLON READ LLC
February 10, 1999
<PAGE> 2

[Map of Safeway Operating Territories]

2
<PAGE> 3

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering to sell
shares of common stock and seeking offers to buy shares of common stock, only in
jurisdictions where offers and sales are permitted. The information contained in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of the common stock. In
this prospectus, "we," "us" and "our" refer to Safeway Inc. and its
subsidiaries, unless the context otherwise requires.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 4
Where You Can Find More Information......................... 7
Disclosure Regarding Forward-Looking Statements............. 7
Price Range of Common Stock................................. 8
Dividend Policy............................................. 8
Selected Financial Data..................................... 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Business.................................................... 16
The Selling Stockholders.................................... 21
Description of Capital Stock and Warrants................... 23
Certain United States Tax Consequences to Non-United States
Holders................................................... 24
Underwriters................................................ 27
Legal Matters............................................... 28
Experts..................................................... 29
Information Incorporated by Reference....................... 29
</TABLE>

3
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and our financial statements, the notes thereto and the other
financial data contained elsewhere in this prospectus or incorporated by
reference herein. Unless we indicate otherwise, the information in this
prospectus assumes that the underwriters will not exercise their over-allotment
option.

THE COMPANY

We are one of the largest food and drug retailers in North America based on
sales, with 1,497 stores as of January 2, 1999. Our U.S. retail operations are
located principally in northern California, southern California, Oregon,
Washington, Colorado, Arizona, Illinois and the Mid-Atlantic region. Our
Canadian retail operations are located principally in British Columbia, Alberta
and Manitoba/Saskatchewan. In support of our retail operations, we have an
extensive network of distribution, manufacturing and food processing facilities.

In April 1997, we completed a merger with The Vons Companies, Inc. pursuant
to which we issued 83.2 million shares of our common stock for all of the shares
of Vons common stock that we did not already own. In connection with the merger,
we repurchased 64.0 million shares of our common stock for an aggregate purchase
price of $1.376 billion. We also hold a 49% interest in Casa Ley, S.A. de C.V.
which, as of January 2, 1999, operated 77 food and general merchandise stores in
western Mexico.

Dominick's Acquisition. In November 1998, we completed our acquisition of
all of the outstanding shares of Dominick's Supermarkets, Inc. for $49 cash per
share, or a total of approximately $1.2 billion. We funded the acquisition of
Dominick's, including the repayment of approximately $560 million of debt and
lease obligations, with a combination of bank borrowings and the issuance of
commercial paper. Dominick's is now our wholly owned subsidiary through which we
operate 114 stores in the greater Chicago metropolitan area, two distribution
facilities and a dairy processing plant. Dominick's had sales of $2.6 billion in
fiscal 1997 and sales of $1.8 billion through its third quarter of 1998.

Carr-Gottstein Acquisition. On August 6, 1998, we signed a definitive
agreement to acquire all of the outstanding shares of Carr-Gottstein Foods Co.
for $12.50 per share, or a total of approximately $110 million, in a cash merger
transaction. Carr-Gottstein had approximately $220 million of debt outstanding
on September 27, 1998. Carr-Gottstein is the leading food and drug retailer in
Alaska, with 49 stores primarily located in Anchorage, as well as Fairbanks,
Juneau, Kenai and other Alaska communities. Carr-Gottstein had sales of $589
million in fiscal 1997 and sales of $440 million through its third quarter of
1998.

The acquisition of Carr-Gottstein is subject to a number of conditions,
including the approval of the holders of a majority of Carr-Gottstein's
outstanding shares, receipt of certain regulatory approvals and other customary
closing conditions. Although we cannot assure you that all of these conditions
to the merger will be satisfied or waived, we believe we will complete the
transaction early in the second quarter of 1999. See "Business -- Carr-Gottstein
Acquisition."

OPERATING STRATEGY

During the past five years, our management team has demonstrated
proficiency at turning around underperforming assets. Central to our success is
a simple but effective formula that focuses on three key priorities to enhance
the performance of our operations, including the operations of companies we
acquire: (1) controlling costs, (2) increasing sales and (3) improving capital
management. Management's focus on these three priorities has produced
significant progress in the following key measures of financial performance:

- Identical-store sales growth

- Expense ratio reduction

- Working capital management

- Operating cash flow margin

- Earnings per share growth

4
<PAGE> 5

RECENT DEVELOPMENTS

FOURTH QUARTER 1998 EARNINGS

On January 28, 1999, we reported net income of $255.0 million ($0.50 per
share) for the 16-week fourth quarter of 1998 compared to net income of $214.9
million ($0.43 per share) for the 17-week fourth quarter of 1997. This
represents a 19% increase in earnings despite the additional week in the fourth
quarter of 1997.

Strong store operations helped increase fourth quarter identical-store
sales (which exclude replacement stores) 2.4% and comparable-store sales 3.0%.
Total sales were $7.9 billion in the 16-week fourth quarter of 1998 compared to
$7.8 billion in the 17-week fourth quarter of 1997.

The Dominick's acquisition was accounted for as a purchase and Dominick's
operating results have been consolidated with ours since approximately midway
through the fourth quarter of 1998. The pro forma amounts presented below for
1997 were computed as if we had owned Dominick's for the corresponding period of
the prior year.

Our continuing improvement in buying practices and product mix helped to
increase gross profit 51 basis points to 28.88% of sales in the fourth quarter
of 1998 from pro forma 28.37% in the fourth quarter of 1997. LIFO expense was
$2.5 million in the fourth quarter of 1998 compared to LIFO income of $8.4
million in 1997. Operating and administrative expense declined 42 basis points
to 22.42% of sales in the fourth quarter of 1998 from pro forma operating and
administrative expense of 22.84% in 1997, reflecting increased sales and ongoing
efforts to reduce or control expenses. This represents the 23rd consecutive
quarter of improvement in operating and administrative expense, after pro forma
adjustments for acquisitions of Vons and Dominick's.

Interest expense increased to $81.8 million in the fourth quarter of 1998
from $77.5 million for the fourth quarter of 1997, due to borrowings incurred in
connection with the Dominick's acquisition. In spite of higher interest expense,
strong operating results pushed the interest coverage ratio (operating cash flow
divided by interest expense) to 8.44 times in 1998 from 7.53 times in 1997.
Operating cash flow as a percentage of sales was 8.72% for the quarter and 8.75%
for the year.

Equity in earnings of Casa Ley, our unconsolidated affiliate, was $11.8
million for the quarter compared to $9.3 million in 1997.

For the year, net income was $806.7 million in 1998 compared to $621.5
million of income before extraordinary loss in 1997. Sales for the year were
$24.5 billion in 1998 compared to $22.5 billion in 1997. The gross profit margin
improved 57 basis points to 29.10% in 1998 from 28.53% in 1997. Operating and
administrative expense improved 28 basis points to 22.56% of sales in 1998
compared to 22.84% in 1997.

At fiscal year end 1998, our outstanding debt was approximately $5.0
billion and our stockholders' equity was approximately $3.1 billion.

5
<PAGE> 6

SAFEWAY INC. AND SUBSIDIARIES

OPERATING RESULTS
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
QUARTER ENDED YEAR ENDED*
------------------------ ------------------------
JANUARY 2, JANUARY 3, JANUARY 2, JANUARY 3,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(16 WEEKS) (17 WEEKS) (52 WEEKS) (53 WEEKS)
<S> <C> <C> <C> <C>
Sales......................................... $ 7,922.6 $ 7,785.4 $24,484.2 $22,483.8
========= ========= ========= =========
Gross profit.................................. $ 2,228.1 $ 2,211.3 $ 7,124.5 $ 6,414.7
Operating and administrative expense.......... (1,776.3) (1,771.7) (5,522.8) (5,135.0)
--------- --------- --------- ---------
Operating profit.............................. 511.8 439.6 1,601.7 1,279.7
Interest expense.............................. (81.8) (77.5) (235.0) (241.2)
Equity in earnings of unconsolidated
affiliates.................................. 11.8 9.3 28.5 34.9
Other income (expense), net................... (0.2) 0.8 1.7 2.9
--------- --------- --------- ---------
Income before income taxes and extraordinary
loss........................................ 441.6 372.2 1,396.9 1,076.3
Income taxes.................................. (186.6) (157.3) (590.2) (454.8)
--------- --------- --------- ---------
Income before extraordinary loss.............. 255.0 214.9 806.7 621.5
Extraordinary loss related to early retirement
of debt, net of income tax benefit of
$41.1....................................... -- -- -- (64.1)
--------- --------- --------- ---------
Net income.................................... $ 255.0 $ 214.9 $ 806.7 $ 557.4
========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary loss............ $ 0.50 $ 0.43 $ 1.59 $ 1.25
Extraordinary loss.......................... -- -- -- (0.13)
--------- --------- --------- ---------
Net income.................................. $ 0.50 $ 0.43 $ 1.59 $ 1.12
========= ========= ========= =========
Weighted average shares outstanding:
Diluted..................................... 511.3 504.4 508.8 497.7
========= ========= ========= =========

OPERATING CASH FLOW:
Income before extraordinary loss.............. $ 255.0 $ 214.9 $ 806.7 $ 621.5
Add (subtract):
Income taxes................................ 186.6 157.3 590.2 454.8
Interest expense............................ 81.8 77.5 235.0 241.2
Depreciation................................ 155.6 135.6 475.1 414.0
Goodwill amortization....................... 21.1 15.8 56.3 41.8
LIFO expense (income)....................... 2.5 (8.4) 7.1 (6.1)
Equity in earnings of unconsolidated
affiliates............................... (11.8) (9.3) (28.5) (34.9)
--------- --------- --------- ---------
Total operating cash flow..................... $ 690.8 $ 583.4 $ 2,141.9 $ 1,732.3
========= ========= ========= =========
As a percent of sales....................... 8.72% 7.49% 8.75% 7.70%
As a multiple of interest expense........... 8.44x 7.53x 9.11x 7.18x
</TABLE>

- ---------------

* The annual income statements include Vons' operating results since the
companies merged at the beginning of the second quarter of 1997. Before the
merger, our operating results include our 34.4% equity interest in Vons.

Our principal executive offices are located at 5918 Stoneridge Mall Road,
Pleasanton, California 94588, and our telephone number is (925) 467-3000.
6
<PAGE> 7

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy these reports, proxy statements and other information at the public
reference facilities of the Commission, in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago, Illinois
60661-2511. You can also obtain copies of these materials from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with it
(http://www.sec.gov). You can inspect reports and other information we file at
the office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.

We have filed a registration statement and related exhibits with the
Commission under the Securities Act of 1933, as amended. The registration
statement contains additional information about us and our common stock. You may
inspect the registration statement and exhibits without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and you may
obtain copies from the Commission at prescribed rates.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the documents that we incorporate by reference,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements relate to, among other things, capital expenditures,
cost reduction, cash flow and operating improvements and are indicated by words
or phrases such as "anticipate," "estimate," "plans," "projects," "continuing,"
"ongoing," "expects," "management believes," "the Company believes," "the
Company intends," "we believe," "we intend" and similar words or phrases. The
following factors are among the principal factors that could cause actual
results to differ materially from the forward-looking statements:

- general business and economic conditions in our operating regions,
including the rate of inflation/deflation, population, employment and
job growth in our markets;

- pricing pressures and other competitive factors, which could include
pricing strategies, store openings and remodels;

- results of our programs to reduce costs;

- the ability to integrate any companies we acquire and achieve
operating improvements at those companies;

- relations with union bargaining units;

- issues arising from addressing year 2000 information technology
issues, including for companies we acquire;

- opportunities or acquisitions that we pursue;

- conditions to the acquisition of Carr-Gottstein, including regulatory
approval, which could affect the timing of or our ability to complete
the acquisition; and

- the availability and terms of financing.

Consequently, actual events and results may vary significantly from those
included in or contemplated or implied by such statements.

7
<PAGE> 8

PRICE RANGE OF COMMON STOCK

Our common stock has been listed on the New York Stock Exchange under the
symbol "SWY" since our initial public offering in May 1990.

The following table sets forth the high and low sales prices for our common
stock for the fiscal quarters indicated as reported by the New York Stock
Exchange Composite Tape. Prices have been adjusted to give effect to two-for-one
stock splits effected on January 30, 1996 and February 25, 1998.

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First quarter............................................. $26 $20 9/16
Second quarter............................................ 24 13/16 21 1/8
Third quarter............................................. 27 3/4 23 1/16
Fourth quarter............................................ 31 23/32 25 11/32
1998
First quarter............................................. $37 1/4 $30 1/2
Second quarter............................................ 40 7/16 34
Third quarter............................................. 46 7/16 37 1/4
Fourth quarter............................................ 61 3/8 37 5/8
1999
First quarter (through February 10, 1999)................. $62 7/16 $52 1/8
</TABLE>

The reported last sale price of the common stock on the New York Stock
Exchange Composite Tape on February 10, 1999 was $52 11/16.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our common stock since
we were acquired by a corporation formed by Kohlberg Kravis Roberts & Co. in
1986, and we do not currently intend to declare or pay any cash dividends. Any
determination to pay dividends in the future will be at the discretion of our
Board of Directors and will depend on our results of operations, financial
condition, capital expenditures, working capital requirements, any contractual
restrictions and other factors deemed relevant by our Board of Directors. See
"Description of Capital Stock and Warrants -- Dividends."

8
<PAGE> 9

SELECTED FINANCIAL DATA

SAFEWAY INC. AND SUBSIDIARIES

The financial data below are derived from our audited consolidated
financial statements, except for the financial data for the 36-week periods
ended September 12, 1998 and September 6, 1997, which are derived from our
unaudited consolidated financial statements. You should read the selected
financial data in conjunction with our consolidated financial statements and
accompanying notes, which we have incorporated by reference herein. In the
opinion of our management, the results of operations for the 36 weeks ended
September 12, 1998 and September 6, 1997 contain all adjustments that are of a
normal and recurring nature necessary to present fairly the financial position
and results of operations for such periods. The results for the 36 weeks ended
September 12, 1998 are not necessarily indicative of the results expected for
the full year.

<TABLE>
<CAPTION>
36 WEEKS ENDED
---------------------- 53 52 52 52 52
SEPT. 12, SEPT. 6, WEEKS WEEKS WEEKS WEEKS WEEKS
1998 1997(1) 1997(1) 1996 1995 1994 1993
---------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Sales.............................. $ 16,561.6 $14,698.4 $22,483.8 $17,269.0 $16,397.5 $15,626.6 $15,214.5
---------- --------- --------- --------- --------- --------- ---------
Gross profit....................... 4,836.4 4,203.4 6,414.7 4,774.2 4,492.4 4,287.3 4,123.3
Operating and administrative
expense.......................... (3,746.5) (3,363.3) (5,135.0) (3,882.5) (3,765.0) (3,675.2) (3,681.8)
---------- --------- --------- --------- --------- --------- ---------
Operating profit................... 1,089.9 840.1 1,279.7 891.7 727.4 612.1 441.5
Interest expense................... (153.2) (163.7) (241.2) (178.5) (199.8) (221.7) (265.5)
Equity in earnings of
unconsolidated affiliates........ 16.7 25.6 34.9 50.0 26.9 27.3 33.5
Other income, net.................. 1.9 2.1 2.9 4.4 2.0 6.4 6.8
---------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
extraordinary loss............... 955.3 704.1 1,076.3 767.6 556.5 424.1 216.3
Income taxes....................... (403.6) (297.5) (454.8) (307.0) (228.2) (173.9) (93.0)
---------- --------- --------- --------- --------- --------- ---------
Income before extraordinary loss... 551.7 406.6 621.5 460.6 328.3 250.2 123.3
Extraordinary loss, net of tax
benefit
of $41.1, $41.1, $1.3 and
$6.7............................. -- (64.1) (64.1) -- (2.0) (10.5) --
---------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 551.7 $ 342.5 $ 557.4 $ 460.6 $ 326.3 $ 239.7 $ 123.3
========== ========= ========= ========= ========= ========= =========
Diluted earnings per share:
Income before extraordinary
loss........................... $ 1.09 $ 0.82 $ 1.25 $ 0.97 $ 0.68 $ 0.51 $ 0.25
Extraordinary loss............... -- (0.13) (0.13) -- -- (0.02) --
---------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 1.09 $ 0.69 $ 1.12 $ 0.97 $ 0.68 $ 0.49 $ 0.25
========== ========= ========= ========= ========= ========= =========
FINANCIAL STATISTICS:
Identical-store sales(2)(3)........ 4.2% 0.8% 1.3% 5.1% 4.6% 4.4% 2.1%
Comparable-store sales(2).......... 4.8 2.5 2.2 6.1 5.5 5.0 3.5
Gross profit margin................ 29.20 28.60 28.53 27.65 27.40 27.44 27.10
Operating and administrative
expense
as a percent of sales............ 22.62 22.88 22.84 22.48 22.96 23.52 24.20
Operating profit margin............ 6.6 5.7 5.7 5.2 4.4 3.9 2.9
Operating cash flow(4)............. $ 1,451.1 $ 1,148.9 $ 1,732.3 $ 1,239.5 $ 1,068.6 $ 947.6 $ 777.0
Operating cash flow margin......... 8.76% 7.82% 7.70% 7.18% 6.52% 6.06% 5.11%
Capital expenditures(5)............ $ 538.1 $ 379.6 $ 829.4 $ 620.3 $ 503.2 $ 352.2 $ 290.2
Depreciation and amortization...... 354.7 304.4 455.8 338.5 329.7 326.4 330.2
Total assets....................... 8,603.4 8,176.2 8,493.9 5,545.2 5,194.3 5,022.1 5,074.7
Total debt......................... 2,854.1 3,353.2 3,340.3 1,984.2 2,190.2 2,196.1 2,689.2
Stockholders' equity............... 2,778.0 1,921.5 2,149.0 1,186.8 795.5 643.8 382.9
Weighted average shares
outstanding -- diluted (in
millions)........................ 508.1 494.6 497.7 475.7 481.2 494.2 493.8
OTHER STATISTICS:
Vons stores acquired in 1997....... -- 316 316 -- -- -- --
Total stores at period-end......... 1,381 1,367 1,368 1,052 1,059 1,062 1,078
Remodels completed during the
period(6)........................ N/A N/A 181 141 108 71 45
Total retail square footage at
period-end (in millions)......... 53.8 52.0 53.2 40.7 40.1 39.5 39.4
</TABLE>

9
<PAGE> 10

- ---------------
(1) We completed the merger with Vons in April 1997. The results of operations
of Vons are included in our results of operations as of the beginning of the
second quarter of 1997.

(2) Reflects sales increases for stores (including Vons stores for the final 41
weeks of 1997 and for 1998) operating the entire measurement period in both
the current and prior periods. The 1997 and 1996 annual identical-store
sales and comparable-store sales exclude British Columbia stores, which were
closed during a labor dispute in 1996.

(3) Excludes replacement stores.

(4) Defined as FIFO income before income taxes, interest, depreciation,
amortization, equity in earnings from unconsolidated affiliates and
extraordinary losses. Operating cash flow is similar to net cash flow from
operations presented in our consolidated statements of cash flows because it
excludes certain noncash items. However, operating cash flow also excludes
interest expense and income taxes. Management believes that operating cash
flow is relevant because it assists investors in evaluating our ability to
service our debt by providing a commonly used measure of cash available to
pay interest, and it facilitates comparisons of our results of operations
with those of companies having different capital structures. Other companies
may define operating cash flow differently, and, as a result, those measures
may not be comparable to our operating cash flow.

(5) Defined under "Business -- Capital Expenditure Program."

(6) Defined as store projects, other than maintenance, generally requiring
expenditures in excess of $200,000.

10
<PAGE> 11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

PERIOD ENDED SEPTEMBER 12, 1998 COMPARED TO PERIOD ENDED SEPTEMBER 6, 1997

Our net income was $193.7 million ($0.38 per share) for the third quarter
ended September 12, 1998, compared to income before extraordinary loss of $150.0
million ($0.30 per share) for the third quarter of 1997. In the third quarter of
1997, we incurred an extraordinary loss of $59.9 million ($0.12 per share)
related to the early retirement of debt which reduced net income to $90.1
million ($0.18 per share).

Our third-quarter sales increased 4.1% to $5.6 billion in 1998 from $5.4
billion in 1997, primarily because of strong store operations. Identical-store
sales (which exclude replacement stores) increased 4.2%, while comparable-store
sales increased 4.8%.

Continuing improvement in buying practices and product mix helped increase
gross profit 62 basis points to 29.52% of sales in the third quarter of 1998
from 28.90% in the third quarter of 1997. LIFO expense was $2.3 million in the
third quarter of 1998. No LIFO expense was recorded in the third quarter of
1997. Operating and administrative expense declined 24 basis points to 22.76% of
sales in the third quarter of 1998 compared to 23.00% in 1997, reflecting
increased sales and ongoing efforts to reduce or control expenses.

Interest expense declined to $48.8 million in the third quarter of 1998
from $62.3 million last year, due to reduced borrowings and lower interest rates
achieved through the refinancing of certain debt in the third quarter of 1997.
For the first 36 weeks of the year, interest expense was $153.2 million compared
to $163.7 million in 1997.

The combination of lower interest expense and strong operating results
increased the interest coverage ratio (operating cash flow divided by interest
expense) to an all-time high of 10.25 times in the third quarter of 1998.
Operating cash flow (as defined under "-- Liquidity and Financial Resources") as
a percentage of sales was 8.95% for the quarter and 8.36% for the last four
quarters.

Equity in earnings of Casa Ley, our unconsolidated affiliate, was $6.3
million in the third quarter of 1998 compared to $4.1 million in the third
quarter of 1997. For the first three quarters of 1998, equity in earnings of
Casa Ley was $16.7 million. In the first three quarters of 1997, we recorded
equity in earnings of unconsolidated affiliates of $25.6 million, which included
$12.2 million recognized in the first quarter of 1997 for the effect of our
34.4% equity interest in Vons.

We merged with Vons at the beginning of the second quarter of 1997.
Consequently, our income statement for the first 36 weeks of 1998 includes Vons'
operating results for the entire period, while the income statement for the
first 36 weeks of 1997 includes Vons' operating results for the second and third
quarters plus the effect of our 34.4% equity interest in Vons for the first
quarter. The following paragraph compares actual results for the first 36 weeks
of 1998 with pro forma results for the same period in 1997, as if we merged with
Vons at the beginning of 1997.

Sales for the first 36 weeks of 1998 were $16.6 billion compared to pro
forma sales of $15.9 billion in 1997. The gross profit margin for the first 36
weeks of 1998 improved 46 basis points to 29.20% from pro forma gross profit
margin of 28.74% in 1997. Operating and administrative expense improved 42 basis
points to 22.62% of sales in 1998 from pro forma expense of 23.04% in 1997.

1997 COMPARED TO 1996 AND 1995

Our net income was $557.4 million ($1.12 per share) in 1997, $460.6 million
($0.97 per share) in 1996, and $326.3 million ($0.68 per share) in 1995. In 1997
and 1995, income before extraordinary items related to debt refinancings was
$621.5 million ($1.25 per share) and $328.3 million ($0.68 per share),
respectively.

Our 1997 income statement includes Vons' operating results since the second
quarter plus the effect of our 34.4% equity interest in Vons in the first
quarter, while the 1996 and 1995 income statements reflect our

11
<PAGE> 12

equity interest in Vons for the full year. In order to facilitate an
understanding of our operations, this financial review presents certain pro
forma information based on the 1997 and 1996 combined historical financial
statements of the two companies as if the merger with Vons had been effective as
of the beginning of each of the years discussed. See Note B to our 1997
Consolidated Financial Statements which are incorporated herein by reference.

During the second quarter of 1997, we were engaged in a 75-day labor
dispute affecting 74 stores in the Alberta, Canada operating area. We estimate
that the Alberta strike reduced 1997 net income by approximately $0.04 per
share, and labor disputes in the British Columbia and Denver operating areas
reduced 1996 net income by an estimated $0.07 per share.

A nine-day strike during the second quarter of 1995 affected 208 stores in
northern California. We estimate that this dispute reduced 1995 earnings by
approximately $0.01 per share.

Sales. Sales for the 53 weeks of 1997 were $22.5 billion compared to $17.3
billion for the 52 weeks of 1996 and $16.4 billion for the 52 weeks of 1995. The
increase was due primarily to our merger with Vons and the additional week in
1997. Identical-store sales (stores operating the entire year in both 1997 and
1996, excluding replacement stores but including Vons stores for 41 weeks in
both years) increased 1.3% while comparable-store sales, which includes
replacement stores, increased 2.2%. The effects of the second-quarter strike in
Alberta weakened 1997 identical-store and comparable-store sales comparisons.
Lack of inflation also softened 1997 sales comparisons. Excluded from
identical-store and comparable-store sales comparisons are 86 stores in British
Columbia that were closed during a strike-lockout for a portion of the second
and third quarters of 1996.

Gross Profit. Gross profit was 28.53% of sales in 1997 compared to 27.65%
in 1996 and 27.40% in 1995. On a pro forma basis, gross profit increased to
28.63% of sales in 1997 from 28.20% in 1996, primarily due to improvements in
buying practices and product mix. In addition, we recorded LIFO income of $6.1
million in 1997 compared to LIFO expense of $4.9 million in 1996 reflecting
slight deflation in 1997.

Operating and Administrative Expense. Operating and administrative expense
was 22.84% of sales in 1997 compared to 22.48% in 1996 and 22.96% in 1995. Our
operating and administrative expense-to-sales ratio increased compared to 1996
because Vons' operating and administrative expense ratio was higher than ours
(partially due to the high cost of real estate and labor in southern
California). In addition, goodwill amortization increased by approximately $30
million as a result of the merger with Vons. On a pro forma basis, operating and
administrative expense declined 35 basis points to 22.95% of sales in 1997, from
23.30% in 1996.

Interest Expense. Interest expense increased to $241.2 million in 1997 from
$178.5 million in 1996 because of the debt incurred during the second quarter of
1997 to repurchase stock in conjunction with the merger with Vons.

During 1997, we recorded an extraordinary loss of $64.1 million ($0.13 per
share) for the repurchase of $588.5 million of our public debt, $285.5 million
of Vons' public debt, and $40.0 million of medium-term notes. The extraordinary
loss represented the payment of premiums on retired debt and the write-off of
deferred finance costs, net of the related tax benefit. We financed this
repurchase with a public offering of $600 million of senior debt securities and
the balance with commercial paper. The refinancing extended our overall
long-term debt maturities and increased our financial flexibility.

In May 1997, we entered into interest rate cap agreements which expire in
1999 and entitle us to receive from counterparties the amounts, if any, by which
interest at LIBOR on an $850 million notional amount exceeds 7%. The unamortized
cost to purchase the cap agreements was $2.5 million at year-end 1997.

As of year-end 1997, we had effectively converted $135.1 million of our
floating rate debt to fixed interest rate debt through the use of interest rate
swap agreements. Interest rate swap and cap agreements increased interest
expense by $3.3 million in 1997, $3.0 million in 1996 and $0.3 million in 1995.
The significant terms of swap and cap agreements outstanding at year-end 1997
are described in Note E to our 1997 Consolidated Financial Statements which are
incorporated herein by reference.

12
<PAGE> 13

Equity in Earnings of Unconsolidated Affiliates. We record our equity in
earnings of unconsolidated affiliates on a one-quarter delay basis.

Income from our equity investment in Casa Ley increased to $22.7 million in
1997 from $18.8 million in 1996 and $8.6 million in 1995. For much of 1995,
Mexico suffered from high interest rates and inflation which adversely affected
Casa Ley. Since 1996, interest rates and inflation in Mexico moderated and Casa
Ley's financial results have gradually improved.

Equity in earnings of unconsolidated affiliates included our share of Vons'
earnings of $12.2 million in the first quarter of 1997, $31.2 million in 1996
and $18.3 million in 1995.

LIQUIDITY AND FINANCIAL RESOURCES

Cash flow from operations was $920.5 million in the first 36 weeks of 1998
compared to $728.4 million in 1997, primarily due to improved results from
operations. Working capital (excluding cash and debt) at September 12, 1998 was
a deficit of $302.2 million compared to a $314.9 million deficit at September 6,
1997.

Cash flow used by investing activities for the first 36 weeks of the year
was $472.5 million in 1998, compared to $257.7 million in 1997. During the first
36 weeks of 1998 we increased capital expenditures to open 18 new stores and to
continue construction of a new distribution center in Maryland. In 1997 we
acquired $57.2 million in cash from the merger with Vons.

Cash flow used by financing activities was $473.4 million in the first
three quarters of 1998, primarily due to repayment of long-term debt. In the
first 36 weeks of 1997, financing activities used cash flow of $518.3 million,
primarily to purchase treasury stock related to the merger with Vons, which was
partially offset by long-term borrowings.

Net cash flow from operations as presented in the consolidated statements
of cash flows is an important measure of cash generated by our operating
activities. Operating cash flow, as defined below, is similar to net cash flow
from operations because it excludes certain noncash items. However, operating
cash flow also excludes interest expense and income taxes. Our management
believes that operating cash flow is relevant because it assists investors in
evaluating our ability to service our debt by providing a commonly used measure
of cash available to pay interest, and it facilitates comparisons of our results
of operations with those of companies having different capital structures. Other
companies may define operating cash flow differently, and as a result, such
measures may not be comparable to our operating cash flow. Our computation of
operating cash flow is as follows:

<TABLE>
<CAPTION>
36 WEEKS ENDED
-----------------------------
SEPTEMBER 12, SEPTEMBER 6, 53 WEEKS 52 WEEKS 52 WEEKS
1998 1997 1997 1996 1995
------------- ------------ -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Income before income taxes and
extraordinary loss.............. $ 955.3 $ 704.1 $1,076.3 $ 767.6 $ 556.5
LIFO expense (income)............. 4.6 2.3 (6.1) 4.9 9.5
Interest expense.................. 153.2 163.7 241.2 178.5 199.8
Depreciation and amortization..... 354.7 304.4 455.8 338.5 329.7
Equity in earnings of
unconsolidated affiliates....... (16.7) (25.6) (34.9) (50.0) (26.9)
-------- -------- -------- -------- --------
Operating cash flow............... $1,451.1 $1,148.9 $1,732.3 $1,239.5 $1,068.6
======== ======== ======== ======== ========
As a percent of sales............. 8.76% 7.82% 7.70% 7.18% 6.52%
As a multiple of interest
expense......................... 9.47x 7.02x 7.18x 6.94x 5.35x
</TABLE>

Based upon the current level of operations, we believe that operating cash
flow and other sources of liquidity, including borrowings under our commercial
paper program and our bank credit agreement, will be adequate to meet
anticipated requirements for working capital, capital expenditures, interest
payments and scheduled principal payments for the foreseeable future. There can
be no assurance that our business will continue to generate cash flow at or
above current levels. The bank credit agreement is used primarily as a

13
<PAGE> 14

backup facility to the commercial paper program. We funded the acquisition of
Dominick's, including the repayment of approximately $560 million of debt and
lease obligations, with a combination of bank borrowings and the issuance of
commercial paper. On November 9, 1998, we closed the public offering of $1.4
billion of senior debt securities. We used most of the proceeds of that offering
to repay outstanding indebtedness under our commercial paper program and the
bank credit agreement. We expect to fund the acquisition of Carr-Gottstein
through the issuance of commercial paper.

CAPITAL EXPENDITURE PROGRAM

During 1998, we invested $1.2 billion in capital expenditures while opening
46 new stores, remodeling 234 stores and completing construction of the new
Maryland distribution center. During 1999, we expect to spend approximately $1.2
billion to add 55 to 60 stores and complete approximately 250 remodels. The
acquisition of Carr-Gottstein could result in additional capital spending in
1999.

YEAR 2000 COMPLIANCE

The year 2000 issue is the result of computer programs that were written
using two digits rather than four to define the applicable year. For example,
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. To the extent that our software
applications contain source code that is unable to interpret appropriately the
upcoming calendar year 2000 and beyond, some level of modification or
replacement of such applications will be necessary to avoid system failures and
the temporary inability to process transactions or engage in other normal
business activities.

In 1997 we established a year 2000 project group, headed by our Chief
Information Officer, to coordinate our year 2000 compliance efforts. The project
group is staffed primarily with representatives of our Information Technology
department and also uses outside consultants on an as-needed basis. The Chief
Information Officer reports regularly on the status of the year 2000 project to
a steering committee headed by the Chief Executive Officer, and to our Board of
Directors.

The year 2000 project group has identified all computer-based systems and
applications (including embedded systems) we use in our operations that might
not be year 2000 compliant, and has categorized these systems and applications
into three priority levels based on how critical the system or application is to
our operations. The year 2000 project group is determining what modifications or
replacements will be necessary to achieve compliance; implementing the
modifications and replacements; conducting tests necessary to verify that the
modified systems are operational; and transitioning the compliant systems into
our regular operations. The systems and applications in the highest priority
level are being assessed and modified or replaced first. Management estimates
that these actions with respect to all priority levels are approximately eighty
percent complete. We estimate that all critical systems and applications will be
year 2000 compliant by June 30, 1999.

We completed our acquisition of Dominick's in November 1998 and are in the
process of identifying which systems and applications of Dominick's might not be
year 2000 compliant and integrating those systems and applications into our year
2000 project. We estimate that all critical systems and applications of
Dominick's will be year 2000 compliant by September 30, 1999. We are not yet
able to estimate the incremental costs associated with achieving compliance, but
we do not expect that these costs will have any material adverse effect on the
benefits we expect from the acquisition of Dominick's.

The year 2000 project group is also examining our relationships with
certain key outside vendors and others with whom we have significant business
relationships to determine, to the extent practical, the degree of such outside
parties' year 2000 compliance. The project group has begun testing procedures
with certain vendors identified as having potential year 2000 compliance issues.
Management does not believe that our relationship with any third party is
material to our operations and, therefore, does not believe that the failure of
any particular third party to be year 2000 compliant would have a material
adverse effect on Safeway.

The year 2000 project group is in the process of establishing and
implementing a contingency plan to provide for viable alternatives to ensure
that our core business operations are able to continue in the event of a

14
<PAGE> 15

year 2000-related systems failure. Management expects to have a comprehensive
contingency plan established by March 31, 1999.

Through December 31, 1998, we expended approximately $17 million to address
year 2000 compliance issues. We estimate that we will incur an additional $8
million, for a total of approximately $25 million (excluding Dominick's), to
address year 2000 compliance issues, which includes the estimated costs of all
modifications, testing and consultants' fees.

Management believes that, should we or any third party with whom we have a
significant business relationship have a year 2000-related systems failure, the
most significant impact would likely be the inability, with respect to a group
of stores, to conduct operations due to a power failure, to deliver inventory in
a timely fashion, to receive certain products from vendors or to process
electronically customer sales at store level. We do not anticipate that any such
impact would be material to our liquidity or results of operations.

15
<PAGE> 16

BUSINESS

In April 1997, we completed a merger with Vons pursuant to which we issued
83.2 million shares of our common stock for all of the shares of Vons common
stock that we did not already own. In connection with the merger, we repurchased
64.0 million shares of our common stock for an aggregate purchase price of
$1.376 billion. We also hold a 49% interest in Casa Ley, S.A. de C.V. which, as
of January 2, 1999, operated 77 food and general merchandise stores in western
Mexico.

Dominick's Acquisition. In November 1998, we completed our acquisition of
all of the outstanding shares of Dominick's for $49 cash per share, or a total
of approximately $1.2 billion. We funded the acquisition of Dominick's,
including the repayment of approximately $560 million of debt and lease
obligations, with a combination of bank borrowings and the issuance of
commercial paper. Dominick's is now our wholly owned subsidiary through which we
operate 114 stores. Dominick's is the second largest supermarket operator in the
greater Chicago metropolitan area based on sales. Dominick's also operates two
distribution facilities and a dairy processing plant. The Dominick's stores
average approximately 61,000 square feet in size. Dominick's had sales of $2.6
billion in fiscal 1997 and sales of $1.8 billion through its third quarter of
1998.

Carr-Gottstein Acquisition. On August 6, 1998, we signed a definitive
agreement to acquire all of the outstanding shares of Carr-Gottstein for $12.50
per share, or a total of approximately $110 million, in a cash merger
transaction. Carr-Gottstein had approximately $220 million of debt outstanding
as of September 27, 1998. Carr-Gottstein had sales of $589 million in fiscal
1997 and sales of $440 million through its third quarter of 1998.

Carr-Gottstein is the leading food and drug retailer in Alaska, with 49
stores, including liquor and tobacco stores described below, primarily located
in Anchorage, as well as Fairbanks, Juneau, Kenai and other Alaska communities.
Carr-Gottstein is Alaska's highest-volume alcoholic beverage retailer through
its chain of 17 wine and liquor stores operated under the name Oaken Keg Spirit
Shops. Carr-Gottstein also operates seven specialty tobacco stores under the
name The Great Alaska Tobacco Company. In addition, Carr-Gottstein's vertically
integrated organization includes freight transportation operations and a
full-line food warehouse and distribution center.

The definitive agreement requires Carr-Gottstein to call a special meeting
of its stockholders where they will be asked to approve the merger of one of our
wholly owned subsidiaries with Carr-Gottstein, with Carr-Gottstein surviving as
our wholly owned subsidiary. An affiliate of Leonard Green & Associates owns
approximately 35% of the outstanding shares and has agreed to vote its shares in
favor of the transaction.

The acquisition of Carr-Gottstein is subject to a number of conditions,
including the approval of the holders of a majority of Carr-Gottstein's
outstanding shares, receipt of certain regulatory approvals and other customary
closing conditions. Safeway and Carr-Gottstein have received a request for
additional information from the Federal Trade Commission, and we and
Carr-Gottstein are in the process of compiling information in response to this
request. In late October 1998, an Alaska consumer group and five individuals
filed a purported class-action lawsuit in Alaska state court seeking an
injunction to prevent our merger with Carr-Gottstein. The consumer group has
dismissed its claims. The individual plaintiffs are seeking to amend the
complaint to add an additional individual plaintiff. We and Carr-Gottstein
believe the lawsuit is without merit and intend to defend the lawsuit
vigorously. Although we cannot assure you that all of these conditions to the
merger will be satisfied or waived, or that this lawsuit will be resolved to our
satisfaction, we believe we will complete the transaction early in the second
quarter of 1999.

There is a risk that we may not be able to implement programs to enhance
the performance of operations at Dominick's in a timely manner, if at all. The
same risk exists with respect to Carr-Gottstein. In addition, we may not be able
to complete the acquisition of Carr-Gottstein because one or more of the
conditions to the transaction may not be satisfied. If we do achieve success in
any one area, that success may be diluted by our

16
<PAGE> 17

inability to produce results in another. These acquisitions also present certain
risks with regard to the integration of Dominick's and Carr-Gottstein with
Safeway, including risks relating to coordinating different operations and
integrating personnel and corporate cultures. If we are not successful in
integrating these operations, our financial results could be adversely affected.

OPERATING STRATEGY

During the past five years, our management team has demonstrated
proficiency at turning around underperforming assets. Central to our success is
a simple but effective formula that focuses on three key priorities: (1)
controlling costs, (2) increasing sales and (3) improving capital management.
Management's focus on these three priorities has produced significant progress
in the following key measures of financial performance:

- Identical-store sales growth

- Expense ratio reduction

- Working capital management

- Operating cash flow margin

- Earnings per share growth

We continue to be focused on these same three priorities and expect
continued improvement, but we cannot assure you as to the future results we will
be able to achieve.

Controlling Costs

We have focused on controlling and reducing elements of our cost of sales
through better buying practices, lower advertising expenses, distribution
efficiencies, manufacturing plant closures and consolidations, improved category
management and increased private label mix.

Our efforts to control or reduce operating and administrative expenses have
included overhead reduction in our administrative support functions, negotiation
of competitive labor agreements, store level work simplification, consolidation
of our information technology operations, elimination of certain corporate
perquisites and the general encouragement of a "culture of thrift" among
employees.

Increasing Sales

We have increased sales by achieving and maintaining competitive pricing,
improving store standards, enhancing customer service and offering high quality
products. Our efforts to upgrade store standards have focused on improving store
appearance, in-stock condition, employee friendliness and speed of checkout. We
have over 850 premium corporate brand products under the "Safeway SELECT" banner
and have repackaged over 3,000 corporate brand products primarily under the
"Safeway," "Lucerne" and "Mrs. Wright's" labels. Since our merger with Vons, we
have been applying certain sales strategies that we and Vons have each employed
successfully. By October 1998, we had introduced in all of our operating areas
the Safeway Club Card (a customer loyalty program designed to reward frequent
shoppers) which was inspired by a similar program at Vons.

Improving Capital Management

Our capital management has improved in two key areas: capital expenditures
and working capital. In the capital expenditure area, we have expanded our use
of standardized layouts and centralized purchasing agreements for building
materials, fixtures and equipment for our new stores and remodels. As a result,
our new store prototype is less expensive to build and more efficient to operate
than the stores we and Vons previously built and operated. These lower project
costs, coupled with our improved operations, have allowed us to improve our
returns on capital investment. Working capital invested in the business has
declined

17
<PAGE> 18

substantially since year-end 1993, primarily through lower warehouse inventory
levels and improved payables management.

RETAIL OPERATIONS

Stores

We operate stores ranging in size from approximately 5,900 square feet to
over 89,000 square feet. We determine the size of a new store based on a number
of considerations, including the needs of the community the store serves, the
location and site plan, and the estimated return on capital invested. Our
primary new store prototype is 55,000 square feet and is designed to accommodate
changing consumer needs and to achieve certain operating efficiencies. Most
stores offer a wide selection of both food and general merchandise and feature a
variety of specialty departments such as bakery, delicatessen, floral and
pharmacy. In most of our larger stores, specialty departments are showcased in
each corner and along the perimeter walls of the store to create a pleasant
shopping atmosphere.

Merchandising

Our operating strategy is to provide value to our customers by maintaining
high store standards and a wide selection of high quality products at
competitive prices. We emphasize high quality perishables, such as produce and
meat, and specialty departments, including in-store bakery, delicatessen, floral
and pharmacy, designed to provide one-stop shopping for today's busy shoppers.

We have developed a line of over 850 premium corporate brand products under
the "Safeway SELECT" banner. These products include, among others, soft drinks,
pasta and pasta sauces, salsa, whole bean coffee, cookies, ice cream, yogurt,
pet food and laundry detergent. The line also includes Safeway SELECT "Healthy
Advantage" items such as low-fat ice cream and low-fat cereal bars, and Safeway
SELECT "Gourmet Club" frozen entrees and hors d'oeuvres. We have repackaged over
3,000 corporate brand products primarily under the "Safeway," "Lucerne" and
"Mrs. Wright's" labels.

DISTRIBUTION

Each of our 11 retail operating areas is served by a regional distribution
center consisting of one or more facilities. With the acquisition of Dominick's,
we have 15 distribution/warehousing centers (12 in the United States and three
in Canada), which collectively provide the majority of all products to our
stores. Our distribution centers in northern California and British Columbia are
operated by a third party. Management regularly reviews distribution operations
focusing on whether these operations support their operating areas in a
cost-effective manner. We completed construction of a replacement distribution
center in Maryland in December 1998.

CAPITAL EXPENDITURE PROGRAM

A component of our long-term strategy is our capital expenditure program.
Our capital expenditure program funds new stores, remodels, information
technology advances, and other facilities, including plant and distribution
facilities and corporate headquarters. In the last several years, our management
has significantly strengthened our program to select and approve new capital
investments, resulting in improved returns on investment.

18
<PAGE> 19

The table below reconciles for the last three fiscal years cash paid for
property additions reflected in our consolidated statements of cash flows to our
broader definition of capital expenditures, excluding Vons, and also details
changes in our store base during such period:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Cash paid for property additions............................... $758.2 $541.8 $450.9
Less: Purchases of previously leased properties............... (28.2) (13.2) (9.9)
Plus: Present value of all lease obligations incurred......... 91.3 91.7 62.2
Mortgage notes assumed in property acquisitions......... 0.9 -- --
Vons first quarter expenditures......................... 7.2 -- --
------ ------ ------
Total capital expenditures.............................. $829.4 $620.3 $503.2
====== ====== ======
Capital expenditures as a percent of sales..................... 3.7% 3.6% 3.1%
Vons stores acquired........................................... 316 -- --
New stores opened.............................................. 37 30 32
Stores closed or sold.......................................... 37 37 35
Remodels....................................................... 181 141 108
Total retail square footage at year-end (in millions).......... 53.2 40.7 40.1
</TABLE>

Improved operations and lower project costs have raised the return on
capital projects, allowing us to increase capital expenditures.

ACQUISITIONS

Our management believes that the supermarket industry in North America is
fragmented and that there may be opportunities to make other acquisitions that
would enhance our long-term growth. Our criteria for considering acquisition
targets include, but are not limited to, strong market share and the potential
for improving operating cash flow margin. These criteria are subject to review
and modification from time to time. We cannot assure you that we will complete
any such acquisition or that, if completed, the business acquired will make any
contribution to our long-term growth.

EMPLOYEES

As of January 2, 1999, we had approximately 170,000 full and part-time
employees. Approximately 90% of our employees in the United States and Canada
are covered by collective bargaining agreements negotiated with local unions
affiliated with one of 12 different international unions. There are
approximately 400 such agreements, typically having three to five-year terms.
Accordingly, we renegotiate a significant number of these agreements every year.

In the last three years there have been four significant work stoppages.
During the second quarter of 1997, we were engaged in a 75-day labor dispute
affecting 74 stores in the Alberta, Canada operating area. We continued to
operate the affected stores with a combination of replacement workers,
management and employees who returned to work. During the second and third
quarters of 1996, we were engaged in a labor dispute in British Columbia which
lasted 40 days and affected 86 stores. Under Provincial law in British Columbia,
replacement workers could not be hired, and therefore all the affected stores
were closed throughout the strike-lockout. Separately, we were engaged in a
strike-lockout in the Denver operating area which lasted 44 days also during the
second and third quarters of 1996. All of the Denver stores operated during the
strike-lockout, largely with replacement workers. A nine-day strike during the
second quarter of 1995 affected 208 stores in northern California. These work
stoppages were resolved in a manner that management considered generally
satisfactory. We estimate that the Alberta strike reduced 1997 net income by
approximately $0.04 per share, that the combined impact of the disputes in
Denver and British Columbia reduced 1996 earnings by approximately $0.07 per
share, and that the dispute in northern California reduced 1995 earnings by an
estimated $0.01 per share.

19
<PAGE> 20

We concluded early negotiations and signed new labor contracts covering
employees whose collective bargaining agreements expired in 1998. Certain of
these contracts were with employees represented by the United Food and
Commercial Workers Union in northern California and Seattle and Spokane,
Washington and by the International Brotherhood of Teamsters in southern
California. In addition, union members in British Columbia ratified a new labor
contract. Our management considers the terms of these new contracts to be
satisfactory. During 1999, collective bargaining agreements covering employees
in our stores in Denver, southern California (Vons) and northern Illinois
(Dominick's) come up for renewal.

Dominick's Litigation. We acquired Dominick's in November 1998. At that
time, there was pending against Dominick's a class action lawsuit filed in March
1995 alleging gender discrimination and seeking compensatory and punitive
damages in an unspecified amount. The lawsuit also alleges national origin
discrimination, but the court has denied plaintiffs' class certification motion
as to those claims. We plan to vigorously defend this lawsuit. It is our
management's opinion that although the amount of liability with respect to this
lawsuit cannot be ascertained at this time, any resulting liability, including
any punitive damages, is not likely to have a material adverse effect on our
financial statements taken as a whole.

20
<PAGE> 21

THE SELLING STOCKHOLDERS

All of the shares of common stock are being sold by the selling
stockholders identified in the following table and the footnotes. The table and
the footnotes also set forth information regarding the beneficial ownership of
our outstanding common stock as of January 25, 1999 for each of the selling
stockholders. Except as indicated by the notes to the following table, the
holders listed below have sole voting power and investment power over the shares
beneficially held by them. The address of SSI Associates, L.P., KKR Partners II,
L.P., KKR Associates, L.P., SSI Equity Associates, L.P. and SSI Partners, L.P.
is 9 West 57th Street, New York, New York 10019.

<TABLE>
<CAPTION>
AFTER OFFERING AND
BEFORE OFFERING AFTER DISTRIBUTIONS(4)
-------------------------- --------------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES PERCENTAGE(3) SHARES OFFERED SHARES PERCENTAGE(5)
---------- ------------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
KKR Associates, L.P.(1)....... 64,337,639 13.1% 19,650,304 44,034,755 8.9%
SSI Equity Associates,
L.P.(2)..................... 9,969,660 2.0% 99,696 6,429,533 1.3%
</TABLE>

- ---------------
(1) The shares are beneficially owned by KKR Associates, L.P. and two limited
partnerships, SSI Associates, L.P. and KKR Partners II, L.P. KKR Associates
is the general partner of each of SSI Associates and KKR Partners II. KKR
Associates, in its capacity as general partner, may be deemed to
beneficially own shares that are owned of record by SSI Associates and KKR
Partners II. James H. Greene, Jr., Henry R. Kravis, Robert I. MacDonnell,
George R. Roberts, Edward A. Gilhuly, Perry Golkin, Michael W. Michelson,
Paul E. Raether, Clifton S. Robbins, Scott Stuart and Michael T. Tokarz are
the general partners of KKR Associates. In their capacity as general
partners, they may be deemed to share beneficial ownership of any shares
beneficially owned by KKR Associates, but disclaim any such beneficial
ownership. Messrs. Greene, Kravis, MacDonnell and Roberts are members of our
Board of Directors.

Shares owned before the offering include 48,352,750 shares held by KKR
Associates, of which 4,317,995 are being offered by this prospectus,
14,862,296 shares held by SSI Associates, all of which are being offered by
this prospectus, and 1,122,593 shares held by KKR Partners II, of which
470,013 are being offered by this prospectus. On or prior to the completion
of the offering, KKR Partners II will distribute the remaining 652,580
shares to its limited partners. After the offering and the distribution,
neither SSI Associates nor KKR Partners II will own any of our common
stock. To the extent that the over-allotment option is exercised, all of
the shares to be sold pursuant to the option will be sold by KKR
Associates. If the underwriters exercise the entire over-allotment option,
then following the offering and the distribution, KKR Associates will own
approximately 42.0 million shares (representing approximately 8.5% of the
outstanding shares).

(2) The shares are beneficially owned by SSI Equity Associates, L.P. SSI
Partners, L.P. is the sole general partner of SSI Equity Associates. SSI
Partners, in its capacity as general partner, may be deemed to beneficially
own shares that are beneficially owned by SSI Equity Associates. Messrs.
Kravis, MacDonnell, Raether and Roberts are the general partners of SSI
Partners. In their capacity as general partners, they may be deemed to share
beneficial ownership of any shares beneficially owned by SSI Partners, but
disclaim any such beneficial ownership. Messrs. Kravis, MacDonnell and
Roberts are members of our Board of Directors. We are a limited partner of
SSI Equity Associates and own 64.5% of the partnership.

All 9,969,660 shares shown as beneficially owned by SSI Equity Associates
prior to the offering represent shares of common stock issuable upon
exercise of warrants to purchase common stock. Of those shares, 3,540,127
shares issuable upon exercise of warrants are attributable to partners
other than Safeway and 6,429,533 shares issuable upon exercise of warrants
are attributable to our limited partner interest in SSI Equity Associates.
Of the 3,540,127 shares, SSI Equity Associates will sell warrants to
purchase 99,696 shares of common stock pursuant to this prospectus. On or
prior to the completion of the offering, the remaining warrants to purchase
3,440,431 shares will be exercised and the shares issued upon exercise will
be distributed to limited partners other than Safeway. In connection with
the exercise, warrants to purchase 32,650 shares will be canceled as
payment of the exercise price. After the offering and the

21
<PAGE> 22

distribution, SSI Equity Associates will hold warrants to purchase
6,429,533 shares of common stock (representing approximately 1.3% of the
outstanding shares) and we will be the sole limited partner of SSI Equity
Associates. SSI Partners will no longer serve as the general partner of SSI
Equity Associates. We intend for the partnership to hold such warrants
until November 15, 2001 when they expire and to not exercise such warrants.

(3) Based on 490.3 million shares outstanding at January 2, 1999. For purposes
of calculating the percentage of shares owned by SSI Equity Associates, we
have assumed that SSI Equity Associates has exercised all of its warrants.

(4) Gives effect to the offering and distributions by KKR Partners II and SSI
Equity Associates described in notes (1) and (2) above.

(5) Based on 493.8 million shares outstanding after the offering and
distribution. For purposes of calculating the percentage of shares owned by
SSI Equity Associates, we have assumed that SSI Equity Associates has
exercised all of its warrants.

SSI Associates made its investment in Safeway in 1986. The limited
partnership agreement pursuant to which SSI Associates was organized, by its
terms, expired on December 31, 1998. As a result of the expiration, the general
partner is in the process of dissolving and winding up SSI Associates. Following
the offering, SSI Associates will not own any of our common stock.

KKR Associates, SSI Associates, KKR Partners II, SSI Equity Associates and
we entered into a Registration Rights Agreement dated as of November 25, 1986. A
copy of the Registration Rights Agreement is incorporated by reference as an
exhibit to the registration statement. Pursuant to that agreement, we agreed to
register the offer and sale of shares of common stock offered hereby. We and the
other parties to the agreement agreed to indemnify each other against certain
liabilities under the Securities Act in connection with the sale of the shares
offered hereby. Pursuant to the Registration Rights Agreement, the selling
stockholders are required to pay the underwriting discounts and commissions and
transfer taxes associated with the offering, and we are required to pay
substantially all expenses directly associated with the offering, including the
registration and filing fees, printing expenses, underwriting expenses and
expenses for counsel and accountants incurred by us or the selling stockholders.

Sales of substantial amounts of common stock, including shares issued upon
the exercise of stock options, or the perception that such sales could occur,
could adversely affect prevailing market prices of the common stock. As a
condition to receiving shares from KKR Partners II and SSI Equity Associates in
the distributions described above, the limited partners who will receive shares
will agree not to sell these shares for 120 days following the distributions.
KKR Associates and SSI Partners have agreed with the underwriters not to waive
this sale restriction for a period of 90 days from the date of this prospectus.

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<PAGE> 23

DESCRIPTION OF CAPITAL STOCK AND WARRANTS

GENERAL

Pursuant to our Restated Certificate of Incorporation, as amended, our
authorized capital stock consists of 1.5 billion shares of common stock, par
value $0.01 per share, and 25 million shares of preferred stock, par value $0.01
per share. At January 2, 1999, we had outstanding 490.3 million shares of common
stock and no outstanding shares of preferred stock. All shares of common stock
are fully paid and nonassessable.

COMMON STOCK

Each holder of common stock is entitled to one vote for each share owned of
record on all matters voted upon by stockholders, and a majority vote is
required for all action to be taken by stockholders. In the event of a
liquidation, dissolution or winding-up of Safeway, the holders of common stock
are entitled to share equally and ratably in our assets, if any, remaining after
the payment of all of our debts and liabilities and the liquidation preference
of any outstanding preferred stock. The common stock has no preemptive rights,
no cumulative voting rights and no redemption, sinking fund or conversion
provisions.

Our Restated Certificate of Incorporation provides for a classified Board
of Directors consisting of three classes as nearly equal in size as practicable.
Each class will hold office until the third annual meeting for election of
directors following the election of such class.

Our bylaws provide for additional notice requirements for stockholder
nominations and proposals at our annual or special meetings. At annual meetings,
stockholders may submit nominations for directors or other proposals only upon
written notice to us at least 50 days prior to the annual meeting.

The common stock is listed on the New York Stock Exchange. The transfer
agent and registrar for the common stock is First Chicago Trust Company of New
York.

PREFERRED STOCK

Our Board of Directors is authorized without further stockholder action, to
divide any or all shares of the authorized preferred stock into series and to
fix and determine the designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereon, of any series so established, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date of this prospectus, the Board of Directors has not
authorized any series of preferred stock and there are no plans, agreements or
understandings for the issuance of any shares of preferred stock.

DIVIDENDS

Holders of common stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefor,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and subject to certain limitations in our bank credit agreement.

WARRANTS

Each warrant is exercisable to purchase one share of common stock at an
exercise price of $.50 per share. The warrants were issued in 1986 to SSI Equity
Associates. There are currently outstanding warrants to purchase an aggregate of
9,969,660 shares of common stock, all of which are held by SSI Equity
Associates. The warrants are exercisable until they expire on November 15, 2001.
The exercise price of the warrants is subject to adjustment in the event we
effect a stock dividend, subdivision of stock and certain other distributions
described in the warrant. A copy of the warrant is filed as an exhibit to the
registration statement and is incorporated herein by reference. The
determination of when or whether to exercise the warrants is within the sole
discretion of the general partner of SSI Equity Associates, except under certain
limited circumstances following the sale of common stock by SSI Associates and
KKR Partners II. After the offering and the distribution, there will be
outstanding warrants to purchase 6,429,533 shares of common stock, all of which
will be held by SSI Equity Associates. We will be the sole limited partner of
SSI Equity Associates and intend for the partnership to hold the warrants until
they expire. See "The Selling Stockholders."

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<PAGE> 24

CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS

The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of common
stock by a holder who is not a United States person or entity (a "Non-U.S.
Holder"). The term "Non-U.S. Holder" means any person or entity that is, for
United States federal income tax purposes, a foreign corporation, a non-resident
alien individual, a non-resident fiduciary of a foreign estate or trust, or a
foreign partnership. An individual may, subject to certain exceptions, be deemed
to be a resident alien (as opposed to a non-resident alien) by virtue of being
present in the United States on at least 31 days in the calendar year and for an
aggregate of at least 183 days during a three-year period ending in the current
calendar year (counting for such purposes all of the days present in the current
year, one-third of the days present in the immediately preceding year, and
one-sixth of the days present in the second preceding year). Resident aliens are
subject to United States federal tax as if they were United States citizens and
residents.

This discussion does not address all aspects of United States federal
income and estate taxes or consider any specific facts or circumstances that may
apply to a particular Non-U.S. Holder. Nor does it deal with foreign, state and
local consequences that may be relevant to Non-U.S. Holders. Furthermore, this
discussion is based on current provisions of the Internal Revenue Code of 1986,
as amended, existing and proposed regulations promulgated thereunder and public
administrative and judicial interpretations thereof, all of which are subject to
changes which could be applied retroactively. EACH PROSPECTIVE PURCHASER OF
COMMON STOCK IS ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND
POSSIBLE FUTURE TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON
STOCK.

We do not currently intend to pay cash dividends on shares of common stock.
See "Dividend Policy." In the event that such dividends are paid on shares of
common stock, except as described below, dividends paid to a Non-U.S. Holder of
common stock will be subject to withholding of United States federal income tax
at a 30% rate or such lower rate as may be specified by an applicable income tax
treaty, unless the dividends are effectively connected with the conduct of a
trade or business by the Non-U.S. Holder within the United States. If the
dividends are effectively connected with the conduct of a trade or business by
the Non-U.S. Holder within the United States and, if a tax treaty applies, are
attributable to a United States permanent establishment of the Non-U.S. Holder,
the dividends will be subject to United States federal income tax on a net
income basis at applicable graduated individual or corporate rates and will be
exempt from the 30% withholding tax described above (assuming the necessary
certification and disclosure requirements are met). Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.

Dividends paid to an address outside the United States are presumed to be
paid to a resident of such country for purposes of the withholding discussed
above (unless the payor has knowledge to the contrary), and, under currently
applicable United States Treasury regulations, for purposes of determining the
applicability of a tax treaty rate. Under recently promulgated United States
Treasury regulations generally effective with respect to payments made after
December 31, 1999, however, a Non-U.S. Holder of common stock who wishes to
claim the benefit of an applicable treaty rate (and avoid backup withholding as
discussed below) will be required to satisfy specified certification and other
requirements, which will include filing a Form W-8 containing the Non-U.S.
Holder's name, address and a certification that such Holder is eligible for the
benefits of the treaty under its Limitations in Benefits Article. In addition,
certain certification and disclosure requirements must be met to be exempt from
withholding under the effectively connected income exemption discussed above.

A Non-U.S. Holder of common stock who is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate, timely claim for
refund with the IRS.

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<PAGE> 25

GAIN ON DISPOSITION OF COMMON STOCK

A Non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on a disposition of a share of common stock
unless:

- subject to the exception discussed below, we are or have been a
"United States real property holding corporation" (a "USRPHC") within
the meaning of section 897(c)(2) of the Internal Revenue Code at any
time within the shorter of the five-year period preceding such
disposition or such Non-U.S. Holder's holding period (the "Required
Holding Period");

- the gain is effectively connected with the conduct of a trade or
business within the United States of the Non-U.S. Holder and, if a tax
treaty applies, is attributable to a permanent establishment
maintained by the Non-U.S. Holder;

- the Non-U.S. Holder is an individual who holds the share of common
stock as a capital asset and is present in the United States for 183
days or more in the taxable year of the disposition and either (a)
such individual has a "tax home" (as defined for United States federal
income tax purposes) in the United States or (b) the gain is
attributable to an office or other fixed place of business maintained
in the United States by such individual; or

- the Non-U.S. Holder is subject to tax pursuant to the Internal Revenue
Code provisions applicable to certain United States expatriates.

If an individual Non-U.S. Holder falls under the second or fourth clause
above, he or she will be taxed on his or her net gain derived from the sale
under regular United States federal income tax rates. If the individual Non-U.S.
Holder falls under the third clause above, he or she will be subject to a flat
30% tax on the gain derived from the sale which may be offset by United States
source capital losses (notwithstanding the fact that he or she is not considered
a resident of the United States). If a Non-U.S. Holder that is a foreign
corporation falls under the second clause above, it will be taxed on its gain
under regular graduated United States federal income tax rates and, in addition,
will under certain circumstances be subject to the branch profits tax equal to
30% of its "effectively connected earnings and profits" within the meaning of
the Internal Revenue Code for the taxable year, as adjusted for certain items,
unless it qualifies for a lower rate under an applicable income tax treaty.

A corporation is generally a USRPHC if the fair market value of its United
States real property interests equals or exceeds 50% of the sum of the fair
market value of its worldwide real property interests plus its other assets used
or held for use in a trade or business. We believe that we are not currently a
USRPHC. However, a Non-U.S. Holder would generally not be subject to tax, or
withholding in respect of such tax, on gain from a sale or other disposition of
common stock by reason of our USRPHC status if the common stock is regularly
traded on an established securities market ("regularly traded") during the
calendar year in which such sale or disposition occurs, provided that such
holder does not own, actually or constructively, common stock with a fair market
value in excess of 5% of the fair market value of all common stock outstanding
at any time during the Required Holding Period. We believe that the common stock
will be treated as regularly traded.

If we are or have been a USRPHC within the Required Holding Period, and if
a Non-U.S. Holder owns in excess of 5% of the fair market value of common stock
(as described in the preceding paragraph), such Non-U.S. Holder of common stock
will be subject to United States federal income tax at regular graduated rates
under certain rules ("FIRPTA tax") on gain recognized on a sale or other
disposition of such common stock. In addition, if we are or have been a USRPHC
within the Required Holding Period and if the common stock were not treated as
regularly traded, a Non-U.S. Holder (without regard to its ownership percentage)
would be subject to withholding in respect of FIRPTA tax at a rate of 10% of the
amount realized on a sale or other disposition of common stock and could be
further subject to FIRPTA tax in excess of the amounts withheld. Any amount
withheld pursuant to such withholding tax would be creditable against such
Non-U.S. Holder's United States federal income tax liability. Non-U.S. Holders
are urged to consult their tax advisors concerning the potential applicability
of these provisions.

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<PAGE> 26

FEDERAL ESTATE TAXES

An individual Non-U.S. Holder who (i) is not a citizen or resident of the
United States (as specifically defined for United States estate tax purposes) at
the time of his or her death and (ii) owns, or is treated as owning common stock
at the time of his or her death, or has made certain lifetime transfers of an
interest in common stock, will be required to include the value of such common
stock in his or her gross estate for federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise.

UNITED STATES INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

We must report annually to the IRS and to each Non-U.S. Holder the amount
of dividends paid to such holder and the tax withheld with respect to such
dividends. These information reporting requirements apply regardless of whether
withholding is required. Copies of the information returns reporting such
dividends and withholding may also be made available to the tax authorities in
the country in which the Non-U.S. Holder resides under the provisions of an
applicable income tax treaty or other agreement with the tax authorities in that
country.

United States backup withholding tax (which, in general, is a withholding
tax imposed at the rate of 31% on certain payments to persons that fail to
furnish certain information under the United States information reporting
requirements) generally will not apply to:

- the payment of dividends paid on common stock to a Non-U.S. Holder at
an address outside the United States (unless the payor has knowledge
that the payee is a United States person); or

- the payment of the proceeds of the sale of common stock to or through
the foreign office of a broker.

In the case of the payment of proceeds from such a sale of common stock
through a foreign office of a broker that is a United States person or a "U.S.
related person," however, information reporting (but not backup withholding) is
required with respect to the payment unless the broker has documentary evidence
in its files that the owner is a Non-U.S. Holder (and has no actual knowledge to
the contrary) and certain other requirements are met or the holder otherwise
establishes an exemption. For this purpose, a "U.S. related person" is (i) a
"controlled foreign corporation" for United States federal income tax purposes
under current regulations, or (ii) a foreign person 50% or more of whose gross
income from all sources for the three-year period ending with the close of its
taxable year preceding the payment (or for such part of the period that the
broker has been in existence) is derived from activities that are effectively
connected with the conduct of a United States trade or business. The payment of
the proceeds of a sale of shares of common stock to or through a United States
office of a broker is subject to information reporting and possible backup
withholding unless the owner certifies its non-United States status under
penalties of perjury or otherwise establishes an exemption. Any amounts withheld
under the backup withholding rules from a payment to a Non-U.S. Holder will be
allowed as a refund or a credit against such Non-U.S. Holder's United States
federal income tax liability, provided that the required information is
furnished to the IRS.

On October 6, 1997, the United States Treasury Department promulgated new
regulations regarding the withholding and information reporting rules discussed
above, effective for payments made after December 31, 1999. In general, these
new regulations do not significantly alter the substantive withholding and
information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The new regulations also
alter the procedures for claiming benefits of an income tax treaty and permit
the shifting of primary responsibility for withholding to certain financial
intermediaries acting on behalf of beneficial owners under some circumstances.
On January 15, 1999, the IRS issued Notice 99-8 proposing certain changes to
these new withholding regulations for non-resident aliens and foreign
corporations and providing a model "qualified intermediary" withholding
agreement to be entered into with the IRS to allow certain institutions to
certify on behalf of their non-U.S. customers or account holders who invest in
U.S. securities. Non-U.S. Holders should consult their own tax advisors with
respect to the impact of the new regulations.

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<PAGE> 27

UNDERWRITERS

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the underwriters
named below, for whom Morgan Stanley & Co. Incorporated, Goldman, Sachs & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, ING Baring Furman Selz LLC, Lehman Brothers Inc., J.P.
Morgan Securities Inc., Salomon Smith Barney Inc. and Warburg Dillon Read LLC
are acting as representatives, have severally agreed to purchase, directly or
through the exercise of warrants held by SSI Equity Associates, and the selling
stockholders have agreed to sell to them, severally, the respective number of
shares of common stock set forth opposite the names of such underwriters below:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ----------
<S> <C>
Morgan Stanley & Co. Incorporated........................... 3,936,834
Goldman, Sachs & Co. ....................................... 3,936,833
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................... 3,936,833
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,323,250
ING Baring Furman Selz LLC.................................. 1,323,250
Lehman Brothers Inc. ....................................... 1,323,250
J.P. Morgan Securities Inc. ................................ 1,323,250
Salomon Smith Barney Inc. .................................. 1,323,250
Warburg Dillon Read LLC..................................... 1,323,250
----------
Total............................................. 19,750,000
==========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock (directly or through the purchase
and exercise of warrants held by SSI Equity Associates) offered hereby (other
than those covered by the underwriters' over-allotment option described below)
if any such shares are taken. With respect to shares of common stock obtained
upon the purchase and exercise of warrants held by SSI Equity Associates, the
underwriters will remit the exercise price of the warrants to Safeway.

The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to certain dealers at a price that represents a concession
not in excess of $.88 a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of $.10 a
share to other underwriters or to certain dealers. After the initial offering of
the shares of common stock, the offering price and other selling terms may from
time to time be varied by the representatives.

KKR Associates, one of the selling stockholders, has granted to the
underwriters an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate of 2,000,000 additional shares of
common stock at the public offering price set forth on the cover page hereof,
less underwriting discounts and commissions. The underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of common stock offered hereby. To
the extent such option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares of common stock as the number set forth next to such
underwriter's name in the preceding table bears to the total number of shares of
common stock set forth next to the names of all underwriters in the preceding
table. If the underwriters' option is exercised in full, the total price to the
public would be $1,145,953,125, the total underwriters' discounts and
commissions would be $29,797,500 and total proceeds to the selling stockholders
would be $1,116,155,625.

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<PAGE> 28

Safeway and the selling stockholders have agreed not to (1) offer, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase or otherwise
transfer or dispose of, directly or indirectly, any shares of common stock or
any securities convertible into or exercisable or exchangeable for common stock,
provided that the foregoing shall not apply to distributions of common stock by
either of KKR Partners II or SSI Equity Associates to any of their respective
limited partners or (2) with respect to Safeway only, enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the common stock, whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
common stock or such other securities, in cash or otherwise, except for (a) the
shares to be sold in the offering, (b) any shares of common stock issued by
Safeway pursuant to stock option plans for our employees and directors or
existing stock option plans for consultants, (c) option grants under stock
option plans for our employees and directors or existing stock option plans for
consultants, (d) any agreement of Safeway in connection with an acquisition of
assets or properties or any capital stock issuable pursuant to the terms of such
an agreement, (e) capital stock issuable upon the exercise of warrants
outstanding on the date of this prospectus or (f) the cancellation of warrants
for a period of at least 90 days from the date of this prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the
underwriters. If any such consent is given it would not necessarily be preceded
or followed by a public announcement thereof. As a condition to receiving shares
from KKR Partners II and SSI Equity Associates, the limited partners who will
receive shares will agree not to sell those shares for 120 days following the
distributions. KKR Associates and SSI Partners have agreed with the underwriters
not to waive this sale restriction for a period of 90 days from the date of this
prospectus.

In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering, if the syndicate repurchases previously
distributed common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.

The warrants held by SSI Equity Associates being purchased by the several
underwriters from SSI Equity Associates will be purchased at a price per
underlying share equal to the price to public less the exercise price of each
such warrant and the underwriting discount per underlying share. The
underwriters will immediately exercise such warrants held by SSI Equity
Associates by paying Safeway the aggregate exercise price of the warrants, and
will include in the offering the 99,696 shares of common stock issuable as a
result of such exercise.

Safeway, the selling stockholders and the underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.

LEGAL MATTERS

Latham & Watkins of San Francisco, California, and Michael C. Ross, our
General Counsel, will issue an opinion about certain legal matters with respect
to the common stock and warrants for Safeway and the selling stockholders.
Certain partners of Latham & Watkins, members of their families, related persons
and others, have an indirect interest, through limited partnerships, in less
than 1% of our common stock. These persons do not have the power to vote or
dispose of such shares of common stock. Michael C. Ross holds common stock and
options to purchase common stock which in the aggregate constitute less than 1%
of our common stock. Brown & Wood LLP of San Francisco will act as counsel for
the underwriters. Paul C. Pringle is a partner of Brown & Wood LLP and owns
1,000 shares of Safeway common stock.

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<PAGE> 29

EXPERTS

Our consolidated financial statements as of January 3, 1998 and December
28, 1996 and for each of the three fiscal years in the period ended January 3,
1998, which are incorporated by reference herein from our Annual Report on Form
10-K for the year ended January 3, 1998, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is also incorporated
by reference herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.

INFORMATION INCORPORATED BY REFERENCE

The Commission allows us to "incorporate by reference" the information we
file with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
Commission will automatically update and supersede this information. We
incorporate by reference the following documents we filed with the Commission
pursuant to Section 13 of the Exchange Act (Commission file number 1-00041):

- Annual Report on Form 10-K for the year ended January 3, 1998
(including information specifically incorporated by reference into our
Form 10-K from our 1997 Annual Report to Stockholders and Proxy
Statement for our 1998 Annual Meeting of Stockholders) and Form 10-K/A
filed March 10, 1998;

- Quarterly Reports on Form 10-Q for the quarters ended March 28, 1998,
June 6, 1998 and September 12, 1998;

- Current Reports on Form 8-K filed on July 15, 1998, October 19, 1998,
November 9, 1998 and November 24, 1998;

- Description of our common stock contained in our registration
statement on Form 8-A filed with the Commission on February 20, 1990,
including the amendment on Form 8 dated March 26, 1990; and

- All documents filed by us with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and before the offering the common stock thereby is
completed (other than those portions of such documents described in
paragraphs (i), (k), and (l) of Item 402 of Regulation S-K promulgated
by the Commission).

You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:

Investor Relations
Safeway Inc.
5918 Stoneridge Mall Road
Pleasanton, California 94588
(925) 467-3790

You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with different information.

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<PAGE> 30

SAFEWAY LOGO