Safeway Inc. Executive Officers and Financial Statements, Papers of Introduction to Business Management

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T W O T H O U S A N D & S E V E N A N N U A L R E P O R T

Five years ago

We set out to reinvent the shopping experience.

Focusing on the consumer, we are continually revitalizing

our marketing plans, rejuvenating our store system and

reinvigorating our corporate brand products.

s a f e w a y i n c.

m a n u fac t u r i ng a n d pro c e s si ng fac i l i t i e s

Year-end 2007 U.S. Canada Milk Plants 6 3 Bakery Plants 6 2 Ice Cream Plants 2 2 Cheese & Meat Packing Plants – 2 Soft Drink Bottling Plants 4 – Fruit & Vegetable Processing Plants 1 3 Cake Commissary 1 – 20 12

pe rc e n tag e o f s t o r e s w i t h spe c i a lt y de pa rt m e n t s a n d f u e l s tat io ns Year-end 2007 Specialty Departments Deli 97% Bakery 95% Floral 96% Pharmacy 76% Fuel Stations 21%

Safeway Inc. is one of the largest food and drug retailers in North America.

As of December 29, 2007, the company operated 1,743 stores in the

Western, Southwestern, Rocky Mountain, Midwestern and Mid-Atlantic

regions of the United States and in western Canada. In support of its

stores, Safeway has an extensive network of distribution, manufacturing

and food processing facilities.

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b i l l i o n i n tota l s a l es

m i l l i o n i n n e t i n c o m e

s to r es i n o pe r at i o n

o o r g a n i c s ™^ pr o d u c t s

g i f t ca r d pa r t n e r s

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We achieved excellent results again in 2007, posting solid gains in sales and earnings. Safeway shoppers continued to be favorably impressed with the unique ambience and content of our highly successful Lifestyle stores. As of year-end 2007, we had gained market share in the U.S. supermarket channel for 12 consecutive quarters.

n e t i nc o m e

Net income was $888.4 million ($1.99 per diluted share) in 2007 compared to $870.6 million ($1.94 per diluted share) in 2006. Various favorable tax items increased earnings in 2006 by $0.22 per diluted share. Excluding these items, earnings per share in 2007 increased 15.7% year over year.^1

s a l e s

Total sales rose 5.2% to $42.3 billion in 2007 from $40. billion in 2006, mainly due to the continuing success of our Lifestyle stores, consistent execution of our marketing strategy, increased fuel sales and a higher Canadian dollar exchange rate. Excluding fuel, identical-store sales were up 3.4%.

g ro s s pro f i t

Gross profit in 2007 decreased 8 basis points to 28.74% of sales. Higher fuel sales (which have a lower gross margin) reduced gross profit by 20 basis points. Excluding fuel, gross profit increased 12 basis points primarily because of lower advertising expense, less “shrink” (product loss) and benefits from supply-chain initiatives, partly offset by investments in price and higher LIFO expense. LIFO expense was $13.9 million in 2007 compared to $1.2 million in 2006.

ope r at i ng a n d a dm i n i s t r at i v e e x pe ns e Operating and administrative expense in 2007 decreased 29 basis points to 24.55% of sales. Higher fuel sales reduced our operating and administrative expense margin by 16 basis points. The remaining 13 basis point decline was primarily the result of reduced employee costs as a percentage of sales as well as larger gains on disposal of property, partly offset by higher depreciation expense.

i n t e r e s t e x pe ns e Interest expense in 2007 declined $7.2 million to $388.9 million despite slightly higher average interest rates, primarily because average total debt declined.

c a pi ta l spe n di ng Capital investments in 2007 increased to $1.77 billion. During the year we opened 20 new Lifestyle stores, completed 253 Lifestyle remodels and closed 38 stores. With 1,024 Lifestyle stores in operation as of year’s end, they accounted for 59% of our total store base. In 2008 we expect to invest up to $1.75 billion in capital expenditures and open as many as 25 new Lifestyle stores while completing up to 255 Lifestyle remodels.

We also opened 22 fuel stations adjacent to our stores, bringing the total at year-end 2007 to 361 stations.

r e t u r n i ng c a s h t o s t o c k ho l de r s We returned $337.6 million to stockholders in 2007, consisting of $111.5 million in the form of dividends and $226.1 million in stock repurchases. The remaining board authorization for stock repurchases as of year’s end was $521.1 million.

Dear Stockholders,

s a f e w a y i n c.

Superior quality is the

cornerstone of our brand promise.

53 %^61 %^61 %^61 %^63 % 65 %

**pe rc e i v e d qua l i t y i m prov e m e n t i n t h e pa s t y e a r b y pr i m a ry l i f e s t y l e s hoppe r s ***

70 %

Innovation in Perishables

s e a f o o d *Sc ale star ts at 50 %.

f l o r a l b a k e r y p r e pa r e d m e at f o o d s p r o d uc e d e l i

We are committed to providing our customers with

the finest, freshest products available in our produce,

meat and seafood, bakery, deli/food service and

floral departments. In produce, we have convened

consumer panels to determine unique product

specifications. Approximately 95% of our produce

specifications are higher than USDA requirements.

We also have developed comprehensive quality-control

standards and procedures as well as a unique, Web- based vendor evaluation system. Prospective suppliers must sign a quality assurance agreement that includes a product testing requirement. As a further check, we have field inspectors in the principal growing regions of the U.S. and Canada. In 2007 alone, we completed more than 29,000 field inspections, helping ensure superior produce quality.

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Innovative Store Environment

The showcase for our innovative new concepts is our

highly successful Lifestyle store format. Each of these

stores is dramatically redesigned with earth-toned

décor, subdued lighting, custom flooring, unique

display fixtures and other special features to impart

a warm ambience that we believe significantly

enhances the shopping experience. Since its inception

in 2003 as an experimental prototype, the concept

has continued to evolve and resonate well with consumers. Over the past five years we have converted nearly 60% of our store base to this format through an aggressive remodeling program. During 2007 we celebrated the opening of our 1,000 th Lifestyle store with a month-long celebration in November.

1 %^8 %^26 % 43 %

pe rc e n tage of t o ta l s t o r e b a s e c o n v e rt e d t o l i f e s t y l e f o r m at

59 %

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Looking ahead, we expect to sustain profitable

growth primarily through ongoing innovation in

our core business. At the same time, we continue

to evaluate non-traditional opportunities to generate

additional revenue and profit streams. The most

visible new growth vehicle to date is Blackhawk

Network, the largest provider of third-party gift

cards in North America. Blackhawk expanded its

operations into the United Kingdom in late 2006 and

into Mexico and Australia in 2007. It develops unique products in easy-to-use formats and delivers them to consumers through a retail network that includes extensive storefronts that reach 165 million shoppers each week. Other promising initiatives at Safeway are currently under development. We expect these businesses, like Blackhawk, to leverage our existing asset or knowledge base.

Innovative New Growth Vehicles

bl ac k h aw k n e t wo r k gi f t c a r d pa rt n e r s

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