TWO THOUSAND & SEVEN ANNUAL REPORT 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. SAFEWAY INC . 2 2007 ANNUAL REPORT 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. MANUFACTURING AND PERCENTAGE OF STORES WITH PROCESSING FACILITIES SPECIALTY DEPARTMENTS AND FUEL STATIONS Year-end 2007 U.S. Canada Year-end 2007 Milk Plants 6 3 Specialty Departments Bakery Plants 6 2 D e l i 97% Ice Cream Plants 2 2 B a k e r y 95% Cheese & Meat Packing Plants – 2 Floral 96% Soft Drink Bottling Plants 4 – Pharmacy 76% Fruit & Vegetable Processing Plants 1 3 Fuel Stations 21% Cake Commissary 1 – 20 12 3 SAFEWAY INC . Building on the momentum created after retooling our strategy, we achieved strong earnings growth in 2007 driven by steady sales gains and operating and administrative expense leverage. FINANCIAL HIGHLIGHTS For the year (dollars in millions, except per-share amounts) 2007 2006 2005 Sales and other revenue $ 42,286.0 $ 40,185.0 $ 38,416.0 Gross profit 12,152.9 11,581.0 11,112.9 Operating profit 1,772.1 1,599.8 1,214.7 Net income 888.4 870.6 561.1 Diluted earnings per share 1.99 1.94 1.25 Cash capital expenditures 1,768.7 1,674.2 1,383.5 At year-end 2007 2006 2005 Common shares outstanding (in millions) (Note 1) 440.1 440.1 449.4 Retail square feet (in millions) 80.3 80.8 81.0 Number of stores 1,743 1,761 1,775 Note 1: Net of 149.2 million, 142.4 million and 130.7 million shares held in treasury at year-end 2007, 2006 and 2005, respectively. 4 2007 ANNUAL REPORT $42 BILLION IN TOTAL SALES $888 MILLION IN NET INCOME 1,743 STORES IN OPERATION 329 O ORGANICS ™ PRODUCTS 250+ GIFT CARD PARTNERS 5 SAFEWAY INC . Dear Stockholders, We achieved excellent results again in 2007, posting solid OPERATING AND ADMINISTRATIVE EXPENSE gains in sales and earnings. Safeway shoppers continued Operating and administrative expense in 2007 decreased to be favorably impressed with the unique ambience and 29 basis points to 24.55% of sales. Higher fuel sales content of our highly successful Lifestyle stores. As of reduced our operating and administrative expense margin year-end 2007, we had gained market share in the U.S. by 16 basis points. The remaining 13 basis point decline supermarket channel for 12 consecutive quarters. was primarily the result of reduced employee costs as a percentage of sales as well as larger gains on disposal of NET INCOME property, partly offset by higher depreciation expense. Net income was $888.4 million ($1.99 per diluted share) in 2007 compared to $870.6 million ($1.94 per diluted INTEREST EXPENSE share) in 2006. Various favorable tax items increased Interest expense in 2007 declined $7.2 million to $388.9 million earnings in 2006 by $0.22 per diluted share. Excluding despite slightly higher average interest rates, primarily these items, earnings per share in 2007 increased 15.7% because average total debt declined. year over year.1 CAPITAL SPENDING SALES Capital investments in 2007 increased to $1.77 billion. Total sales rose 5.2% to $42.3 billion in 2007 from $40.2 During the year we opened 20 new Lifestyle stores, billion in 2006, mainly due to the continuing success of completed 253 Lifestyle remodels and closed 38 stores. our Lifestyle stores, consistent execution of our marketing With 1,024 Lifestyle stores in operation as of year’s end, strategy, increased fuel sales and a higher Canadian dollar they accounted for 59% of our total store base. In 2008 we exchange rate. Excluding fuel, identical-store sales were expect to invest up to $1.75 billion in capital expenditures up 3.4%. and open as many as 25 new Lifestyle stores while completing up to 255 Lifestyle remodels. GROSS PROFIT Gross profit in 2007 decreased 8 basis points to 28.74% We also opened 22 fuel stations adjacent to our stores, of sales. Higher fuel sales (which have a lower gross bringing the total at year-end 2007 to 361 stations. margin) reduced gross profit by 20 basis points. Excluding fuel, gross profit increased 12 basis points primarily RETURNING CASH TO STOCKHOLDERS because of lower advertising expense, less “shrink” We returned $337.6 million to stockholders in 2007, (product loss) and benefits from supply-chain initiatives, consisting of $111.5 million in the form of dividends and partly offset by investments in price and higher LIFO $226.1 million in stock repurchases. The remaining board expense. LIFO expense was $13.9 million in 2007 authorization for stock repurchases as of year’s end was compared to $1.2 million in 2006. $521.1 million. 6 2007 ANNUAL REPORT CORPORATE CITIZENSHIP contracts, effective use of labor scheduling and active As noted on page 19 of this report, Safeway is an industry management of workers’ compensation expense should leader in charitable giving and environmental responsibility. allow us to invest in price and enhance the bottom line. Our cash and in-kind donations in 2007 exceeded $172 million. The primary beneficiaries of our giving are Safeway has a tradition of continuous innovation. On the organizations that provide assistance in five areas of need: following pages, we highlight some of the innovative ways hunger relief, cancer research and awareness, education, we are reinventing the shopping experience for our people with disabilities and disaster assistance. customers and giving back to the communities we serve. Our environmental achievements in 2007 included purchasing In closing, once again I’d like to acknowledge the hard 87 million kilowatt-hours of renewable energy, recycling work and enthusiastic support of our 201,000 employees. approximately 500,000 tons of materials for reuse, and They are the primary source of our past achievements and converting virtually our entire U.S. company-owned truck the key to our future success. On behalf of the entire fleet to run on cleaner-burning biodiesel fuel. Safeway team, I pledge our renewed commitment to enhancing customer satisfaction and shareholder value in In addition, our latest Corporate Governance Quotient, 2008 and beyond. based on the rating system devised by Institutional Shareholder Services and applied to more than 8,000 companies worldwide, was higher than 91.5% of S&P companies and 97.7% of companies in our Food & Staples Steven A. Burd Retailing peer group. Chairman, President and Chief Executive Officer February 26, 2008 OUTLOOK We are very encouraged about Safeway’s future as we continue rolling out our highly successful Lifestyle stores 1 DILUTED EARNINGS PER SHARE HISTORY ADJUSTED and executing our marketing strategies, which are bolstered FOR CERTAIN TAX ITEMS (UNAUDITED ) by proprietary consumer insights and tools that guide us 2007 2006 to provide the right products at the right prices. In addition, Diluted earnings per share, as reported $ 1 . 9 9 $ 1.9 4 our reinvigorated private-label products, unique proprietary Certain tax adjustments — (0.08) brands and superb perishables should continue to surprise Interest earned on favorable tax and delight our customers while growing market share. settlement, net of tax — ( 0.14) Likewise, our proven ability to reduce costs through shrink Diluted earnings per share, as adjusted $ 1 . 9 9 $ 1.72 control, supply-chain efficiencies, competitive labor Percentage increase 15.7% 7 Superior quality is the cornerstone of our brand promise. 2007 ANNUAL REPORT Innovation in Perishables PERCEIVED QUALITY IMPROVEMENT IN THE PAST YEAR BY PRIMARY LIFESTYLE SHOPPERS * 53% 61% 61% 61% 63% 65% 70% SEAFOOD FLORAL BAKERY PREPARED MEAT PRODUCE DELI FOODS *Scale starts at 50%. We are committed to providing our customers with standards and procedures as well as a unique, Web- the finest, freshest products available in our produce, based vendor evaluation system. Prospective suppliers meat and seafood, bakery, deli/food service and must sign a quality assurance agreement that includes floral departments. In produce, we have convened a product testing requirement. As a further check, consumer panels to determine unique product we have field inspectors in the principal growing specifications. Approximately 95% of our produce regions of the U.S. and Canada. In 2007 alone, we specifications are higher than USDA requirements. completed more than 29,000 field inspections, We also have developed comprehensive quality-control helping ensure superior produce quality. 11 2007 ANNUAL REPORT Innovating With Our Brands CORE EXPERTISE ASPIRATIONAL WELLNESS ™ Continuous innovation is a hallmark of the products innovations in our Consumer Brands portfolio is a we sell under our own labels. Our recently rebranded color-coded system on Eating Right product Signature Café line of culinary-inspired, ready-to-eat packaging that highlights dietary benefits and foods includes an expanded array of gourmet soups, nutritional facts. We also extended our highly popular sandwiches and salads, along with upscale offerings O Organics product line in 2007 to include O Organics such as chicken, turkey, pork and meatloaf entrées for Baby! and O Organics for Toddler! as well as pizza and side dishes. Among numerous 13 2007 ANNUAL REPORT Innovative Store Environment PERCENTAGE OF TOTAL STORE BASE CONVERTED TO LIFESTYLE FORMAT 1% 8% 26% 43% 59% 2003 2004 2005 2006 2007 The showcase for our innovative new concepts is our has continued to evolve and resonate well with highly successful Lifestyle store format.