Mr Smith is giving way to Carlos Criado-Perez, who joined Safeway as chief operating officer in the summer. Mr Criado-Perez, 47, was tipped as Mr Smith's successor at the time, although the handover had not been expected to take place until next year.
When Mr Criado-Perez was appointed in August, Mr Smith was reported as saying: "I would hope to appoint him as my successor, but we are talking years. It is a rough, tough old market place, but I enjoy my job."
Mr Smith had been under pressure at Safeway for some time and his departure had been long forecast. The City appeared to welcome the news, marking the company's shares 12.5p higher to 211p. This was despite a warning from the company that its first-half profits would be around pounds 150m - at the lower end of expectations. However, the company said its trading was ahead of the industry average.
Mr Smith, 52, is expected to receive a pay-off of up to pounds 1.2m. He was employed on a two-year rolling contract and last year his total earnings were pounds 615,000, of which pounds 527,000 was basic pay. One analyst said: "I,'m sure he [Colin Smith] is a nice man but I think this move is good for the business."
Mr Smith came from an accountancy background while the City has been pushing for a recognised retailer to revitalise the chain, which is facing increasing price pressure from Tesco, Sainsbury's and Asda.
A spokesman for Safeway admitted that the succession had been brought forward but said: "This shows Safeway is capable of taking good, firm action in contrast to Sainsbury's, where the demotion of Dino Adriano has been a fudge." He said the decision for Mr Smith to leave was made "by mutual consent".
Mr Criado-Perez yesterday gave a firm pledge to increase Safeway's market share. He said: "At the moment we are number four [in the UK supermarket sector]. We are not looking to remain number four." He said he would be giving full details of his strategic plans at the group's interim results presentation on 25 November.
He added: "I do not want to tell our competitors what we are planning, but I can tell you that there will be substantial decentralisation. I intend to drive decisions from store level."
He said he hoped to bring more focus to the business than his predecessor. "I am a retailer. I have worked from the bottom to the top. My first job was pushing trolleys... Mr Smith is a much broader manager."
He said he perceived his former company, Wal-Mart, as "a formidable threat" to the sector. But he said: "The company has yet to demonstrate it can perform as well abroad as at home."
Paul Smiddy, food retail analyst at Credit Lyonnais Securities, welcomed the decision. "There was no point holding back with this decision.... The possibility of a conflict between Mr Smith and Mr Criado-Perez over retail strategy could have damaged the business. [Mr Criado-Perez] now has full scope to change the business quickly and radically."
Mr Criado-Perez, a keen marathon runner, was previously chief operating officer of the international operations of Wal-Mart, the US giant that acquired Asda in June.
David Webster, Safeway's chairman, said: "With all that is happening in the retail sector, we needed a change of strategy and a change of direction.... To make that happen, we needed a new face." He claimed the change was "a turning point for Safeway".