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A Question of Economics

The unrest comes as Wall Street has been pressuring grocers to trim labor costs. Meanwhile, sales and market share have been slipping.

October 13, 2003|Melinda Fulmer and Nancy Cleeland | Times Staff Writers

The labor fight roiling Southland supermarkets today began brewing more than a year ago, when the head of Safeway Inc. initiated a meeting of the nation's top four markets and the union representing grocery workers.

At the union's headquarters in Washington, Safeway Chairman and Chief Executive Steven A. Burd sought to persuade labor leaders that they would have to make concessions in upcoming contracts across the country.

For the most part, the grocery chains and the United Food and Commercial Workers union had enjoyed a mutually beneficial relationship. Supermarket profits were strong, and so were wages and benefits for store workers. Now, however, the advantages enjoyed by both were being jeopardized by low-cost, nonunion competitors such as Wal-Mart Stores Inc., Burd told union leaders.

Supermarket executives "said, 'We need a new and different kind of agreement if we're going to stay in business. Otherwise, in eight or 10 years, we're afraid we're not going to be here,' " recalled Sarah Palmer Amos, the UFCW's executive vice president and director of collective bargaining.

The union, though, was not persuaded.

"In this industry, there's always some new format that everybody gets all excited about," Palmer Amos said. "Seven or eight years ago, it was the club stores. But the truth is, that has not been the end of traditional supermarkets."

Rather than agree to restructure any contracts, union leaders decided to put together a national strike fund, with supermarket workers contributing an extra $2 a week. From that point, the battle was on.

The tussle broke into the open Sunday, as thousands of picketing grocery workers descended on Safeway's Vons and Pavilions stores, Kroger Co.'s Ralphs chain and Albertsons Inc. outlets, urging people not to shop there.

On its face, the conflict is over demands by the companies to cut health and pension benefits, freeze wages and establish a markedly lower pay scale for new hires. But behind these sticking points are rapidly changing economics for the supermarket sector.

Industry executives insist the threat from their rivals is real. Their business, they say, faces assaults large and small -- from giant discounters such as Wal-Mart and Costco Wholesale Corp. to smaller retailers such as Trader Joe's Co., 99 Cents Only Stores and a number of ethnic grocery chains.

Around the country, Wal-Mart has been rolling out so-called Supercenters, which sell a full line of groceries. The first of 40 planned Supercenters in California is expected to open next year.

"Wal-Mart is really cleaning up," said Andrew Wolf, an analyst with BB&T Capital Markets in Richmond, Va. "They have been growing same-store sales in the high single digits for years, while conventional food retailers have been mostly negative for the last three years."

One big reason: Wal-Mart can afford to offer shoppers sweeter deals. The Bentonville, Ark., retailer is nonunion and typically pays its workers less than $9 an hour. By contrast, most union supermarket workers are clerks who now earn up to $17.90 an hour.

Mark Husson of Merrill Lynch & Co. and other Wall Street analysts have been putting pressure on Pleasanton, Calif.-based Safeway, Cincinnati-based Kroger and Albertsons of Boise, Idaho, to reduce their labor costs to compete on price.

"All employers need a level playing field," Husson said. At some point, "you have to make a violent change to get a chance at surviving."

Meanwhile, as sales and market share have been slipping for the supermarkets, the expense of running the stores has been rising. Health-care costs have escalated sharply, with union contracts providing fully paid medical care.

Complicating matters is the continued soft economy, which has prompted many customers to cut back on higher-margin items, from choice steaks to better bottles of Chardonnay.

"Five years ago, it was a bull market," Husson said. Now, retailer costs have "shot upward just as sales have collapsed downward."

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Lower Same-Store Sales

The nation's three largest chains reported lower same-store sales, or sales at stores open at least a year, for their most recent quarters. Albertsons posted a 1.3% drop compared with the same period a year earlier. Kroger's same-store sales were down 0.1% and Safeway's dipped 2.2%.

But the three have not suffered equally.

Kroger, for one, has boasted particularly strong bottom-line results. Its net income swelled 15% to $1.2 billion in its fiscal 2002 ended Feb. 1. That was up from $1.04 billion the previous year and contrasts with earnings of $877 million in fiscal 2000.

"Kroger has just executed more consistently," Wolf said, noting that it has discounted prices to deal with nonunion competitors. "They swallowed the bitter pill and took pricing down earlier."

Kroger's competitors have fared far worse. Albertsons had net income of $485 million in its fiscal year ended Jan. 30, down 3% from the $501 million it earned the previous year and 36% from the $765 million it earned in its fiscal year ended Feb. 1, 2001.

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