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AFTERSHOCKS

Two years after the devastating Southern California strike-lockout, the major chains there are still struggling to regain pre-strike profit levels while their competitors continue to reap increased sales.With a year to go before the expiration of the contract that ended the 141-day labor dispute, both sides are reflecting back and projecting forward.The seven locals of the United Food and Commercial

Two years after the devastating Southern California strike-lockout, the major chains there are still struggling to regain pre-strike profit levels while their competitors continue to reap increased sales.

With a year to go before the expiration of the contract that ended the 141-day labor dispute, both sides are reflecting back and projecting forward.

The seven locals of the United Food and Commercial Workers Union are reflecting on what they had to accept to end the dispute - a two-tier system for wages and benefits, slower progressions and work-rule changes - and projecting whether they can make up any ground next year while still maintaining their health care benefits.

The area's three major employers - Kroger, Safeway and Albertsons - are reflecting on how long it will take to reap the full benefits of the lowered costs they won while questioning whether those long-term savings were worth the permanent loss of sales volume they have experienced.

Local sources told SN the three chains as a group have lost sales of nearly $1.3 billion since the dispute ended in March 2004, or about 5% of the estimated $26 billion they collectively do in Southern California.

Safeway-owned Vons - which was the strike target - and Albertsons probably lost 25% or more of their volume during the strike, sources here said, adding that they've probably gotten back more than half of what they lost since then.

Kroger-owned Ralphs, on the other hand, lost the least among the three chains because the union lifted picket lines from Ralphs stores three weeks after the labor action began - to give customers a reasonable shopping alternative, the union said at the time, but to sow dissent among the employers, the chains claimed.

To whatever degree Ralphs suffered, however, Kroger picked up sales at its Food 4 Less stores here, "which probably more than made up for [what it lost at Ralphs]," one local source told SN.

Gains by Rivals

During the labor dispute, the sales lost by the chains were divided among other operators. According to local estimates, Gelson's Markets, Encino, Calif., saw sales climb 100%; Stater Bros. Markets, Colton, Calif., 60%; Whole Foods Market, Austin, Texas, 50%; Trader Joe's, Monrovia, Calif., 40%; Smart & Final, Los Angeles, 30%; and Costco Wholesale Corp., Issaquah, Wash., 20%.

Those who held on to most of the volume after the strike-lockout ended were said to be Costco, Smart & Final, Trader Joe's and Stater Bros.

Stater Bros., a signatory to the master contract covering Southern California, did not participate in the labor dispute but agreed in advance to accept whatever terms the industry was able to work out with the union. "Had we participated in the lockout, we would have been out of business and gone by now," said Jack Brown, chairman, president and chief executive officer, "because the covenants in our debt would not have allowed us to drop below a certain profitability level. As a result, we would have been vulnerable after the first 30 days of the dispute because of the debt load we were carrying."

Brown said it's hard to assess how much business Stater has held onto. "We gained about $1 billion in sales with only four additional stores between 2003, the year before the dispute, and 2005, the year after it ended. If I had to estimate today, I'd say we probably held onto about 10% of the business we picked up, which is higher than I would have anticipated."

Costco believes it held onto about half of the volume it picked up, according to Richard Galanti, executive vice president and chief financial officer. "We believe our 40 stores in the Southern California area saw sales rise about 10% beyond our regular growth there, which amounted to about 1% for the company overall. And although most consumers went back to their previous shopping habits once the dispute ended, we estimate that we kept at least half of what we gained."

Galanti said Costco may also have changed some consumers' shopping habits in the process. "We know some people who never shopped Costco before the strike who were used to buying meat at their supermarket in smaller units, but once they experienced larger packs at Costco, we think that helped drive some of the business we got," he said.

Smart & Final acknowledged post-strike gains earlier this month when it reported results for the fiscal year ending Jan. 1. "It's worth noting that the context for this most recent quarter's sales growth is very good retention of the phenomenal growth we reported in late 2003 as a result of the retail grocery strike," said Richard N. Phegley, senior vice president and chief financial officer, Smart & Final, while speaking with financial analysts. "Our weekly sales rate in the most recent quarter is higher than we recorded in the fourth quarter of 2003, and although it includes a small boost from newer stores, it is a sales achievement that many thought unlikely two years post-strike."

Whole Foods reported comparable-store sales increases in excess of 20% during the labor dispute, and sales were still up 14% six months after it ended. While acknowledging at that time it was becoming harder to quantify the impact of the post-strike environment on its business, John Mackey, chairman, president and CEO, said, "We haven't seen any real erosion in Southern California sales."

Unified Western Grocers here, which services most Southern California independents, told SN it held onto $15 million to $20 million of the $130 million of wholesale sales it picked up during the strike-lockout, or 12% to 15%.

However, a local observer said higher-end operators like Whole Foods, Gelson's and Bristol Farms (which had not yet been acquired by Albertsons) "probably lost most of the initial business they had gained early in the strike, once pickets were lifted from Ralphs, because their business models don't fit most customers' needs."

Lost Forever

Many observers believe the sales the chains lost will never be regained. "With Wal-Mart Supercenters still on the edges [of the marketing area], it's not going to get any easier for them to win back those sales," said Perry Caicco, an analyst with CIBC World Markets, Toronto.

The chains are also struggling to regain pre-strike profit levels.

David Dillon, chairman and CEO of Kroger Co., the Cincinnati-based parent of Ralphs Grocery Co. here, said during an analysts call last December that sales in Southern California have been decent. "But the disappointment [is] that we believe there are more sales and operating profit opportunities available than what we have achieved, [and] we thought it would be a little quicker," he said.

Steve Burd, chairman, president and CEO of Pleasanton, Calif.-based Safeway, parent company of Vons here, was a bit more optimistic when he told analysts in July, "Vons continues to beat our internal expectations, led by sales [that are] running ahead of plan. We continue to believe we will achieve pre-strike profit levels in Southern California sometime in 2006."

As they approached labor talks in 2003, executives at Albertsons, Kroger and Safeway indicated their belief that the contract negotiations were a now-or-never proposition, as escalating expenses in labor and health care required them to seek ways to reduce their cost base if they hoped to be competitive with non-union operators, including Wal-Mart, which was poised at that time to begin opening supercenters in California.

The contract that was ultimately approved introduced a second-tier for clerks, starting at a lower wage and with slower progressions to journeyman status - a circumstance that is making it tougher to attract and hold new employees, Stater Bros.' Brown acknowledged. "It's more challenging to hire new entry-level people today because a lot of companies, especially fast-food companies, are offering 50 cents more an hour than we do but with no benefit costs, and we see more hiring challenges ahead because of that.

"However, the new contract enabled us to be more competitive against companies that don't offer the benefits we do. While it's true our people now pay $60 a month for the same health care that used to cost them nothing, they have to realize teachers, police and others pay up to $300 or more a month for the same benefits, so the contract still offers a great value."

Higher Turnover

Greg Conger, president of UFCW Local 324, Buena Park, Calif., told SN he doesn't believe the industry can truly be satisfied with the contract it got, given the fact the turnover rate among first-year hires has soared to 76% - "an unprecedented turnover rate," Conger said - compared with a norm of 30% to 42%.

"The reason it's so much higher now is because of the draconian cuts made by the employers - including low wages for new hires and a health care premium that was shoved down our throats - which is forcing entry-level people looking for a job to go to In & Out Burger and make more money with better benefits. Years ago, the industry was a path to a career, but to keep good, quality, hardworking people, the employers will have to change."

Conger said about 1,500 employees, or 3% of the pre-strike total, did not come back to work. He also said approximately 35% of the chains' current employee base is made up of new hires.

Competition is intense for experienced workers, Conger said. "In our jurisdiction, two Vons stores closed, and managers from nearby Albertsons and Ralphs stores were right there trying to recruit some of those people. Although the Vons employees had the option to transfer to other Vons locations, Albertsons and Ralphs were out recruiting to get some of them to come to work for them because they were qualified and experienced and had demonstrated a willingness to stay in the industry."

With turnover so high, it's making life tougher for first-tier employees, a veteran store-level employee at one of the chains told SN. "The experienced employees have to work harder to make up for the 'empty bags' who are walking around the stores," he said.

The contract whose renewal sparked the labor dispute expired Oct. 5, 2003. After a strike-lockout of 4+ months, the successor agreement took effect in early March 2004.

Health care was at the crux of the dispute two years ago. While the employers ultimately won the right to establish a second wage tier and to allow some job sharing between food and GM clerks, the unions avoided accepting co-payments when the chains agreed to continue to pay the premiums for the first two years of the contract, with co-pays required from employees in the third year if the chains were unable to maintain the benefit.

The employers have been able to continue to pay employee premiums into the third year, Conger told SN, "which tells me the strike was not about health care at all because they still have money available - it was about union busting, which is what we said all along."

With the 2004 labor agreement set to expire a year from now, the UFCW is already talking tough. "The old [first-tier] members are ready to fight to get back at least some of what they lost," Conger said, "although they know they won't get it back in one fell swoop."

While he declined to pinpoint what the union will be looking for in health care, Conger said it will try to raise salary levels for new hires to narrow the gap with those hired under the prior agreement.

"We've got to bring those levels up to what other industries pay or else our members will always be second-class citizens," he said. "And I think there's a willingness on the part of the employers in general to face the fact that getting what they wanted has not worked out very well and will not work as a panacea for the future or as an effective way to combat the competitive threat of Wal-Mart."

According to Caicco, it is unlikely the industry will be willing to concede very much on wage rates for new hires. "The chains aren't going to sacrifice the newer hires for the older employees," he said. "In fact, it would strengthen the union if the gap were lessened, and I question if that's where the union will really push."

Jonathan Ziegler, a Santa-Barbara, Calif.-based analyst with Dutton & Associates, El Dorado Hills, Calif., said the health care issue is not going to disappear. "I think the union will have to accept that it will require more baby steps to achieve an ultimate solution on health care, with co-payments and the imposition of employee contributions to their monthly insurance premiums. In fact, I believe health care will continue to be an issue between management and employees until some sort of solutions are forthcoming from the federal government."

Gary Giblen, senior vice president and director of research at Breen, Murray, Carret in New York, told SN he expects the union to seek to hold the line on health care benefits, "which are already better than most Americans have," he said, "while it seeks to preserve jobs with increased hours. The employers, on the other hand, will seek the opposite - broader work rules, more employee contributions to health care and stricter progressions."

Fallout from the labor dispute is continuing in separate court cases:

o A mutual aid pact among the chains, in which they agreed to split profits among themselves if any one was not picketed. That agreement, signed by the three chains in advance of the strike, was deemed illegal by the California attorney general because of the inclusion of Food 4 Less, which was not involved in the dispute.

o A trial pending against Ralphs in U.S. District Court here, stemming from allegations it deliberately encouraged locked-out workers to apply for employment under false names and identities ยก- a charge Kroger Co. denies.

Back to the Bargaining Table

In the next round of labor talks in Southern California, which could begin by the end of this year for contracts that expire in early 2007, compromise may be easier to come by, some industry observers said.

An X factor in the negotiations could be Supervalu, Minneapolis, which is scheduled to take ownership this summer of the best-performing assets of Albertsons, including its Southern California operations.

Greg Conger, president of United Food and Commercial Workers Union Local 324, told SN the union locals here have discussed Supervalu with their counterparts in the Midwest and with the international union, "and while we've been told they're tough to deal with, we also understand they are honest and honorable."

Asked if his opinion of Supervalu contrasted with his views on Kroger and Safeway, Conger said he was unwilling to say "because I still have to deal with both of those companies as well."

Gary Giblen, senior vice president and director of marketing for Breen, Murray, Carret, New York, said he believes the union will have the upper hand next year "because things are still hanging in a delicate balance for the chains. Safeway doesn't want to disrupt store labor as it builds a market for its lifestyle stores; Supervalu will not want to interfere with its integration of the Albertsons stores; and Kroger, which has been retreating in Northern California, will be reticent about impacting its standing in Southern California."

Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London, said the union might try to pressure the employers to create more jobs by committing to more expansion.

One source, who asked not to be named, said the employers have indicated they believe they may have overreached in forcing the issue two years ago, which might make them more willing to compromise before negotiations reach an impasse the next time.

Jonathan Ziegler, Santa Barbara, Calif.-based analyst with Dutton & Associates, El Dorado Hills, Calif., said he also believes the chains may be more willing to compromise. "Supermarket managements realize the labor dispute cost them more than they ever anticipated and the recovery has been slower than they anticipated, and therefore, they probably won't want to take another hit," he told SN.

"In addition, rather than being a premium-pay industry as it once was, the second-tier wage puts the supermarket industry more in line with food-service operators, and if it's harder to attract new employees, as it apparently is, then maybe the industry will have to pay more to staff the stores or see customer service suffer, and that could play into the hands of the union.

"But the union is also in pain, and no one on that side wants to go through what it did two years ago," Ziegler said. "With the union likely to try to get back some of what it gave up, there's a lot of room for horse trading, and it could come down to a question of the state of the economy in California and the prospects for Wal-Mart Supercenter growth in the state."

Perry Caicco, an analyst with CIBC World Markets, Toronto, told SN he believes the chains will hold most of the leverage going in "because they're very serious about what they're doing and they want to avoid the consequences if they don't get what they want."

Asked whether the employers are likely to be more willing to trade the next time around, Conger said, "No one wants another strike. But we can't let another contract go by without getting back what the employers stole from us," citing the mutual aid pact signed by the three chains that is the subject of a probe by the California attorney general and the indictment of Kroger-owned Ralphs by federal authorities for knowingly hiring back locked-out employees under false names and identities.

ELLIOT ZWIEBACH

Vons Clips Coupons

ARCADIA, Calif. - The Vons division of Pleasanton, Calif.-based Safeway said it would no longer double manufacturers' coupons at 74 Southern California stores - all 58 locations in San Diego and 16 additional units in south Orange County.

Vons, based here, has been doubling coupons for more than 20 years, although it dropped the program two years ago in Fresno, Calif., and Las Vegas.

Spokeswoman Sandra Calderon said Vons has not decided whether it would consider eliminating double coupons at its 180 stores in Los Angeles County and north Orange County "because redemption rates are different in different areas. But we'll continue to review other areas and see what redemption rates are like elsewhere."

Calderon said Vons decided to stop doubling coupons "because manufacturers are putting out fewer coupons and we're seeing less redemptions, so retailers and manufacturers need to work together to find better ways to help customers to save money.

"Manufacturers are doing more targeting mailings and offering checkstand coupons, and we've had the Vons Club card for over 20 years, which gives manufacturers more exposure for their products. Manufacturers see that card programs work, and they're stepping up the ways they promote their products through the loyalty cards."