It's been almost a year since the strike-lockout in Southern California ended, and the three chains involved are still trying to recover.
The losses of sales and profits incurred by Safeway, Kroger and Albertsons during that 20-week dispute, however, will in the long run be seen as a worthwhile sacrifice to gain labor-cost savings, analysts said.
In those negotiations and others since, supermarket operators have compromised with the United Food and Commercial Workers union to preserve wages and benefits for senior employees, while creating a new labor-cost model based on junior, less compensated workers. The supermarket chains hope the changes will put them on more even footing with their nonunion competitors, as more and more new workers rotate into the employee ranks.
"I think we'll continue to see the UFCW and the chains work toward a more competitive playing field," said Chuck Cerankosky, analyst, KeyBanc Capital Markets, Cleveland. "We've seen a variety of reductions in the cost of providing benefits and the relaxation of work rules.
"The simple truth is that all the alternative channels [that supermarkets compete against], including Wal-Mart, Whole Foods and the club stores, are all nonunion, and that's an ongoing economic factor that has to play a part in any negotiations between the chains and the UFCW."
The industry has just cycled through an extremely busy period for labor-contract negotiations, including new agreements covering 275,000 workers in 2004 alone, according to an estimate by JP Morgan, New York.
Only a handful of large contracts loom ahead in 2005, and while a few remain unresolved from prior years -- including one covering Dominick's workers in Chicago that has been on hold since 2002 (see related story) -- the current year will be much lighter in terms of its bargaining schedule. Negotiations in Denver with UFCW Local 7 covering 17,300 workers at about 200 Safeway, Albertsons and Kroger-owned King Soopers stores in Colorado continue on a contract that expired in September. King Soopers workers recently have agreed to allow a federal mediator to draw up a new contract, although workers at Safeway and Albertsons have not.
CONTRACTS DUE TO EXPIRE
This year's largest contract expirations include one with UFCW Local 881 in Chicago -- one of the two unions that is also bargaining with Safeway-owned Dominick's -- covering about 175 Jewel stores owned by Albertsons, which expires in October, and a group of contracts expiring in May that cover hundreds of Kroger stores in Atlanta and other Georgia markets.
Gary Rhodes, a spokesman for Kroger, declined to comment on this year's talks specifically, but said agreements reached in 2004 covering more than 96,000 employees have "made progress toward our goal of labor-cost competitiveness."
"These new agreements have included a variety of measures to bring our labor costs more in line with the competition, including modest cost sharing by our associates for health care benefits and caps on cost increases in health care plans," he said. "We continue to be committed to achieving a cost structure that enables us to grow our business and create more good jobs, while providing our associates with competitive wages and benefits. Our goal at the bargaining table is always the same: to balance our associates' need for competitive wages and benefits with the company's need to remain competitive and grow our business."
Other large contracts scheduled to expire this year include one covering Pittsburgh-based Giant Eagle and other operators in the Cleveland market, and several covering workers in New Jersey, New York and Pennsylvania at ShopRite and other operators.
"Coming off of successful negotiations with our Pittsburgh-area labor unions in 2004, we look forward to productive discussions with our respective labor unions in the Cleveland and Youngstown [Ohio] markets later this year," said Brian Frey, a spokesman for Giant Eagle. "Although we will have nothing to publicly disclose on this topic until we have a signed contract, we have excellent working relationships with both local unions [880 and 19] and are working toward mutually beneficial outcomes."
Since the settlement in Southern California last Feb. 29, unions and the chains have reached agreements without work stoppages in several other regions, including Seattle, Houston, Chicago, Minneapolis and various Northeastern markets.
"The past year's bargaining has really gone quite far to eliminate the cost disadvantage of supermarkets against nonunion discounters," said Marc Levinson, an economic researcher at JP Morgan, in a recent conference call. "It's not entirely gone, but it is significantly reduced."
Supermarkets gained advantages in wages, benefits and work rules that will start to kick in later this year, he said, and will have even more impact in 2006 and 2007. Most of the contracts negotiated recently have included relatively small wage increases for existing workers and lower wage scales for new hires.
That means that supermarkets should start to see their labor costs increase at a slower rate as current workers are succeeded by a new crop of younger workers who will have to work a lot longer to reach the top level of wages and benefits. In Northern California, for example, workers will have to log 7,800 hours before advancing to the next pay level -- or three years at a full 40 hours per week.
"Within two to three years, the cost savings will become very significant, and very visible," Levinson said.
According to JP Morgan research, the average hourly wage for a supermarket worker was up only 0.2% in the period from January through November 2004, to $10.90, compared with $10.88 in the comparable period in 2003. That represents a difference of about 10% between supermarkets and discount stores, a margin that analysts said they expect to decrease even further as supermarkets bring in new workers at lower rates. In 1995, that margin was 24%, according to JP Morgan.
NEW PREMIUM PAY RULES
New rules on premium pay written into some recent contracts also will allow supermarkets to employ new, lower-paid workers on Sundays and holidays, when premium pay was typically time-and-a-half and preferential treatment was given to workers with seniority.
Instead of time-and-a-half, or even double time for holiday work, the premium pay for these new workers, if it exists at all, will be as low as a $1-per-hour bonus. Some will receive no premium at all, and others will receive up to time-and-a-third.
In Southern California, for example, supermarkets will be able to give premium hours to new hires beginning this July at the $1-per-hour premium. Eventually, analysts said, supermarkets will be able to staff their entire stores with new hires on holidays.
Many of the newer contracts contain work rules that allow vendors to stock products on shelves and divert some of the responsibility currently shouldered by the highest-paid workers. Some contracts allow for lower-paid meat wrappers, for example, to perform tasks once performed by higher-paid meat cutters.
"Under the old contracts, you had a situation where work rules made it very difficult to run the store," said Cerankosky. "I don't think people realize how restrictive those can be on labor productivity in the store. If you talk to a nonunion operator and ask them how they would run their business if they couldn't use vendor stocking, or they were limited to a certain percentage of part-time hours, they can't imagine that kind of world."
Recent contracts also have increased the percentage of supermarket labor that can be deployed on a part-time basis. According to the JP Morgan research, the average workweek for supermarket employees fell below 31 hours for the first time in 15 years in 2004, and average weekly wages have fallen 5% as a result of the increasing use of part-time workers.
The use of more part-time workers not only slows the rate at which they advance up the pay scale, cutting wage costs in the long term for the supermarket chains, but it also reduces the employers' costs of providing health insurance.
"The way these contracts have been negotiated, these companies typically make a smaller contribution [for health benefits] for a part-timer than a full-timer," Levinson said.
Previously, most contracts have required contributions by the employers on an hourly basis.
PAYING FOR HEALTH CARE
The union and the employers have found various ways to reduce the costs of health insurance, which continues to be a focal point of almost all negotiations. Some contracts -- such as those in Southern California and Seattle -- call for workers to begin making co-payments on their insurance premiums, while others -- such as those in Northern California -- have lowered costs by reducing the benefits workers receive from the plans.
In many cases, the health care plans are administered by trust funds that the employers support by making increasing contributions based on the plans' costs. Many of the new contracts put a cap on the increases that employers must pay, however, regardless of whether the costs of the plans rise. If health care costs rise faster than the employers' contributions, it could force some locals and chains to return to the bargaining table in the coming years before their contracts expire to renegotiate their health care coverage.
In the Seattle negotiations last year, for example, contributions from Safeway, Kroger and Albertsons were frozen at 8% per year. Various other plans have increased the deductibles for workers, increased the percentage of their claims that they have to pay out of pocket, or reduced their coverage in other ways that lower the cost of the premiums.
Unions in many areas have been willing to forego wage increases in favor of protecting as much of their health care coverage as possible.
In current negotiations between Safeway, Albertsons, Fred Meyer and Rosauer's in Spokane, Wash., on a contract that expired Jan. 1, UFCW local 1439 is seeking higher contributions from the employers after the cost of its health care plan rose 14% this year.
"We were expecting an increase of 8% to 8-1/2%, so we need a lot more money than what we thought we were going to need," said Larry Hall, president of the local. "We've modified our benefits twice already, and we're not in a position where we want to modify benefits any more than we already have."
Employees there already contribute $10 per month to help cover the cost of their health care, he said.
"Health care costs remain a central issue in negotiations," said Greg Denier, a spokesman for the UFCW headquarters in Washington. "As costs rise, there is more pressure on the health care programs. But we will continue to fight for affordable health care."
Denier said the union also would continue to fight for higher starting salaries for new workers and to maintain a high percentage of full-time workers.
"I think there's a long-term concern for both the UFCW and the employers that we need to significantly increase wages at the entry level in order to attract people to the industry and keep people in the industry," he said. "Supermarkets cannot survive on a Wal-Mart level of employment."
In the JP Morgan conference call, Steve Chick, analyst, also cautioned that the new labor contracts may not be a cure-all for supermarkets' sales woes in their battle with alternative formats.
"I'm not sure if adding more part-time workers and lowering labor costs really cuts to the heart of the problem, which is improving sales productivity and traffic," he said.
