SAFEWAY SEES CONTRACT PROGRESS 2004-10-25 (2)

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said last week negotiations with union locals in Denver have been "disappointing," while talks in the Bay Area and Chicago are moving ahead slowly.

However, chain executives expressed confidence the company will ultimately reach settlements in all regions with restructured contracts similar to those it has negotiated with other union locals over the last three years. Those contracts give Safeway the right to hire people at market wages and benefit structures.

"We've made it clear that we need restructured contracts in all markets. So there's no confusion there," Steve Burd, chairman, president and chief executive officer, said. "But as we look at each negotiation, we understand they will be different, but with some commonalities."

Burd made his remarks to industry analysts during a conference call to discuss financial results for the third quarter and 36 weeks ended Sept. 11, which showed flat sales and declining earnings.

According to Burd, of the markets in which Safeway is in negotiations, "Denver is probably the most disappointing in terms of progress, but that doesn't mean we're at all pessimistic about getting good results. We will end these negotiations with a restructured contract because it's essential that we do so."

Burd said Safeway is preparing a "last, best and final" offer in Denver, at the request of the union, with voting likely by the end of the month.

Even if the union leadership does not recommend acceptance of that final offer, union members could vote to approve it anyway, Burd pointed out, as they did in Northern California three years ago. At that time, union members voted to accept the chain's offer over the objections of union leadership.

Safeway is negotiating on two fronts in Northern California, with talks in the Sacramento Valley proceeding "very well," while those in the Bay Area are moving slowly, Burd said.

However, the decision by all parties in the Bay Area to combine bargaining units -- with Safeway, Albertsons and Kroger negotiating as a single group and eight union locals negotiating as another group -- has simplified the process, he said. An extension of the talks through Dec. 8 was also a positive move, he added.

The three chains also agreed not to sign a mutual strike-assistance pact, Burd noted, "though that does not mean if this new approach doesn't work that we might possibly sign a mutual strike agreement on Dec. 9."

Larree Renda, executive vice president, said she agreed with Burd that negotiations in Denver were disappointing "because the union local there has set unrealistic expectations in a marketplace where change is really warranted. We are attempting, for the most part, to protect the wages and benefits of our current employees while allowing us to have more flexibility with the market rate on new hires. But we have made literally no progress in the traditional negotiating process."

Once Safeway submits a last, best and final offer to the union, "we can't predict what will happen," she said, "though we're encouraged by the involvement of the international union, which has been helpful to the process. But the problems remain."

In the Bay Area, the decision to extend talks for at least eight weeks more is encouraging, Renda said, "though a lot of hard work has to be done there. But there are clear paths that have been set in other negotiations that I think will lead us to peaceful resolutions because the employers and the unions agree that it's in both our interests to find solutions."

Regarding Dominick's in Chicago, Renda said, "We are making progress there, but it is only baby steps. However, the union leadership there has been very willing to meet with us, and spend hours and hours at the negotiating table. We believe it will take time, but we should be able to find solutions there as well."

Asked if the United Food and Commercial Workers Union understands the resolve of Safeway and the other chains to restructure their contracts, Renda replied, "I have to believe it does because we've demonstrated that very consistently. The union has shown us in other negotiated settlements that there can be solutions. I believe the union is cooperating with us for the most part in trying to find those solutions that help protect our people and their members."

Burd made a similar comment. "There's an overpowering understanding by the unions and the employers about the situation unionized grocers find themselves in," he said. "Everyone is trying to find creative solutions in their own markets."

In response to a question about Vons, the Southern California division of Safeway that was the target in the 141-day strike, Burd said he was unable to pinpoint what percentage of hours is being worked by pre-strike employees. "But under the restructured contract, we initially expected that at the end of three years, 31% of the hours would be worked by post-ratification employees. We now believe the number will be much larger than that because we didn't anticipate the number of employees who never returned to work."

Burd also said service levels at Vons have been up "for at least the last two quarters," and turnover is less than it was in the pre-strike period among food and general merchandise clerks, though it is higher in the courtesy clerk category.

Sales for the third quarter and 36 weeks were flat, rising 0.3% to $8.3 billion in the 12-week quarter and dropping 1.1% to $24.3 billion for the year to date, with comparable-store sales for the quarter, excluding sales at strike-affected stores in Southern California and excluding fuel, down 0.5%.

Net income fell 21.4% to $159.2 million for the quarter and 32.1% to $357.5 million for the 36-week period. According to Burd, earnings were impacted by two extraordinary items during the quarter: strike recovery costs in Southern California totalling $45 million, or 10 cents per share -- driven primarily by declines in sales and gross margins, and a $12.1 million contribution to the multi-employer health and welfare fund in Northern California, or 3 cents per share.

Burd said the sales recovery in Southern California "clearly has slowed, so we and others in the market continue to invest in gross margin to recoup sales lost from pre-strike levels."

He said the gross margin rate improved through the quarter and into the first four weeks of the fourth quarter, "and additional operating expenses continue to improve as the mix of the workforce continues to change."

One edge Safeway has in its Southern California recovery, Burd pointed out, is a variety of proprietary products "that we think give us an advantage over others who are trying to accomplish the same recovery. But it's just going to take longer [to recover] than we might at first have anticipated."

3RD-QUARTER RESULTS

Qtr Ended: 9/11/04; 9 /6/03

Sales: $8.3 billion; $8.28 billion

Change: 0.3%

Comp-store: -0.5%*

Net Income: $159.2 million; $202.5 million

Change: -21.4%

Inc/Share: 35 cents; 45 cents

36 Weeks: 2004; 2003

Sales: $24.3 billion; $24.6 billion

Change: -1.1%

Comp-store: Not Available

Net Income: $357.5 million; $526.1 million

Change: -32.1%

Inc/Share: 80 cents; $1.18

*Comparable-store sales excluding sales at strike-affected stores in Southern California and excluding the effect of fuel sales.