WAREHOUSE STRIKE HURTS 4Q EARNINGS AT SAFEWAY

ELLIOT ZWIEBACH

PLEASANTON, Calif. -- Safeway here said last week the 47-day Teamster strike against its northern California distribution center cost the company approximately $114 million, dropping earnings per share by 13 cents for the fourth quarter ended Dec. 30.

Steve Burd, chairman, president and chief executive officer, said the strike cost Safeway $140 million in lost sales, which resulted in a onetime loss of $24 million, combined with productivity losses totaling $49 million and gross margin losses of $41 million.

He said Safeway "is still having a hard time believing the cost of the strike," and it is continuing to review the matter with Summit Logistics, the third-party company that oversees the chain's Tracy, Calif., warehouse that experienced the strike late last year.

According to Burd, the strike was more costly than anticipated for two reasons.

"First, the unprecedented amount of violence, particularly in the first couple of days -- which resulted in 52 injuries, 31 hospitalizations and 61 broken windshields -- made it impossible to maintain our usual in-stock conditions for two weeks, and it interfered with the flow of merchandise for three weeks.

"Second, because of the third-party arrangement, we were one step removed from day-to-day strike management, although that circumstance meant the clerks could not honor Teamster picket lines. But Summit brought in a non-local work force, which had to be paid, fed and housed for a period that began three days before the strike. Summit paid their airfare, plus a salary of $11 an hour and another $11 an hour to the agency that supplied them, which meant warehouse expenses were 40% higher during the strike.

"In addition, productivity was only 40% of normal, and that was as good as it got. And our wage and benefits costs were three times greater than normal."

Burd also said Summit couldn't handle the full work of the distribution center, "so the facility was able to do only about 65% of its normal volume. The other 35% was handled by Safeway, which put together a makeshift work force of 80 assistant managers that handled part of the balance and was actually more productive than the warehouse.

"The rest of the work was handled by direct-store delivery vendors, which raised gross margins.

"But we feel the strike was worth taking because the result was a six-year contract with better terms than Summit's last, best and final offer. Plus, there's been no lingering effect. I've never seen sales snap back this fast, which says a lot for the Safeway franchise in northern California."

Burd said all strike costs were accounted for in fourth-quarter earnings, "but we're not sure Summit is entitled to a full reimbursement."

The Summit contract comes up for review in October, he said, "and our experience in northern California brings into question what we want to do long-term with that facility, which is our largest distribution center by a factor of two.

"Our thinking is, if we hadn't been one step removed, gross margins would not have been hurt so much and labor costs would have been lower -- though we would have run the risk of 23,000 clerks joining the picket lines. So outsourcing is something we will be reviewing."

Burd said its third-party arrangement with C&S Wholesale Grocers, Brattleboro, Vt., for the chain's Eastern division distribution facility would enable Safeway to shut down the warehouse in case of a strike and get supplies from other C&S operations, "so we wouldn't need help from DSD vendors." Safeway's other third-party arrangement is in British Columbia, where clerks are precluded from honoring picket lines related to a warehouse strike, he added.

Safeway said net income for the 16-week fourth quarter fell 2% to $299.1 million and sales rose 0.8% to $9.9 billion, with comparable store sales up 1.4%; for the full year net income was up 12.5% to $1.09 billion -- the company's first $1-billion earnings quarter -- and sales rose 10.8% to $32 billion.

Burd said rolling blackouts in northern California will have a negligible impact on Safeway, since its Tracy distribution center is on the same power grid as a nearby fire station, which means power will not be shut off there.

He also said all other distribution centers and manufacturing facilities in the state have generator capacity, as do all stores.

Melissa Plaisance, senior vice president, finance and investor relations, said Safeway has long-term contracts for power in northern and southern California that run through March 2002 "that are substantially below spot rates."