SAFEWAY SEES BENEFITS FROM NEW SOUTHERN CALIF. CONTRACT 2004-03-29 (1)

MARK HAMSTRA

NEW YORK -- The new labor contract in Southern California will do an effective job of narrowing the wage gap between Safeway, Pleasanton, Calif., and its nonunion rivals, Steve Burd, chairman, president and chief executive officer, told investors at a conference here last week.

Speaking at the Merrill Lynch Retailing Leaders conference, Burd said holding out for a more favorable contract during the 20-week strike against Safeway's Vons and Pavilions chains was an easy choice, given the fact that Safeway's wages, on average, were $8.59 per hour more than those of nonunion competitors before the strike.

"Wages and benefits are 68% of our operating expenses, and you can't have this kind of disadvantage in the biggest part of your operating costs," he said.

Burd described the new contract agreement, which calls for lower wages and benefits for new hires but preserves much of the old employees' compensation structure, as being "employee-friendly."

"It helps close the gap [between Safeway's wage and benefit costs and those of its nonunion competitors], and 89% of the gap closing is borne by people who have not yet been hired," he said. "The health plan, the pension plan and the wages are all above the market."

He said using a system Safeway devised to compare its own compensation plan with those of the market in general, the previous health care plan that employees received indexed at 477, with 100 as the market average. For new employees, the health plan now indexes at 104.

"We had to ratchet that back," he said.

The former pension plan indexed at 269, while the pension plan for new hires indexes exactly at the market average of 100. While the former wage scale indexed at 170, wages for new hires index at 122.

Safeway's cost savings will accrue over the long term, he said.

"Over time, new hires will be the bulk of our workforce," he said.

The restructuring of the labor contracts in Southern California was part of a plan launched two years ago to lower wages and benefits throughout the country. By the end of this year, Burd said he expects to have renegotiated 95% of the contracts Safeway has in the United States.

Asked how quickly sales might return to pre-strike levels, Burd would not estimate a time frame. He said that after a 43-day strike in Denver, sales recovered "instantaneously," but after another strike in Alberta, Canada, it took 18 weeks to return to pre-strike sales levels.

Employees, however, "are happy to have their jobs back," Burd said. He told the audience that he heard from his executives responsible for the region that employee morale was "excellent" since the strike ended.

Speaking later at the same conference, David Dillon, chief executive officer, Kroger Co., Cincinnati, said the anticipated price competition in the region after the strike has been relatively limited.

"There are some hot features in the market right now," he said. "If you want cheap soft drinks, you can find them right now in Southern California."

However, he said Kroger was looking beyond getting customers back into the stores quickly.

"We look at this as a long-term issue, not a one-week or two-week issue," he said. "Our first objective was to get our stores back in decent shape, get our employees back and happy to be back."

Dillon said the first ads that Kroger's Ralphs chain ran in the market after the strike was over included "welcome back" messages to employees.

The two executives outlined different strategies for the future of their chains overall, however. While Dillon reinforced his message that the company would continue aggressive price promotions throughout the year at the expense of gross margins, Burd steered the emphasis in the other direction, saying that promotional pricing would continue, but that his company's emphasis going forward would be on differentiation through improved perishables offerings.

"We think the real opportunity is at the perimeter of the store," said Burd. "We want to be known for having the best meat, the best produce, and the best delis with a superior meals program."