THE NEW ERA 2006-05-08 (1)

MARK HAMSTRA

It's a new era for food retailing workers as much as it is for their employers.

The role of the union in the supermarket workplace has evolved, and employers have been forced to rethink their strategies for compensation as they face increasing pressures from nonunion competitors such as Bentonville, Ark.-based Wal-Mart Stores and its rapidly expanding network of supercenters.

"One of the things I'm seeing is that a lot of my clients are trying to rework their business model," said Bob Kelley, president, Pure Culture Consulting, Richmond, Va., and a faculty member at the University of Richmond, where he teaches human resources strategy and labor relations. "The only way you can adjust your business strategy from a labor standpoint is to either get very creative from a bonus standpoint, do something with the base rate of pay, or do something with the salary and benefits of the new workers that are coming in - and that's the strategy that a lot of the chains have taken."

Nearly all union labor contracts that have been negotiated in the past several years have included a two-tiered system where incoming workers start at a lower rate of pay and progress at a slower rate to the next salary level. In addition, these incoming workers tend to have to pay more for their health insurance, and sometimes have policies that include higher deductibles and scaled-back benefits compared with the policies that longtime workers had become accustomed to.

This has led to higher rates of turnover for these workers, but eventually it should reduce the operating costs for union retailers.

"The assumption is that as the first tier of workers retire, the problem is going to take care of itself, but something like that can take 10-15 years," Kelley said.

Safeway, Pleasanton, Calif., is among the companies that have been actively seeking to accelerate this process through buyouts of its older employees after it renegotiates a contract. In the first quarter of 2006, for example, the company spent $6 million on buyouts, and was still able to report a strong profit gain in the period.

In fact, the company said its operating and administrative expense for the period was down 27 basis points as a percentage of sales, even with the buyouts, and the company said it expected even further reductions in costs in the second quarter.

Steve Burd, chairman, president and chief executive officer, Safeway, said it was difficult to predict how much the company would spend on these buyouts because each contract is slightly different, but he did say he thought the company was "in the sixth inning" in terms of its effort to reduce labor costs by purchasing the early retirement of higher-paid workers.

Safeway is deploying the strategy at the same time it is rapidly deploying its new "lifestyle" store format, which features more organic offerings, an expanded perishables presentation and more prepared foods, a format some analysts said might have benefited from having a veteran, service-oriented staff.

As the chains cut back on wages and benefits, they are going to have to be creative in terms of how they structure their compensation plans, Kelley suggested.

"My belief is that the culture drives the business," he said. "If you feel that by paying lower wages, you are going to get lower-skilled employees, then potentially that could be the case. But there are other variables that come into play, such as how these companies are training their people and what other types of benefits or programs they are putting in place.

"Sometimes you can get creative and do that, but everyone is just trying to compete with Wal-Mart, and they are trying to adjust their business model to be able to do that. If that's what they need to do, then they need to work double-time to try to still maintain what I call 'full engagement' on the part of the hourly employee. Whether it's a two-tiered wage system, or you are paying people great wages, you still have to create full engagement in what they are doing."

Kelley pointed to the companies that have been selected as Fortune magazine's 100 best companies to work for, such as Wegmans Food Markets, Rochester, N.Y., which was the No. 1 company last year and No. 2 this year, as the examples for the rest of the industry. Kelley's former employer, Ukrop's Super Markets, Richmond, also made the list for five years.

"These companies are the leaders that are trying to differentiate themselves," he said. "They are looking at creative ways from a compensation and benefits standpoint to engage their people."

Higher Turnover

One of the effects of this two-tiered wage structure is that the turnover rate among new hires is much higher than it had been, according to observers.

Burt Flickinger, managing director, Strategic Resource Group, New York, who has assisted in mediating several supermarket labor contracts around the country, said the rate of turnover among new workers in the first year of a two-tier contract has increased about 10% -12% in recent years.

"In terms of retention of new hires, it's not as great for the people at the lower tiers than it has been in the past," he said, although he noted that "Kroger and Safeway are still paying better than Target or Wal-Mart."

Greg Conger, president of United Food & Commercial Workers Local 324, Buena Park, Calif., told SN earlier this year that the turnover rate among first-year hires is 76%, compared with a norm of 30%-42%, following the contentious negotiations in Southern California that resulted in a 20-week strike-lockout in 2003 and 2004.

"Years ago, the industry was a path to a career," he said. "But to keep good, quality, hard-working people, the employers will have to change."

Conger said about 35% of the chains' current employee base is made up of new hires in Southern California.

Flickinger agreed that with the slower progressions and reduced benefits packages in health care and pensions, the concept of a lifelong supermarket career might be dying.

As Wal-Mart accounts for an increasing percentage of the groceries sold in the U.S., union laborers are making up a smaller portion of food retailing jobs.

"If you go back 15 years ago, before Wal-Mart went multiregional with supercenters, 90% of the supermarket sector was unionized in most of the densely populated Northern and Western markets," Flickinger said. "It was a level playing field, and everyone operated off the same contract, so whoever was the best merchant would win."

The growth of Wal-Mart has left the UFCW, Washington, with little choice but to make concessions to the supermarkets in order to preserve membership, observers said.

"It's one of those situations where if you don't do something, you close up shop and you lose those jobs," Kelley of Pure Culture said. "If you do [adopt a two-tiered pay scale], the new people are going to feel the pain, but not the longer-term people that helped create part of your success.

"Where else can a company cut costs?" he said. "They can look at efficiency, they can close stores - the unions understand it is a matter of survival."

Changing Role of Unions

In some ways, the role of the UFCW has evolved over the years - instead of focusing its energy entirely on organizing supermarket chains, it has become much more involved in grass-roots political activism aimed at slowing the growth of Wal-Mart.

"I think the unions are probably trying to redefine what their long-term role is," Kelley said. "The role they played from 1955 to 1980 is a very, very different role from the one they have now.

"If you think about it, the vacation we enjoy and the holidays we enjoy are all an outgrowth of the success the unions had back in the 1950s and 1960s - but that kind of stuff isn't happening anymore. There's only so much you can negotiate, only so much vacation you can negotiate, and from a business formula standpoint, they can only afford to do so much of that.

"I think the union role is being redefined," he said. "Having a grass-roots level impact through the legislative process is probably where you're really going to see them affecting the playing field across America."

Pat O'Neill, executive vice president and director, collective bargaining, UFCW, told SN the union remains active in its organizing efforts, but it has changed tactics somewhat under the direction of Joe Hansen, a former meatcutter who was named president in the wake of the Southern California strike-lockout.

"I guess it's a fair statement that we're not necessarily out filing petitions with the National Labor Relations Board to gain representation at the national food companies, but we feel we're still going to be successful organizing those companies," he said.

In addition to its work through WakeUpWalMart.com, an organization seeking to effect change at the retailer, the UFCW also is working closely with supermarket retailers to tackle the problem of rising health care costs, he said.

"We recognize the health care problem, but as we told employers, it's bigger than them and it's bigger than us," he said. "We can't go out and solve this by ourselves."

Among the initiatives is an effort to promote what O'Neill called "quality-driven health care," or plans that provide the most service for the best cost. The union is also seeking to implement more plans where a greater emphasis is placed on keeping workers healthy in the first place rather than waiting until they need higher-cost medical care.

"It's about 20% of the employees in any given unit that account for 80% of the costs," he said. "That's why we're trying to look at controlling the costs on those 20%, to try to drive some of those initiatives that promote better health."

The rapid rise of health care costs is having an impact on negotiations, he said, in part because of the "maintenance of benefits" clauses in the contracts. These clauses traditionally required employers to make up the difference as health care costs rose over the course of the contracts, but in many cases the costs have risen beyond the limits of the contracts.

"It has a lot of repercussions," O'Neill said. "If an employer has a cap that says they will pay for a 10% increase, but the costs go up 15%, that extra 5% has to come from somewhere, and it comes out of the benefits."

O'Neill also said the unions are seeking to work with the chains to be more flexible about work rules, one of the areas where analysts said union labor had often created inefficiencies at the store level. In some regions, the UFCW and the chains have adopted a single classification of workers that can be assigned to multiple tasks.

"We are trying to think outside the box," he said. "The single classification is something that gives our members more hours and gives the employers more flexibility, so it helps both sides."

Pushing 'Fair Share' Bills

In an effort to level the playing field with Wal-Mart, the UFCW has been supporting so-called "fair share" bills in state legislatures around the country that would require large employers to spend a minimum amount on employee health care. So far, only Maryland has passed such a bill - with the support of Landover, Md.-based Giant Food - but about 20 others have introduced legislation in some form.

Although some supermarket companies have come out in favor of such legislation, Kelley noted that it could come back to haunt them at some point if the lawmakers eventually expand the legislation so that it impacts supermarkets.

"The benefit legislation in Maryland could have an effect on other players," he said. "It could be opening up Pandora's box."

Flickinger cited the Maryland fair-share law as "one of Wal-Mart's worst political losses" and said it is exemplary of the types of gains the unions are making against the company by working together.

"Now that they are freed from the Byzantine bureaucracy of the AFL-CIO, you will see the Teamsters, Bakers, the UFCW and the SEIU working together to organize Wal-Mart," he said. "With the leaders of these unions working together with much more effectiveness, I believe you will see a unionized Wal-Mart within this decade.

"It's going to be the most ferocious fight that we've seen on the labor front this century," he added.

The decline of Wal-Mart's stock price - it is down about 30% in the last four years - is playing into the union's hand, he said. "The salient strength of the Wal-Mart story of the 20th century is its biggest weakness. Wal-Mart workers who worked for the company for 25 years and put $5 a week in the company's stock plan used to be able to retire with $550,000-$850,000, even though they never advanced beyond a low-level position and never worked more than 40 hours a week. Now the great story of Wal-Mart's stock rising exponentially has really ground to a halt.

"The environment is the most fertile it's ever been for organized labor to become active and organize at the store level."

Although UFCW Canada has made some headway getting the union certified at some Wal-Mart locations in Canada, Wal-Mart has yet to staff a store with union labor.

O'Neill is optimistic that success in Canada will translate in the U.S., however. "Canada's going to show workers here what they can get with a union contract and real voice on the job," he said.

CHANGE TO WIN

The defection of several unions from the AFL-CIO last year to form the Change to Win coalition will allow those unions to focus more attention on organizing in the U.S., according to O'Neill.

"The AFL-CIO was such a large body, people were getting pulled in a lot of different directions," he said. "One of the main issues we had with the AFL-CIO was they felt there had to be political change in order for organizing to be effective. Our belief is that we have to organize more workers in order to be effective politically.

"We agree that the labor laws in this country are archaic, but we didn't think just working on it from a political angle was going to solve the problem."

For the UFCW, the Southern California negotiations were a turning point, O'Neill said.

The union has already begun preparing for the negotiation of the next contract to begin in 2007.

"Even with the most successful strike we've ever had in terms of member support and community support, it still wasn't enough against these national companies," he said. "So, we're going to coordinate bargaining with the rest of our retail unions and mobilize our members."

Union's Political Group Takes Aim at Wal-Mart

WASHINGTON - In the year since its inception as an arm of the United Food & Commercial Workers Union, WakeUpWalMart.com here has been an unrelenting hammer on the public image of Wal-Mart Stores, Bentonville, Ark.

Now, it is preparing to turn the heat up even more.

"Particularly as we head into the political elections of 2006 and into the presidential election campaign of 2008, we are planning to make the debate about Wal-Mart one of the most pressing political questions in this country," said Paul Blank, campaign director, WakeUpWalMart.com.

He cited as an example of Wal-Mart's potential as a political hot potato the recent refund of a $5,000 campaign contribution that Wal-Mart had made to Sen. Hillary Clinton, D-N.Y., as "sending a strong signal to every Democratic candidate."

WakeUpWalMart.com last fall issued a list of six demands for change at the $317 billion retailer, which the organization said would help make it a more responsible corporate citizen. The demands were:

Pay all Wal-Mart workers a "fair living wage," which the group defines as being "enough to support a family."

Provide all workers "comprehensive, affordable health insurance coverage."

Ensure equal opportunity and equal pay for women and minorities through a stringent and independent monitoring process.

Adopt a zero-tolerance policy and institute an independent monitoring program to stop the use of child labor in the U.S. and abroad.

Establish a "Buy America" program that annually increases the percentage of American-made goods purchased by Wal-Mart.

Work with local communities to effectively address Wal-Mart's impact on issues like traffic, sprawl, the environment and local businesses.

Although Democrats have historically been more likely to side with labor unions and to be more receptive to regulation of businesses, Blank said the demands for change at Wal-Mart have some appeal to both parties.

"This is not a Democrat-Republican issue," he said. "Republicans are just as concerned with taxpayers having to subsidize the health care benefits of a company with $11 billion in profits as Democrats are."

He also said Wal-Mart's impact on small businesses could be a concern for Republicans, "not to mention Wal-Mart's cozy relationship with China."

"Those are the kinds of issues that you'll see debated in the Republican party much more than the Democratic party," he said.

WakeUpWalMart.com has also gained some sympathizers in the retail food industry as it has sought to introduce legislation that would require Wal-Mart to provide more health care coverage for its workers. In Maryland, for example, Giant Food and the UFCW worked on the same side to pass legislation there requiring large companies to provide a minimum level of health care coverage.

As Wal-Mart has invested considerable energy into trumpeting changes it has made to its health care plans, WakeUpWalMart has been unrelenting in its criticism, turning the battle into a one of public relations.

"We think the program speaks for itself when you look at what Wal-Mart's doing," said Pat O'Neill, executive vice president and director of collective bargaining, UFCW. "They are spending millions not on trying to sell product necessarily, but on selling themselves."