Supermarkets in transition

Grocery chains struggle to find their own niche amid stiff competition from big-box stores and upscale food outlets

April 05, 2004|By Nora Macaluso | Nora Macaluso,Special to Baltimoresun.com

While a strike was averted at more than 300 Giant and Safeway stores in the Baltimore-Washington region, the issues that factored into labor negotiations remain and must be addressed by both company managers and union leaders if the companies are to remain viable long term, industry observers say.

"This publicly held supermarket model is going to get squeezed out," said David Livingston, managing partner of DJL Research, a consulting firm based in Pewaukee, Wis. "Probably over the next 10 years, you're going to see some big changes, a lot more exits out of the market."

Mark Millman, president of Millan Search Group, a national retail consulting firm based in Owings Mills, agreed:

"It will be very competitive over the next couple of years," he said. "They've got some real challenges ahead of them."

The underlying issue for supermarket chains -- union or not -- is this, observers say: relevance in an increasing competitive market.

"Supermarkets are kind of stuck in the middle," between big-box discounters like Wal-Mart Stores Inc. on the one end and upscale, premium-quality outlets like Whole Foods Market Inc. and Trader Joe's Corp. on the other, said Mark Hamstra, retail editor at Supermarket News, a New York-based industry publication.

Grocery chains like Giant Food LLC and Safeway Stores Inc. nationwide are "going through a transition phase," Hamstra added.

"All the supermarket chains are being very aggressive at taking costs out of their systems so they can compete on price, but at the same time they're also doing things to enhance their service and improve their products," he said. "It's still a work in progress."

Strike averted

Last week, about 29,000 members of Locals 400 and 27 of the United Food and Commercial Workers Union ratified four-year contracts with Giant and Safeway stores in the Baltimore-Washington region. The unanimous vote averted a strike, unlike in California, which lasted five months.

Under the agreement, current employees at the 340 stores will see their annual health-care deductibles double to $200, and co-payments on prescription drugs also will rise. Hourly salaries will rise $1.25 during the contract. They also will continue earning time-and-a-half or double-time for Sunday duty.

New employees will have higher insurance co-payments and must wait longer before they are eligible for the same health benefits as existing workers. These workers also will start at $1 extra an hour on Sundays, eventually working up to time-and-a-half pay after five years.

The base pay for a Safeway worker under the old contract was $13.10 an hour, according to a Safeway spokesman.

The contract is "far better than most plans in retail," said Greg Denier, a union spokesman. "The issue of health care will continue to be a difficult issue in bargaining, and, more broadly, a difficult issue for workers."

Pleasing Wall Street

Besides the Wal-Mart influence, many grocers must answer to Wall Street. That also increases the pressure to cut costs and grow profits.

Giant Food, with headquarters in Landover, was acquired in 1998 by Royal Ahold N.V., the Dutch grocer. Ahold still is reeling from a billion-dollar accounting scandal at its Columbia-based U.S. Foodservice Inc. subsidiary.

Ahold also is merging Giant's executive operations with those of another U.S. subsidiary, Stop & Shop Cos. of Quincy, Mass.

Safeway, based in Pleasanton, Calif. has been traded publicly since 1928. The company is experiencing its own "self-inflicted problems," including troubles at its Dominick's division, wrote Merrill Lynch analyst Mark Husson in a February report. And Safeway's top executives are taking the heat from shareholders because of the California labor strife.

The strike was estimated to have cost Safeway and the other chains involved, Kroger Co. and Albertsons Inc., more than $1 billion in lost sales.

"A lot of the big public companies have been so obsessed with getting bigger, making acquisitions, growing and integrating those acquisitions, in some cases maybe they've kind of lost touch with customers a little bit," Hamstra said.

"The real problem is mostly in the management of the chains, because their first allegiance is to the stockholder, and the worker and the customer come second," Livingston said. "They're constantly trying to please the Wall Street analysts."

Barry Scher, a Giant spokesman, disagreed.

"We have a fiduciary responsibility to our stockholders, but we also have an obligation to serve our customers with the most modern, up-to-date shopping conveniences in a warm and friendly atmosphere," he said. "We are constantly striving to meet those objectives."

Pampering customers

Some chains, however, are doing it right, observers say.

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