(The following story by Mike Freeman appeared on The San Diego Union-Tribune website on February 13.)
SAN DIEGO — Safeway, owner of the Vons chain, put a price tag on the Southern California grocery strike for the first time yesterday, saying it cost the company $103 million during the fourth quarter.
The labor dispute, now in its 126th day, resulted in losses of $2 million a day during the quarter ended Jan. 3, the company said.
But chief executive Steven Burd told analysts that the red ink has slowed as the dispute has dragged on, reflecting that shoppers are returning to the stores. Labor leaders disputed Burd’s claim.
Explaining a complex earnings report, Burd was both revealing and guarded about the impact of Safeway’s labor battle with the United Food and Commercial Workers Union, which represents 70,000 grocery employees from San Diego to San Luis Obispo.
Burd declined to tell analysts how much sales had slumped because of the strike. But he did say the stalemate contributed nearly 15 percent to Safeway’s hefty quarterly loss of $696 million, or $1.57 a share.
About 20,000 workers at Safeway’s Vons stores went on strike Oct. 11.
Albertsons and Kroger Co.’s Ralphs immediately locked out their workers. While Kroger and Albertsons reported partial effects of the strike in their third quarters, Safeway is the first to reveal the financial damage for an entire quarter.
Negotiations between the UFCW and the companies resumed Wednesday, the first formal meeting since talks broke down on Dec. 19. Discussions are ongoing.
Overall, Safeway’s $696 million loss was mostly made up of writeoffs and one-time charges related to its struggling Dominick’s stores in Illinois and its Randall’s chain in Texas signaling the eroding value of the chains since Safeway acquired them for a combined $2.5 billion a few years ago.
In the same period last year, Safeway lost $1.05 billion, or $2.37 a share, again largely because of writeoffs.
Sales for the quarter totaled $11 billion, up 3 percent from $10.7 billion in the prior year. The company attributed the increase to new stores and the addition of gas stations at some of its supermarkets.
For the entire year, Safeway lost $170 million, or 38 cents per share, on sales of $35.5 billion. In 2002, Safeway lost $828 million, or $1.77 per share, on sales of $34.8 billion.
Despite the large loss in the quarter, Safeway delivered an operating profit that exceeded analysts’ expectations. It made 43 cents per share on an operating basis, beating the mean estimate of 31 cents by analysts surveyed by Thomson First Call.
Safeway said the impact from the strike was 23 cents a share for the quarter. While a big blow, the damage was close to the analysts’ forecast.
“It was a little bigger than I expected, but it wasn’t out of the ordinary,” said Mark Hugh Sam, an analyst with Morningstar.
Andrew Wolf, an analyst at BB&T Capital Markets, said he had forecast an impact of at least 25 cents a share.
“What’s helping the stock is the fact that the strike cost was not as catastrophic as some people had modeled,” he said.
The supermarket giant’s shares closed up 70 cents yesterday at $22.49.
Safeway’s strike loss included its estimated share of proceeds from a mutual aid pact with Ralphs and Albertsons. The chains agreed to share revenue in the event of a strike. California Attorney General Bill Lockyer has challenged the agreement in court as a violation of antitrust law. So there’s no guarantee that Safeway will get what it expects from the agreement.
And Safeway is on the hook more than its competitors. The UFCW has picketed Ralphs locations only sporadically since December, giving sympathetic shoppers a guilt-free option for groceries. If Lockyer wins and the revenue sharing deal collapses, Safeway could suffer a greater hit than it now expects.
Burd defended the company’s hard-line stand to control labor costs, saying Safeway faces growing competition from non-union stores such as Wal-Mart, which is entering Southern California with super centers that sell groceries.
“We have a significant labor difference,” he said. “It’s about $12 an hour in this particular market. I don’t want to put a return on investment on this thing, but we believe this is absolutely the right thing to do for the business.”
During the first month of the strike, Safeway’s losses were $2.4 million a day, Burd said. Now they now average $2 million a day. Sales are about 30 percent higher now than during the first three weeks, Burd added, as more shoppers cross picket lines.
UFCW officials said they doubt that more shoppers are patronizing Safeway stores. They think Safeway’s losses will remain at $2 million a day for the duration of the strike.
The union estimates that Safeway’s sales plunged $500 million during the fourth quarter. Throughout the strike, it has cast Burd as the villain trying to strip workers of hard-earned health benefits. UFCW International spokesman Greg Denier said Burd is pursuing a “kamikaze strategy” that squeezes workers to mask disastrous acquisitions of Dominick’s and Randall’s.
That strategy, according to the union, is destroying the company’s customer base and employee morale in Southern California both vital if it expects to rebound quickly once the strike ends. The region represented 20 percent of Safeway’s profits nationwide before the walkout.
“Our stance is we’re long past the point where this makes any rational economic sense,” said Michael Garland, an investment researcher with the AFL-CIO. “He’s dug in.”
Union officials claim Safeway has written off $1.3 billion of the Randall’s acquisition over the past few years. The company also tried to sell struggling Dominick’s but failed, in part because the UFCW wouldn’t agree to terms from the potential buyer.
Analysts were concerned about Safeway’s string of writeoffs over the past few years. Hugh Sam of Morningstar called Safeway a “serial one-time charger.
“It builds into my thesis that over the next five years, these supermarkets are going to have a very tough time against the charging Wal-Mart,” he said.
“You’ll constantly see these one-time charges going though where they’re writing down assets.”
(Reuters and the Associated Press contributed to this report.)