(The following story by Jessica Guynn appeared on the Contra Costa Times website on February 12.)
SAN FRANCISCO – Several hundred union members rallied in the heart of the Financial District in an effort to shake Wall Street’s faith in Safeway Inc. on the eve of its fiscal fourth-quarter report and as contract negotiations in the bitter four-month labor dispute resumed after a seven-week hiatus.
Clerics prayed. Union leaders orated. Steve Westly, the politically ambitious state controller, stumped. Art Pulaski, head of the California Labor Federation, even hinted the unions are poised to launch a boycott as part of a national strategy to turn up the pressure on supermarket chains in the strike and lock-out that has idled 70,000 workers.
“We are going to keep escalating around the country,” Pulaski said.
“Seeing all of this support is a morale booster,” said Denise Matty, an out-of-work Vons clerk from Los Osos in central California. “It makes me feel we are not alone.”
Staging a demonstration outside the Pacific Exchange was intended to be symbolic but rang hollow with Safeway managers and financial analysts who track the fluctuations of Safeway stock.
“Here they are preaching to the investment community but investors who closely follow the grocery sector and who closely follow our company and our unionized competition are very supportive of what the companies are doing and why they are doing it,” said Safeway spokesman Brian Dowling.
“My concern really isn’t with the political grandstanding,” said Mark Hugh Sam, a retail analyst with Morningstar who owns no shares of the supermarkets embroiled in the labor dispute. “I am concerned with how things will get settled.”
Unions have targeted Safeway, which owns Vons and Pavilions stores, for spearheading the supermarket industry’s crusade to corral labor costs across the country.
Safeway Chief Executive Steve Burd says union supermarkets must cut health care and pension benefits and create a lower tier of wages and benefits for new hires to compete with non-union discounters such as Wal-Mart Stores Inc., which plans to roll out 40 massive stores with supermarket sections in California in the next four to six years. Burd said he is willing to accept the short-term losses in sales and profits for future savings on rising employee health care costs.
“We view this as an investment in the future,” Burd said in October.
Financial analysts largely have supported Burd’s quest.
Unions say the strike has cost Safeway millions of dollars and incalculable losses in good will from the community. On this point, unions and analysts agree.
The red ink continues to flow. By some estimates, Safeway, Albertson’s and Kroger have lost almost $2 billion in sales at roughly 900 stores in Southern California as customers steer clear of pickets and patronize smaller chains and mom-and-pop stores.
Burd will detail the financial impact of the labor strife on Safeway in a phone call with investors and analysts today. Albertson’s said it lost an estimated $132 million in sales, and Ralphs lost as much as $145 million in sales, in their fiscal third quarters.
Several analysts estimate that Safeway has bled $500 million.
“I think it’s going to be a fairly sizable revenue and earnings impact,” said Jeff Tryka, a senior analyst with Delafield Hambrecht, who owns no shares in the supermarket chains. Tryka estimates that if Safeway had averted the strike, it would have earned 60 cents a share in the fourth quarter. Now he thinks the supermarket giant will earn 33 cents a share.
One analyst cited the ongoing labor strike and increased competition in cutting his rating from “neutral” to “sell” Monday. Despite analyst downgrades, the stock has held up, closing at $21.79.
“The market is looking at this from a forward earnings perspective,” Tryka said. “This is painful for now but hopefully the company will be able to pattern more reasonable health-care expenses for the company going forward.”
The long-term cost of strained labor relations are harder to measure. Alienating customers and the workers who serve them can be expensive. Even if the strike settles, supermarkets will have to spend tens of millions of dollars in advertising to get customers back, Hugh Sam said.
Analysts say both sides in the labor stalemate are feeling pressure: unions from workers who are running out of money, supermarkets from investors who are running out of patience. But from a dollars-and-cents perspective, Safeway clearly can outlast its workers, Hugh Sam said.
“Safeway generates $800 million in free cash flow a year,” he said. “Technically, they could go on forever.”