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Large supermarket chains move to cut costs to compete with Wal-Mart

(Tuesday, Aug. 26, 2003 -- CropChoice news) -- Ellis Mnyandu, Reuters via The Agribusiness Examiner: Supermarkets nationwide are in a funk. Looking at their lackluster sales and profits one would wonder if Americans were perhaps going without food.

Although grocers have historically been regarded as one of the most resilient sectors in retail, the past two years have seen them losing more customers to drugstores, warehouse clubs, and even dollar stores.

It's not only tough competition impacting on supermarkets, but rising staff benefits and wage costs, which stem from the industry's staunchly unionized past.

As a result, companies like Kroger Co., Safeway Inc. and Albertsons Inc. are scrambling to keep costs down to better compete with their nonunion rivals, particularly Wal-Mart Stores Inc.

Even with an aggressive growth program, Wal-Mart --- the largest private sector employer --- has steered clear of costly union contracts, a step that has, however, made it a big target for unions seeking to organize on its floor.

There are about 38 labor-related lawsuits in 30 states filed against Wal-Mart, but that is not stopping the discounter from taking more market turf.

For the first time in its history, Wal-Mart's supercenters with full-line grocery stores will outnumber the company's traditional discount stores by the end of this year, heaping even more pressure on mainstream grocery chains.

"Grocers have to try to close the gap between their labor costs per hour and those of nonunion competitors like Wal-Mart," said Mark Husson, a Merrill Lynch supermarket industry analyst.

"They've got to get their cost down," he added.

Wal-Mart, besides being the world's largest company, has expanded to become the biggest player in the fiercely competitive $680 billion U.S. grocery industry it joined only a decade ago.

Size allows Wal-Mart to extract better terms from suppliers, allowing it to buy and sell goods cheaper than the competition.

But causing more headaches for supermarket executives is the prospect that the discounter, as well as smaller less-unionized chains, could gain even more ground amid any failure to win labor concessions on costs.

According to the Food Marketing Institute, the supermarket business remains one of the most labor-intensive industries, employing 3.5 million workers in the United States alone.

The FMI estimates that last year 15.7 percent of the average supermarket's sales and more than half of gross margin went to pay employee costs, including wages and benefits.

Recent data from the Bureau of Labor Statistics also shows that average hourly earnings at supermarkets since 1992 have risen 37% to about $10.35 from $7.56.

However, at Wal-Mart --- which is no friend of unions --- the average hourly wage stands at around $8, according to the United Food and Commercial Workers Union (UFCW), with 1.4 million members.

Patricia McConnell, a UFCW attorney with law firm Meyer, Suozzi, English & Kline in New York, said unions were "flexible" enough to cooperate with employers on anything that made their business better, but would not sacrifice worker benefits in any cost cutting that the retailers want to do.

"The unions are not the enemy, Wal-Mart is the enemy that we all face," McConnell said. "What supermarkets should be doing is help unions put pressure on Wal-Mart to protect workers and pay benefits as the rest of the industry is doing."

But current demands from employees at a money-losing Chicago unit of No. 3 U.S. grocer Safeway better illustrates the difficulty that grocers face in their quest to rein in expenses.

Safeway, based in Pleasanton, California, has seen its efforts to sell Dominick's supermarkets chain snarled by unionized staff, who want prospective buyers to maintain costly staff benefits even as the 114-store division continues to lose customers.

Analysts expect supermarkets to focus on costs spawned by such things as health care, pension and overtime pay. But closing the cost gap between themselves and their nonunion rivals "is going to be a long negotiations game and there may be pain along the way," Merrill Lynch's Husson said.

Jason Whitmer, an analyst at FTN Midwest Research said, "I would not be surprised if there were strikes in the next 12 to 24 months" as wage and benefit control talks between employers and unions gain speed.

Wal-Mart's staff costs per hour, according to Husson, work out to about 70% of what is currently being incurred by Kroger, the top mainstream U.S. grocery chain, whose sales now, however, lag those of Wal-Mart. In an industry with razor thin margins such as food retailing, such a glaring cost disadvantage certainly hurts.