Safeway’s Acquisition Missteps Amplify Problems With Labor
By KATE BERRY
Staff Reporter
It’s easy to see how Safeway Inc., parent of Vons and Pavilions, became the primary antagonist of 70,000 unionized employees who are either striking or locked out of their jobs.
After overpaying for a series of acquisitions since 1997, Safeway has the most to gain from winning labor concessions, such as a proposed two-tier wage structure contract that could yield cost savings of up to 13 percent.
If the United Food and Commercial Workers union can be forced to submit to the chains’ proposals, Safeway Chairman and Chief Executive Steve Burd still has a chance to dismiss criticism that he saddled the company with too much debt in its expansion.
The company stands to save $65 million to $75 million, or 10 cents a share in earnings, in the first year alone if a contract with a two-tier wage structure is ratified.
While the strike could temporarily lower profits by as much as 15 cents a share, according to Lisa Cartwright, an analyst at Smith Barney, the long-term savings from a favorable contract would more than offset those losses.
When analysts asked Burd during a conference call last month how much the strike would cost, he said: “Even if you assume a very large number, that is a very small number relative to accepting a business as usual deal. That’s frankly how we look at it.”
Debt factor
Meanwhile, Safeway has $7.5 billion in debt and tapped the public markets last week to raise another $650 million. Some of that was incurred on acquisitions that the company now acknowledges were ill advised.
Last year, Safeway took a $1.5 billion write down in the fourth quarter related to two of them Dominick’s Supermarkets, a 114-store chain in Chicago, and Randall’s Food Markets Inc., a 116-store chain in Houston.
“The total amount that they’ve written off would have paid the wages and health care for the workers for several years to come,” said Mark Hugh Sam, an analyst at Morningstar. “But the fact is that their cost structure is too high, so that’s the real question now.”
Earnings fell 28 percent in the third quarter ended Sept. 6, to $202.5 million, while sales rose 3.6 percent, to $7.8 billion (same-store sales fell 1.5 percent). Meanwhile, the stock price has fallen by 10.6 percent. By comparison, the other two chains involved in the labor dispute, Kroger Co., parent of Ralphs, and Albertsons Inc., have seen their stock rise by 14.9 percent and 0.1 percent, respectively.
While all the chains have an incentive to take a tough stance with the union, Safeway has “most to gain due to its disproportional exposure to California,” Cartwright said. Nevertheless, she cut her rating on Safeway to “sell” from “hold” last week.
Of the three, Pleasanton-based Safeway has the highest percentage of stores in Southern California, with 16.5 percent, followed by Kroger with 15.3 percent and Albertsons’ 12.3 percent.
Normally, a concentration in Southern California is a good thing; the region boasts among the strongest profit margins in the country. But now the supermarkets fear the impending entrance next year of non-union super centers operated by Wal-Mart Stores Inc., precipitating the current labor crisis.
Safeway’s acquisition blunders have amplified its labor pains.
The company announced last week that it will try to salvage its struggling Dominick’s chain in Chicago, after unsuccessfully trying to sell it for a fraction of its purchase price. Analysts believe that negotiations with unionized workers, who were seen as an obstacle to a sale, are likely to heat up as well.
“They’re setting a precedent with labor,” said Art Turock, principal at Art Turock & Associates, a strategic supermarket consultant in Kirkland, Wash., adding that if California unions agree to a contract, others will follow.
Safeway’s acquisition binge began in 1997 with the purchase of Vons, a chain of 320 stores in Southern California and Las Vegas, for $2 billion. Following the Vons purchase, there was Dominick’s in 1998 for $1.85 billion, and the following year Safeway spent an additional $1.4 billion in cash and stock to buy Randall’s. After that came Genuardi’s Family Markets Inc. chain in Norristown, Pa.
Three of the acquisitions Dominick’s, Randall’s and Genuardi’s ended up contributing lower sales and earnings, although Dominick’s is considered to be the most problematic.
