Sunday's expected ratification of a new four-year labor contract means the three largest supermarket chains in Southern California can turn their attention back to making money which they've been doing successfully since the last labor dispute in 2003-2004.

The retailers Albertsons, owned by Supervalu Inc.; Ralphs, owned by Kroger Co., and Vons, owned by Safeway Inc. were bound to keep details of the agreement confidential until union members voted on it. Likewise, the seven unions under the United Food & Commercial Workers banner didn't reveal the particulars, but recommended a "yes" vote to their 63,000 members.

"While we cannot go into specific detail," said Mike Shimpock, spokesperson for the Southern California Grocery Workers, "we can say that it includes fair wage increases and significantly improves health care benefits."

The deal appears to be a victory for the union because of a partial repeal of the two-tier system instituted after the disastrous four-month strike in 2003-2004. The two tiers refer to separate groups of workers: veterans who received higher wages and health care, and new workers who received less money and coverage.

So why did supermarkets give back spoils from the 2004 battle?

"I don't think they had a choice. A lot of excellent employees left the business because of the strike," said Phil Lempert, a food industry analyst and owner of "It doesn't surprise me it was settled. It should never have gotten this far, especially considering the last strike."

Alec Levenson, a professor at the Center for Effective Organizations at the USC Marshall School of Business, said that history shows two-tier employee systems rarely function. "The incumbent workers, usually union, say, 'We'll put up with it in the hopes things will turn around.' The company hopes that over time, as the incumbents leave or retire, the new wage structure will become universal. But it's typically never a happy solution for the long term," he said. "It becomes a growing source of discontent. So it's not surprising that when the next round of negotiations comes around, people say this isn't working."

The 2004 strike cost the union, too, because a good percentage of its members left the business. For the stores, the strike forced loyal customers to shop at competing stores and a significant number have not returned. With that history in mind, the downside of aggressive negotiating loomed large for both sides. "If you take a look at the potential of losing more customers and employees, it would have been a huge mistake," said Lempert.

In 2004, Safeway estimated its losses alone at $412 million from the strike. The losses for a work stoppage this year could have been greater simply because the fortunes of all three chains have improved significantly in the last three years.

High times

In March, Kroger's board increased its quarterly dividend, a move Safeway made in May 2006. In the last year Kroger's stock has gained 25 percent and Safeway's stock improved 29 percent.

Kroger reported that same-store sales, excluding gasoline sales, grew at 5.6 percent in 2006 and 3.5 percent in 2005. In 2007, management expects growth in the 3 to 5 percent range "through merchandising and operating initiatives that improve the shopping experience for our customers and continue building customer loyalty."

The growth at Supervalu looks spectacular because of the company's 2006 acquisition of 1,100 Albertsons stores, many in Southern California.

"The retail grocery industry can be characterized as one of continued consolidation and rationalization, with the acquisition being one of the largest acquisitions in the history of the industry," management said in the company's 2006 annual report. "We believe we can be successful against this industry backdrop with our regional retail formats that focus on local execution, merchandising and consumer knowledge. In addition, our operations will benefit from our efficient and low-cost supply chain and new economies of scale."

In the previous strike, the stores cited competition from non-union retailers, membership warehouses and dollar stores. However, structural changes such as the rise of upscale grocery stores and a bigger union presence in the labor pool has lessened the chain's competitive disadvantages.

The food distribution industry "is headed toward the extremes," said Lampert. "On the one hand, some retailers offer lots of prepared food, high levels of customer service and specialty products. And then on the other side, some people deliver great value. Some manage to deliver both, notably Trader Joe's and Costco, but they are the exceptions."

However, Levenson notes that mainstream grocery stores have crossed into both the high end and the low end of the market. Ten years ago, a shopper couldn't get the prepared foods and gourmet items now available at the corner supermarket. At the same time, the stores have added large volume discount items to compete against the big box outlets.

Supermarkets "are trying to find that middle niche, betting that no one will buy all their groceries at Whole Foods even if they're an upscale consumer," Levenson said.

Pool party

Another factor that likely influenced the supermarkets' position was the potential for a significantly more shallow pool of potential market employees in L.A. County.

Tesco plc, the giant United Kingdom grocery chain, announced last month that it was planning to open as many as 12 Los Angeles County stores, and has already scheduled several hiring fairs for potential employees.

The unions appeared to have positioned themselves well in the run-up to the negotiations by signing "model agreements" with the smaller chains of Stater Bros. and Gelson's one a discounter, the other a gourmet store. The UFCW incorporated these agreements into a business rationale for reaching an agreement.

"Supervalu, Kroger, and Safeway all enjoy annual sales that are 10 to 20 times bigger than Stater Bros. and Gelson's. The smaller chains don't have the economies of scale in their warehousing and distribution networks, nor do they have the clout with major manufacturers and vendors that the national chains command. And they face the same non-union competition in the Southern California market," a statement from the UFCW on April 5 explained.

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