Kroger, Albertsons Report Profit Drop in Wake of Labor Dispute

The just-ended California supermarket strike and lockout erased more than $235 million in combined fourth-quarter profit at Kroger Co. and Albertsons Inc., but they said Tuesday that the labor contract they won was worth the price.

Figures released by the two companies, which negotiated the pact with Vons and Pavilions owner Safeway Inc., confirmed that the three together suffered at least $1.5 billion in forgone sales during the 4 1/2-month dispute. And Albertsons and Kroger, owner of the Ralphs chain, warned that their 2004 results would suffer because, with the contract ratified just 10 days ago, their costs were rising as they began spending heavily to get operations back to normal.

Among those costs: Stepped-up promotions to win back the customers who shopped elsewhere during the battle with the United Food and Commercial Workers union, which idled 59,000 workers at 852 stores in Central and Southern California. Union members started returning to their jobs late last week.

Kroger and Albertsons -- the two largest conventional supermarket chains in the country -- said they secured the labor-cost savings they wanted to do battle with low-cost mass merchandisers such as Wal-Mart Stores Inc. that are expanding in groceries. Chief among the savings was a two-tier system in which new hires would receive much less in wages and benefits than veteran employees.

“The entire reason we were willing to endure such a long period of disruption was to compete more effectively in the future,” Lawrence Johnston, Albertsons’ chief executive, said in a conference call with analysts.

He predicted that the contract would mean “lower prices for consumers.”

In a separate conference call, Kroger CEO David Dillon said the “final contract in Southern California is less costly to Kroger than the offer that was on the table when the strike and lockout began last October.” But he maintained that the contract still provided Ralphs employees “with excellent wages and benefits.”

The dispute began Oct. 11, when the UFCW struck Safeway’s Vons and Pavilions. Albertsons and Kroger’s Ralphs, bargaining jointly with Safeway, locked out their union workers the next day. It ended Feb. 29 when the contract was ratified, so most of the effects were reflected in the companies’ fourth-quarter results.

Those results varied widely because of Ralphs’ unique position in the dispute and because of a “mutual aid” pact among the three chains.

At first the UFCW picketed all three, and a majority of shoppers avoided the picket lines. But on Halloween, the union removed pickets from Ralphs, saying it wanted to ease shoppers’ inconvenience. That sent many people back to Ralphs.

Thus Kroger said that Ralphs’ lost sales during its fiscal fourth quarter, which ended Jan. 31, totaled $40 million to $45 million. That was far less than the $700 million that Albertsons said it suffered in lost sales in its fiscal fourth quarter ended Jan. 29 and the $600 million-plus in sales lost by Safeway in its fourth quarter.

But the strike and lockout in California, along with a small labor dispute in West Virginia, reduced Kroger’s quarterly profit by $156.4 million and lowered the profits of Albertsons and Safeway by $90 million and $103 million, respectively.

(Safeway reported its quarterly results last month, when it said the dispute added to a $696-million overall loss for the company.)

One reason for the larger loss at Kroger is that Ralphs -- because it reaped a windfall when the pickets were removed -- is obligated under the mutual-aid pact to share some of that cash with the two other chains.

Asked about the size of those payments, Dillon replied, “We don’t plan to release that at the present time.”

But he said the amount was “embedded in the cost of the strike to us.”

California Atty. Gen. Bill Lockyer has sued the companies over the pact, alleging that it violates federal antitrust laws. The companies deny any wrongdoing. Neither side has released details about the agreement.

Beyond the pact, Kroger’s strike-related losses also indicate that Ralphs’ “prices are not as competitive” as those of some rivals. That hurt the chain despite the pickets’ being removed, said Mark Hugh Sam, an analyst at Morningstar Inc.

The two CEOs touched on other aspects of the strike and its end:

* Both said they didn’t yet know how many of their veteran workers would return and how many quit during the long impasse. “I’m not sure we’d make it public even if we have it,” Dillon said.

* Asked if they were thinking of offering buyouts to veteran employees -- in order to get more new, lower-paid workers on their payrolls -- Dillon said it was “way too soon to discuss that kind of issue.” Johnston said that “we’ve done that in other markets, and we keep that option open in Southern California.”

* Dillon said Kroger wouldn’t necessarily seek two-tier labor pacts in other upcoming labor negotiations but noted that Kroger had been using them since 1978. “This is not some new concept,” he said.

Cincinnati-based Kroger said the California dispute contributed to a $337.4-million overall net loss in the quarter, which also included hefty write-downs in the value of some assets and other one-time charges. A year earlier, it earned $381 million, or 50 cents a share. Kroger’s fourth-quarter sales rose to $13 billion from $12.5 billion.

Albertsons, based in Boise, Idaho, said the $90-million cut in its earnings from the strike reduced its overall fourth-quarter earnings to $130 million, or 35 cents a share, from $205 million, or 54 cents a share, a year earlier.

Johnston said Albertsons would aggressively push promotions to win back shoppers; it had already announced plans to offer “loyalty” or “club” discount cards, as Ralphs and Vons do. Also, Albertsons today plans to unveil a program that gives customers two movie tickets for every $200 they spend either at Albertsons or its Sav-on drugstores.

“And there’s much more ahead,” Johnson said, without elaborating.

The chains’ stocks fell with the broader market Tuesday. Kroger lost 35 cents to $18.56, Albertsons dropped 21 cents to $23.91 and Safeway fell 41 cents to $21.70, all on the New York Stock Exchange.