It looks as if our long national nightmare may be coming to an end — once again, someday soon, we will all be able to shop at our neighborhood national chain grocery store. As a consumer of foodstuffs, I find this convenient. As a consumer of financial products, I’m principally happy that I don’t own any shares of the stock of said national chain grocery store companies.
I’m prepared to allow, despite my obvious fondness for organized labor, that, from time to time, employees get paid too much, and, to create competitive organizations, salaries and benefits need to be cut. The national grocery chains are up against it: they need to bring down operating costs to compete with Wal-Mart and the likes. Salary costs are a big part of the difference; cutting salaries seems reasonable.
But there are other parts to the equation as well. According to “an article in Baseline magazine”:http://www.baselinemag.com/article2/0,1397,1527221,00.asp, there are a lot of costs that contribute to the difference Albertson’s and Wal-Mart’s shelf price, among them advertising, head offices, distribution (that’s those Teamsters, not the grocery clerks and butchers — a much tougher target), and even the base cost of the product from the supplier.
The major grocery chains chose to make offers to their clerks in Southern California that made economic sense for the companies — but that the companies also knew the unions would be unlikely to accept. Management chose to risk a strike — and got it. So, for more than four months, most chain stores in Southern California have undergone drastic decreases in sales as customers stayed away. Some estimates put the total loss to the grocers’ bottom line at over $70 million. That’s a lot of money to pay. Will it be made back?
Unlikely. First of all, the ultimate resolution is not unduly positive for the grocery chains. The key health care benefit cuts are put off into the future — and who knows if, in the future, they can be made without more strikes? Current workers get no raises, but nor do they take a pay cut. Future hires are given a lower pay scale, making them cheaper but also making them likely strong union supporters as they angle for a ticket onto the higher salary rate card. And how many years will it take new employees to outnumber existing ones? Even if the turnover comes quickly, it doesn’t necessarily bring savings, because each new hire brings substantial training costs. It seems it may take years, perhaps more than a decade, for the grocery chains to start saving real money from these concessions. And who knows where the next contract will take us in that time?
Meanwhile, the stores have chosen a strategy that actively drove customers away. As millions of Southern Californians chose not to cross picket lines, shoppers learned to frequent new stores. The Whole Foods and neighborhood ethnic grocery I stop at are both filled with new customers and have been for months. How many consumers will go back? Lower prices are good, but people are also creatures of habit. And now Ralphs is in a price war not just with Vons’ but also with Jon’s markets, which carry low-cost goods targeted at the Latino market. Ralph’s has good prices but Del Monte will never cut its wholesale prices as low as Goya will.
The groceries are planning to lure customers back with deeply-cut prices. But that just creates even more price-conscious customers. Rather than building loyalty, it makes deals most salient to shoppers. A shopper who thinks only of getting deals will not stay at Safeway when Wal-Mart comes to town.
It’s hard to say what will happen to grocery stores in the future. But this victory seems small, even Phyrric, and the war against big-box stores seems long. Was this strike the best way for management to build shareholder value? Only if the way to win is by playing Wal-Mart’s game, maybe not even then. And, most often, it’s the ones who play a different and new game that win.