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Supermarkets in transition

While a strike was averted at more than 300 Giant and Safeway stores inthe Baltimore-Washington region, the issues that factored into labornegotiations remain and must be addressed by both company managers and unionleaders if the companies are to remain viable long term, industry observerssay.

"This publicly held supermarket model is going to get squeezed out," saidDavid Livingston, managing partner of DJL Research, a consulting firm based inPewaukee, Wis. "Probably over the next 10 years, you're going to see some bigchanges, a lot more exits out of the market."

Mark Millman, president of Millan Search Group, a national retailconsulting firm based in Owings Mills, agreed.

"It will be very competitive over the next couple of years," he said."They've got some real challenges ahead of them."

The underlying issue for supermarket chains -- union or not -- is this,observers say: relevance in an increasing competitive market.

"Supermarkets are kind of stuck in the middle," between big-box discounterslike Wal-Mart Stores Inc. on the one end and upscale, premium-quality outletslike Whole Foods Market Inc. and Trader Joe's Corp. on the other, said MarkHamstra, retail editor at Supermarket News, a New York-based industrypublication.

Grocery chains like Giant Food LLC and Safeway Stores Inc. nationwide are"going through a transition phase," Hamstra added.

"All the supermarket chains are being very aggressive at taking costs outof their systems so they can compete on price, but at the same time they'realso doing things to enhance their service and improve their products," hesaid. "It's still a work in progress."

Strike averted

Last week, about 29,000 members of Locals 400 and 27 of the United Food andCommercial Workers Union ratified four-year contracts with Giant and Safewaystores in the Baltimore-Washington region. The unanimous vote averted astrike, unlike in California, which lasted five months.

Under the agreement, current employees at the 340 stores will see theirannual health-care deductibles double to $200, and co-payments on prescriptiondrugs also will rise. Hourly salaries will rise $1.25 during the contract.

They also will continue earning time-and-a-half or double-time for Sundayduty.

New employees will have higher insurance co-payments and must wait longerbefore they are eligible for the same health benefits as existing workers.These workers also will start at $1 extra an hour on Sundays, eventuallyworking up to time-and-a-half pay after five years.

The base pay for a Safeway worker under the old contract was $13.10 anhour, according to a Safeway spokesman.

The contract is "far better than most plans in retail," said Greg Denier, aunion spokesman. "The issue of health care will continue to be a difficultissue in bargaining, and, more broadly, a difficult issue for workers."

Pleasing Wall Street

Besides the Wal-Mart influence, many grocers must answer to Wall Street.That also increases the pressure to cut costs and grow profits.

Giant Food, with headquarters in Landover, was acquired in 1998 by RoyalAhold N.V., the Dutch grocer. Ahold still is reeling from a billion-dollaraccounting scandal at its Columbia-based U.S. Foodservice Inc. subsidiary. Ahold also is merging Giant's executive operations with those of another U.S. subsidiary, Stop & Shop Cos. of Quincy, Mass.

Safeway, based in Pleasanton, Calif. has been traded publicly since 1928.The company is experiencing its own "self-inflicted problems," includingtroubles at its Dominick's division, wrote Merrill Lynch analyst Mark Hussonin a February report.

And Safeway's top executives are taking the heat fromshareholders because of the California labor strife. The strike was estimated to have cost Safeway and the other chainsinvolved, Kroger Co. and Albertsons Inc., more than $1 billion in lost sales.

"A lot of the big public companies have been so obsessed with gettingbigger, making acquisitions, growing and integrating those acquisitions, insome cases maybe they've kind of lost touch with customers a little bit,"Hamstra said.

"The real problem is mostly in the management of the chains, because theirfirst allegiance is to the stockholder, and the worker and the customer comesecond," Livingston said. "They're constantly trying to please the Wall Streetanalysts."

Barry Scher, a Giant spokesman, disagreed.

"We have a fiduciary responsibility to our stockholders, but we also havean obligation to serve our customers with the most modern, up-to-date shoppingconveniences in a warm and friendly atmosphere," he said. "We are constantlystriving to meet those objectives."

Pampering customers

Some chains, however, are doing it right, observers say.

Texas-based H.E. Butt Grocery Co., which operates stores under the nameH-E-B, and Publix Super Markets in Florida -- both privately owned, non-unionchains -- are among those moving to further enhance customer service, Hamstrasaid. Many of their outlets are more nimble, stocking items that appeal tocustomers in specific neighborhoods.

"When Publix goes into a new market, for example, they can invest a lot inthe stores, in marketing, and in labor," Hamstra said.

Scher said Giant plans to open an average of one new store a month thisyear -- at an average cost of about $6 million each. Giant also has more than20 "major remodelings" of existing stores under way, he said.

Livingston also cited Wegmans Food Markets Inc., the nonunion chain basedin Rochester, N.Y., which opened a 130,000-square-foot store in Sterling, Va.,in February. Another store is planned for Fairfax.

Wegmans intends to proceed with plans for its first Maryland store nextyear in the Hunt Valley Towne Center in Baltimore County, said a spokeswoman,Jo Natale.

"We invest a lot in training," Natale said. "Many cheese-shop managers goto Europe every year -- and the produce people have traveled across thecountry to visit a supplier."

This combination of competitive pricing and knowledgeable employees makescustomers want to come back, Livingston said.

And more, not fewer, workers need to be working in grocery stores, headded.

"Instead of cutting labor, they need to increase their labor, and they needto differentiate themselves as much as they can from chains like Wal-Mart,"Livingston said.

Wegmans, which plans to hire about 500 people for the Hunt Valley store,views Wal-Mart as "a tool to drive out competitors," Livingston said.

For its part, Safeway is opening Safeway a store next week at Arundel Millsthat will feature a "brand-new format," said Craig Muckle, a spokesman for thecompany's Eastern division in Lanham. It will have recessed, incandescentlighting and mahogany counters.

The store will have a "department-store ambience," he said.

"Virtually all of what we do is going to be transparent to the customer,"Muckle said. "We do a lot of measurements of a lot of different things, and weuse those measurements as tools to improve our efficiency."

Competitive prices, top service

Grocers do not have an either-or decision between service and price, saidHamstra of Supermarket News.

"There can be a balance," he said. Chains don't have to beat Wal-Martprices, he said, but just come "within a few percentage points" and offeroptions the cheaper outlets don't.

Husson of Merrill Lynch plays down the Wal-Mart effect, at least in majormarkets. The discounter, he said in a February report, has only 33 percent ofits big "supercenters" in the top 100 markets.

"It is good to remember just how much of a small-town retailer Wal-Martis," Husson wrote. The economy, "conventional" competition, health-care andpension costs have ranked above Wal-Mart as problems over the past two years,according to Husson.

'Channel blurring'

But some chain grocers are responding, if a bit slowly.

"I see them incorporating elements of some of these other formats thatthey're competing against," said Jenny McTaggart, senior editor of ProgressiveGrocer, an industry publication also based in New York. "We're seeingsupermarkets increase their organic offerings," while others are adding"mini-Dollar-Store aisles" with bargain products.

"There's a lot of 'channel-blurring' going on," McTaggart said.

In the South, Kroger is launching a private line of organic foods,McTaggart said, and Publix is "doing an excellent job with their organicofferings," differentiating that line from traditional products.

While smaller, non-union grocers are able to respond on a more personallevel to the community, McTaggart said, the bigger chains have someadvantages.

"They can work with manufacturers and get deals," she said. "That givesthem more leverage. And their logistics might be better.

"It's a real balancing act," McTaggart added. "It's not that supermarketsare these bad guys that are just out to get profits. There definitely has tobe a middle ground."

McTaggart said the stores that will find it hardest to compete are thosethat rely mainly on price.

"You really have to try to differentiate yourself," she said. "There aresome basic things that supermarkets can really focus on to try to wincustomers -- but in reality, customers have a lot of options, and they arelooking for convenience."

Copyright © 2015, The Baltimore Sun
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