A CHANGED ENVIRONMENT IN SOUTHERN CALIFORNIA

Five months after the end of the longest labor dispute in Southern California history, the market is still seeking its new level.

Promotions are down, underperforming stores are being closed and consumers remain in flux as they decide whether to return to the major chains or stick with the alternative outlets they discovered during the 141-day strike-lockout -- a willingness to be flexible that could make Wal-Mart an attractive alternative as it begins adding supercenters in the area, observers told SN.

"Wal-Mart has a lot of the up-for-grabs factors that Southern California consumers seem to be looking for in the post-strike environment," Gary Giblen, senior vice president and director of research for C L King Associates, New York, pointed out. "Consumers are open for change, and alternative formats like Wal-Mart are more attractive than ever, particularly as the 'big three' grow less and less attractive by relentlessly cutting labor and raising prices on an ongoing basis and making themselves less pleasant shopping experiences in the process -- all of which makes the prospects for Wal-Mart supercenters as an alternative greater than ever."

The Southern California market has historically been dominated by Ralphs and Vons, with Lucky Stores as a third major player until it was acquired by and folded into Albertsons in 1999.

While the three market leaders may have been weakened during the labor dispute, their shares remain strong, with Ralphs, a division of Kroger Co., leading the market with a share of nearly 19%, followed by Albertsons with about 17% and Vons in third place with about 16%, according to analysts.

The majors find additional competition in the San Bernardino-Riverside area east of Los Angeles County from Stater Bros. Markets, which controls a 10% share in Southern California but accounts for about one-third of the market share in its two-county home base.

The landscape changed when managements of Albertsons, Kroger and Safeway took a hard-line stance in last fall's labor negotiations with seven locals of the United Food and Commercial Workers Union -- presumably because of the pending entry of Wal-Mart supercenters into the marketplace.

"Labor costs in California have historically been higher because they've been easy to pass on, and this was the first time a challenge arose where the chains opted to take a tougher stance because Wal-Mart was coming," said Giblen.

"They didn't believe they could wait three more years [until the next round of contract talks] to get costs down," Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., added.

The UFCW launched a strike against Vons in mid-October and was immediately locked out of Albertsons and Ralphs -- although the union lifted the picket lines at Ralphs within two weeks to give consumers a viable shopping option, it said at the time. Without the financial resources of the local chains' corporate parents, Stater opted to remove itself from the fray while agreeing to accept whatever settlement the three chains and the union agreed to.

As a result, Stater saw sales levels rise more than 50% and was one of several beneficiaries of the strike as consumers sought other options without picket lines and high out-of-stock conditions. Also benefiting from the market disruption were Costco, Smart & Final, Whole Foods and a variety of smaller ethnic and independent retailers.

In the process, customer counts at the three chains dropped precipitously, with some estimates putting the loss of volume at 40%. Approximately 25% to 30% of that business has apparently come back since the strike-lockout ended in early March, observers pointed out, but the rest has remained diffused among the other retailers.

Besides the loss in customer counts, other changes have occurred in the post-strike environment in Southern California:

Promotional levels have fallen off in Southern California. "The chains have been running one- and two-page ads with 12 to 20 items at hot prices -- running at maybe $1 below cost -- but nothing that you'd call price-war promotions," one observer said. "That's because the stores are in bad shape and they aren't quite sure how much money they've lost, and they can't afford the markdowns to sell below cost too much."

Worker attitudes are generally negative. Even among the workers who returned to work, there is said to be considerable displeasure, according to observers, because of the contract they accepted after 141 days off the job, "which is resulting in low productivity, low levels of customer service and higher shrink."

Several underperforming stores have closed or will be closed. Ralphs shuttered 14 units earlier in the summer and said it would close five more in the fall, and reports indicated Safeway may close 10 to 15 underperforming Vons stores in the next few weeks.

"Both chains had stores before the strike that should have been closed," one observer said. "During the strike, the volume at those stores got so low that it was clear a decision to close them would have to be made. Once the stores didn't get back much of the volume they had lost, it was a no-brainer to close them.

"But Albertsons had gotten rid of a lot of underperforming stores when it acquired Lucky in 1999, so most of its stores are in good shape, and it's unlikely there will be any closings there."

Moving forward, Ralphs is facing the possibility of a federal lawsuit over allegations that some of its store managers knowingly rehired locked-out workers who used false names and Social Security numbers. After conducting its own internal investigation, Ralphs acknowledged that "some of the reports of misconduct are correct."