Supermarkets and their local labor unions will be treading on fragile economic ground when they face off in upcoming contract negotiations.
Skyrocketing health benefit costs and nonunion competition have retailers wondering how they can continue to foot the bill for employee health care while still remaining competitive. Some union representatives are saying they are prepared for a tough fight despite the soft economy in order to get higher wages and continued health and pension benefits.
Though both sides may come to loggerheads on these issues, some industry observers are predicting unions may be more reluctant to strike than ever before in the event of a stalemate.
Ron Powell, president of the United Food and Commercial Workers Local 881, Oak Brook, Ill., said, "The most important things for us this year are wage increases and health benefits. These topics will dominate."
Local 881 represents nearly 23,500 workers in the Chicago area employed primarily at Boise, Idaho-based Albertson's Jewel division and at Pleasanton, Calif.-based Safeway's Dominick's Finer Foods division.
The union's contract will expire Oct. 6. It is the largest of the U.S. supermarket industry contracts scheduled to be renegotiated in 2002.
Powell said he is optimistic that keeping an open dialogue with the retailers will result in a contract that includes wage and pension increases for all tiers of employees.
"Even with the economy the way it is, we are confident," Powell said. "There are only two major players in the Chicago area, Jewel and Dominick's. And they have been playing tug-of-war for years. So that gives us somewhat of an edge, knowing that a strike could damage both of their positions."
In Queens Village, N.Y., the UFCW Local 1500 contract will expire on June 22, the second largest expiring this year. The 12,700 union members are employed at supermarkets in the New York metropolitan area, including Pathmark, Carteret, N.J., and Stop & Shop, Quincy, Mass.
"I don't think the economy has affected supermarkets the way it has other industries, like the restaurant and hotel industries," Local 1500 President Frank Meehan said.
"We feel we are justified going forward with our three primary goals of wage increases, increased pension benefits and making sure employees do not have to pay for health benefits. Retailers will be looking to their employees to pay for some of their medical benefits, but we have to try to make sure we don't let that happen," Meehan said.
James Jerele, president of UFCW Local 880 in Cleveland, said he thinks the economic situation will play a major role this September in negotiation talks. The local represents nearly 15,000 workers. It will renegotiate three contracts with area retailers, including Kroger, Cincinnati. "If the economy remains this volatile, it will have its place in the room as well," Jerele said.
Union confidence is buoyed historically by the knowledge that a potential strike situation can harm supermarkets measurably. But strike threats may be uncommon in 2002, since several union locals voted against strikes in 2001.
Last fall, a group of eight UFCW locals in northern California voted against a strike and eventually accepted a contract they originally rejected. Workers at Shaw's Supermarkets, East Bridgewater, Mass., accepted a company offer after working for weeks past contract negotiation deadlines. UFCW Local 1262, Woodbridge, N.J., representing 28,000 workers, settled a contract dispute in the 11th hour with Pathmark and Stop & Shop, among others.
In fact, one of the few strikes of note last year was between UFCW 1360, West Berlin, N.J., and ShopRite of Cherry Hill, N.J. Workers held out for seven weeks before finally accepting a contract that included little of the union's initial demands. The recent trend of union's being reluctant to strike could put them at a disadvantage in this year's talks, industry observers said.
Powell told SN he thinks the toughest battle will be with Safeway, which has seen strike threats fail to materialize. "A strike is really our only weapon, but we have to be careful if we are going to use that weapon," he said.
Jerele said, "Having a force of 15,000 workers will give us some leverage, but we will have to wade those waters carefully so that the retailers do not get into lockout mode if we threaten to strike."
Jonathan Ziegler, San Francisco-based managing director with Deutsche Banc Alex. Brown, New York, said he doesn't think the unions are scared to play the strike card. "If the economy stays weak, there may be some reluctance to strike if jobs are not available. But labor will not roll over and play dead," he said.
A Big Concern
The rising cost of health insurance will be a major sticking point in contract negotiations, union representatives told SN.
A recent study commissioned by Food Distributors International, Falls Church, Va., found that health care costs are rising at a rate of 14% annually. According to the study, annual health care costs per employee in the food industry can run as high as $8,700.
Kroger will renegotiate two of the year's largest contracts with employees in Dallas and Little Rock, Ark. UFCW Local 2008 in Little Rock, which represents nearly 3,000 workers at Kroger stores in the area, has a contract that expires in June. Union President Michael Keen said he expects a tough fight on the issue of health benefits.
"Kroger is looking to reduce costs, and they are going to try to reduce their contribution to the employee health care fund," Keen said. "We will not let that happen. I can guarantee this is going to be the toughest negotiation Kroger has ever had."
Gary Rhodes, spokesman for Kroger, said, "Health care will be an overwhelming challenge in this year's negotiations. We will work with the unions to address the soaring costs of health care benefits."
Roundy's, Pewaukee, Wis., also expects health benefits to present the biggest challenge in hammering out a mutually beneficial contract, according to company spokesman David Busch. Roundy's contract with members of UFCW Local 1444, Milwaukee, expires this fall.
"With health care costs increasing 14% to 15% every year, it really changes the dynamic," Busch said. "Even if the union's expectation is simply maintaining the status quo on health and benefits, how can they expect us to provide that if our costs increase by 15%?"
New York's Meehan also said that he expects a tough negotiation process this year. "It is going to be a tough fight, especially since retailers have lost money on pension investments. They are going to be looking to make up for losses and rising insurance costs."
Concerning the rising costs of health care, Meredith Adler, an analyst with Lehman Brothers, New York, told SN that there is really one simple solution: employee contributions for health benefits.
Adler said she believes that the UFCW understands in theory that they must work with retailers to help drive down the cost of benefits. The real task, she said, will be translating this idea at the local level.
"If you look at nearly every other industry in this country, each employee contributes something to his health insurance," Adler said. "The unions have to realize that in order for the industry to stay competitive, they may have to start doing the same."
Adler pointed out that the contract accepted last year by Albertson's and Safeway workers in northern California included partial benefit contributions from employees. "In that case, some progress was made, but much more needs to be done," she said.
The Nonunion Crunch
Big-box operators like Wal-Mart Stores, Bentonville, Ark., and Target, Minneapolis, have continued to resist unionization efforts, and the wage discrepancy between union and nonunion operators also may present problems at the bargaining table.
Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., told SN that supermarkets are at a disadvantage when competing with nonunion retailers because nonunion retailers' operating costs are much lower, generating higher profit margins.
"The unions have argued for, and won, high wages and benefits for their members," Wolf said. "This has created operating costs that are much higher for supermarkets than operators like Wal-Mart. Also, the work rules are much tighter in supermarkets than at Wal-Mart, which limits productivity. Wal-Mart can cross train workers to perform in several different positions, which gives them another cost advantage."
Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said that contract negotiations will be affected less by the economy and more by widespread penetration of these nonunion retailers in several parts of the country. Cerankosky said that unions may not be able to argue successfully for better wages when nonunion competitors are paying so little.
"Organized chains are obviously going to take the negotiations seriously, and look at the unions' demands as serious requests," Cerankosky told SN. "But at the same time, with increased nonunion competition, some other issues instead of wages and benefits will have to be stressed by the companies."
Ziegler said that unions must think carefully before asking for too much in light of supercenter and warehouse club expansion. He said that as retailers strive for increased margins to compete with supercenters and club stores, increasing wages could hurt cost-cutting efforts and lead to possible job cuts.
"The unions will have to look out for their employers in order to keep those union jobs in existence," Ziegler said. "There has to be some sanity to their demands. The industry numbers are not that great, and sales are lower than expected. And with a weak economy there may be increases in competition for supermarket jobs, so unions have to be careful not to exert so much pressure that they are disruptive."
Busch told SN that as Wal-Mart expands into Wisconsin, keeping up with union demands while fighting supercenters becomes increasingly difficult. "When you take into consideration its lower cost of goods, lower wages and the fact that Wal-Mart has even passed some insurance costs on to participants, it becomes an even bigger challenge to show profit gains against such competition," Busch said. "Unions and retailers have to work together to fight Wal-Mart, since one strong supercenter can take out competition in a way that's devastating."
Some unions have taken it upon themselves to help tighten the gap between union and nonunion wages.
William Pearson, president of UFCW Local 789, St. Paul, Minn., told SN that the union has extended its "You Are Worth More" media campaign, which began last year, aimed at raising union awareness among employees at Super Target stores that recently opened in the area. Through the campaign, the union hopes to increase part-time and entry-level wages in the region. This will both help supermarkets better compete with supercenters and give the union more leverage in contract negotiations, said Pearson.
The union's contract with Supervalu's Cub Foods and Fleming's Rainbow stores expires next month. A major goal will be to secure higher wages for part-time and entry-level employees, he said.
Pearson explained that higher starting wages would actually save money in the long run because the cost savings would give supermarkets another competitive weapon against supercenter expansion.
"Something needs to change if we are going to attract and retain good workers in the retail industry," he added. "Employee turnover costs are ridiculous. It is really staggering. No one wants a career in the supermarket industry at the store level. If we can convince retailers to offer decent starting salaries, we can help cut training costs and keep other turnover costs out of the system by retaining more workers."
Jerele told SN that Wal-Mart supercenter penetration in northeast Ohio has been slight. Thus, he said, nonunion wages will not play a role in negotiations. Even if Wal-Mart expands into the area, Jerele said the union does not plan to alter its negotiation strategies in the future. He said a long-term contract that provides job security and regular wage increases in the event of increased nonunion penetration is not an option.
"Local 880 has never argued for a contract longer than three years," Jerele said. "It's too hard to look into that crystal ball and guess how inflation, health care costs and competition will affect negotiations. Others have got caught up in that, accepted longer contracts and got burned. We will take our chances on shorter contracts."