Three years after one of the most divisive and painful labor disputes in industry history, all eyes return to Southern California again this month. Union leaders and major supermarket employers there are currently at work negotiating new agreements to replace the three-year deal arrived at after a 141-day strike/lockout ended in 2004. As the sun sets on that deal, union leaders are seeking to collapse

Three years after one of the most divisive and painful labor disputes in industry history, all eyes return to Southern California again this month.

Union leaders and major supermarket employers there are currently at work negotiating new agreements to replace the three-year deal arrived at after a 141-day strike/lockout ended in 2004. As the sun sets on that deal, union leaders are seeking to collapse the structure of that contract's “tiers,” which provided a less attractive schedule of wages and benefits for new workers than for employees predating the agreement. The contract, covering 70,000 workers at Ralphs, Vons, Albertsons and other retailers, expires March 5.

Labor leaders have already claimed one victory in that campaign as the result of an early settlement six union locals struck with Stater Bros. Markets last month. The deal eliminates the two-tier wage structure, according to Greg Conger, president of United Food and Commercial Workers Local 323, Buena Park, Calif. The agreement also improves health benefits, Conger said, though it does allow Stater Bros. to reopen discussion on that depending on the benefits negotiated with other chains.

According to Pat O'Neill, director of collective bargaining for the UFCW in Washington, the Stater Bros. deal eliminates tiered wages by extending the levels that new hires can rise to. “By lengthening the progression, new hires will get periodic raises, and by the time they get to the top, they will be on the same level as anyone else,” O'Neill explained.

The 2004 contract allowed new hires to earn a maximum of $15.10 per hour after 7,800 hours, compared with a maximum of $17.90 an hour after 2,600 hours for then-current workers. The new agreement with Stater Bros. raises the maximum rate for new hires to the same level for all workers, but achieving the rate would require more than 7,800 hours, union officials explained.

Jack Brown, chairman and chief executive officer of Stater Bros., told SN in an interview that the last deal resulted in an “economic and emotional disaster” for the supermarket industry and that Stater Bros. settled early to avoid another work stoppage. He would not elaborate on terms of the agreement. “We negotiated without the threat of a strike, and it helped us respect one another's views,” Brown said.

Some observers said they would not be surprised to see other retailers follow Stater's lead and relax the tiered structure. That's partly to reduce high turnover levels under the current system, they say, but also because its structure over the course of the last three years churned a majority of workers to the lower tier, assuring that lower cost structures for the employers were here to stay.

“There's been quite a shift between second- and first-tier percentages on the West Coast, and there's a lot more second tier now,” Rian Wathen, senior managing consultant for Labor Relations Services, Newport Beach, Calif., told SN. “Typically, there's a spike of retirements after a contract is settled, as people wait around to see if there's a buyout. And as that attrition happens, it fills up the second tier. And the employers get labor savings without having to do anything.”

As the balance between higher- and lower-tier workers continues to shift, so do the priorities of the union representing those workers, Wathen explained.

“It's of no great political benefit to negotiate for the older tier because the union's constituency has become the second tier,” said Wathen. “My understanding is that in Southern California, that shift happened pretty rapidly.”

If employers ultimately got the contract they wanted, they still wear scars from the battle to get it. Kroger's Ralphs division last year was fined $20 million and forced to make $50 million in restitution payments after pleading guilty to charges of hiring locked-out workers under false identities to serve at its stores, and federal authorities were reportedly looking into criminal charges against individuals who engaged in the practice. The profit-sharing agreement between Ralphs, Vons and Albertsons has come under scrutiny from union and state officials. They surrendered an estimated $2 billion in sales and ceded market share to competitors like Whole Foods and Costco, some of which they will never regain, analysts said.

“The strike cost them quite a lot of money in sales and profits, and they're only now getting it back,” Mark Husson, an analyst for HSBC Securities, New York, told SN. “I don't think they are jumping for joy with their performance there yet.”

The majority of sources who spoke to SN are predicting a peaceful resolution in Southern California this time around, arguing that neither side can bear the expense of another fight. “They will try very hard to settle amicably,” predicted Jonathan Ziegler, an analyst for Dutton & Associates, Santa Barbara, Calif. “The last contract was just too painful before and after.”

The 2003-2004 work stoppage was sparked in part by retailers concerned about an invasion of Wal-Mart supercenters in California. The Bentonville, Ark.-based company opened its first such store in March 2004 and at one time projected it would have as many as 40 supercenters in California by 2008. A Wal-Mart Stores official said the company had 21 supercenters in the state as of December 2006, but its progress has been slowed by tough opposition from some local communities.

Other Hot Spots

While there may ultimately be peace in Southern California, it will not be the only hot spot for contract negotiations this year. Contracts up and down the West Coast expire this year, including deals in Central and Northern California, and in the Puget Sound area of Washington. In New England, Stop & Shop and thousands of its employees have contracts expiring this week. A union official in New England recently described the sides as being far apart in those negotiations. Kroger, in addition to Southern California, has deals expiring in several of its top markets, including Cincinnati, Detroit, Houston, Memphis, Toledo, Seattle and West Virginia.

“Many of these contracts may be challenging as we seek competitive cost structures in each market,” Kroger CEO David Dillon said in a recent conference call. “In every contract negotiation, we work to reach a balanced agreement that meets the cost-efficiency objectives while fulfilling our commitment to provide our associates with solid wages and benefits. Maintaining this balance allows Kroger to invest in our business to provide new job opportunities for existing associates and create new jobs for more people.”

Kroger workers in Houston are hoping they too can share in Kroger's recent success. “Kroger has done extremely well in this market, in spite of all the competition from Wal-Mart,” said Bill Hopkins, president of Local 455, representing 12,000 Kroger employees as they look for a new contract beginning April 1. “They have found a way to compete. Our members want their pensions protected and their lives to improve. We enjoy seeing employers do well as long as they can share it with their workers.”

“It's a big year,” O'Neill of the UFCW said. “The biggest impact is just the sheer number of contracts we have this year. It could become a problem if we have some adverse circumstances, but I'm not anticipating that now.”

While employers are realizing overall cost savings as a result of the tiered contracts in Southern California, some observers aren't sure retailers are happy with the way the system has worked and might be willing to make modifications.

“The idea of split wages just doesn't work,” Richard Kochesperger, a professor of food marketing at St. Joseph's University, Philadelphia, told SN. “The turnover is too high. I think businesses have pushed too hard. If you look around at the successful companies, they're the ones with quality people in the stores.”

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, agreed, saying that contracts that have pulled costs closer to those of Wal-Mart have in some cases also blunted the advantages of a knowledgeable and experienced workforce.

“I think what [Stater Bros.'] Jack Brown sees is that having more full-time workers gives him a higher retention rate, and a customer service advantage, and productivity-per-property advantage that arguably provides real business benefits in a market like Southern California,” Flickinger told SN. “One of the things I've seen in the two-tiered system is more turnover, and that's affecting shopper satisfaction in the stores.”

Employer Success

Wathen, whose firm specializes in union prevention, said he doesn't believe negotiations will get too heated if only because employers got almost everything they asked for last time. “Employers may be in a position where they don't have to ask for as much now,” he said.

Wathen also believes that the labor dispute and subsequent contract may have cost the union the confidence of its members. “Employees got hammered last time — they lost houses and cars and didn't go back for anything more than they walked off for,” he said. “I think employees were upset with the employers but also lost faith with the union. Do you think they will follow [union leadership] off a cliff again? I don't think so. I think the UFCW will be practical.”

One significant change between the 2004 and 2007 negotiations is the relative fortunes of the employers. Safeway and Kroger are posting their best financial results in many years, and Albertsons, today in the hands of new owner Supervalu, has dropped most of the former company's weak assets.

Andrew Wolf, analyst, BB&T Capital Markets, Richmond, Va., said negotiations may have a different tone this year because of the success that Kroger and Safeway have enjoyed.

“Right now the unions are looking at this recovery that the big chains have had as well,” he said. “They have a history of wanting to share the good times with the workers. It should be very interesting to see how things go in March in Southern California — it could set the pace for labor negotiations for the year.”

He said when retailers are struggling, they have more leverage to seek concessions from organized labor.

“In tough times, it's a lot easier for the employer to say, ‘You need to help us out, and help us save jobs here,’” he said. “But in good times, the unions come out and say they want some more of the pie.”

O'Neill of the UFCW said the financial condition of the employers should stand to benefit the union's case.

“It should play to our favor,” he said. “Part of the reason they've had such a nice run is that we've worked well with them in the past, trying to control spending on health care and pensions and other areas of the contract. We can argue our members are an integral part of their success, and we should share in the benefits.”

Steve Burd, Safeway's chairman, in fact might be surprised to find an ally in the UFCW regarding his call for health care reforms.

“We're appreciative of the things he's doing,” O'Neill said. “We've said for years that health care is a problem that's bigger than business and labor and something that can't be solved at the bargaining table. We're in agreement with a lot of the things he's talking about, including the importance of staying healthy in the first place.”

Trouble in New England?

O'Neill called ongoing negotiations between Stop & Stop and local unions in Connecticut, Massachusetts and Rhode Island “probably the most difficult we face” in 2007. Nearly 40,000 workers in those states face an expiring contract Feb. 17 and had not reported progress in talks. As SN went to press, several locals had considered giving union leaders strike authority.

Stop & Shop, a division of Netherlands-based Ahold, has struggled recently, as its parent company attempts a turnaround by cutting in-store prices amid at least some clamor that the division could be sold or merged. Union officials believe lower shelf prices will be funded by labor cuts.

“We don't have a lot of confidence in Ahold. They have a lot of self-inflicted problems,” O'Neill said. “They've latched onto the idea that labor happens to be one of their most controllable costs. But maybe their problem isn't labor; it's in the decisions made by management.”

Union labor and Stop & Shop have battled throughout the current contract on issues such as implementation of work-scheduling software, reductions in store hours and other business changes. “Our membership at Local 371 has declined as Stop & Shop has expanded,” said Brian Petronella, president of UFCW Local 324, Westport, Conn., which represents around 4,800 Stop & Shop workers. “That's based on technology like automatic scan registers, on the company announcing that 24-hour stores would be closed at midnight and stores that were open until midnight being closed at 10.

“Now we hear they want to go to self-serve fish counters, which will also eliminate good jobs,” Petronella added. “We've reached the point where enough is enough.”

But the main point of contention in negotiations is division of health care expenses, Petronella said. “We've had nine sessions talking about health care and haven't gotten anywhere,” he told SN. “We have to talk about pension issues, wage issues and premium issues. If we can get it done by [Feb.] 17, so be it. If not, we'll try to continue to negotiate.”

Stop & Shop hopes its unions will “come to the table to talk meaningfully about the issues,” the company said in a statement. “Stop & Shop has put a comprehensive proposal on the table, including a comprehensive health and welfare proposal, which will allow us to be competitive with other food retailers throughout the New England marketplace.”

Given Stop & Shop's recent struggles, Husson said a work stoppage could be catastrophic for the retailer and its employees. “Hopefully, the union can see that a strike would be short-sighted, since it just might wind up with a bunch of stores closing.”

Largest UFCW Contracts Expiring in 2007
Multiple Southern Calif. Multiple 70,056 MARCH 5
Stop & Shop Mass., R.I., Conn. Multiple 36,669 FEB. 17
Meijer Grand Rapids, Mich. 951 28,836 SEPT. 8
Multiple Northern Calif. Multiple 26,746 DEC. 1
Multiple Central Calif. 8 14,359 OCT. 6
Multiple Puget Sound, Wash. Multiple 13,626 MAY 5
Kroger Cincinnati 1099 12,771 OCT. 6
Kroger Houston Multiple 12,057 MARCH 31
Multiple St. Louis 655 9,130 MAY 13
Multiple Minnesota 653 8,464 MARCH 4
Kroger Memphis, Tenn. 1529 8,054 OCT. 6
Multiple N.J., N.Y. 464A 7,459 AUG. 18
Kroger Detroit 876 7,387 JUNE 9
Food Basics Ontario 175 6,483 JUNE 23
Safeway Edmonton, Alb. 401 6,262 MARCH 17
Food 4 Less Calif. Multiple 4,223 JUNE 3
Giant Eagle Pa., W.Va. 23 3,897 JUNE 24
Fortinos Ontario 175 3,860 JUNE 12
Kroger Charleston, W.Va. 400 2,451 OCT. 13
Multiple Mo. 88 2,427 SEPT. 30
Kroger Toledo, Ohio 911 2,361 APRIL 7
Fred Meyer Seattle 21 2,000 FEB. 3
A&P N.Y. 342 1,588 OCT. 30
* May include multiple bargaining units whose contracts expire with the same employers on the same dates.
Source: United Food and Commercial Workers