Safeway Chief at Center of Standoff

If there is one person at the heart of the Southern California supermarket strike, it might well be Steven A. Burd.

As Safeway Inc.’s chairman and chief executive, Burd is leading the industry’s campaign to slash its labor expenses, making him the focal point for angry members of the United Food and Commercial Workers union.

Unwilling to make the concessions Burd and other supermarket executives want, the union launched a strike a week ago against Safeway’s Vons and Pavilions stores, prompting Albertsons Inc. and Kroger Co.’s Ralphs stores to lock out their union workers.

The UFCW has railed against Burd’s desire to pare workers’ health-care and pension benefits, freeze existing salaries and institute a lower tier of wages for new hires. The union fears that would set a precedent for coming supermarket contract talks nationwide.

It knows that Burd, 53, has a reputation for being tough with organized labor. There have been several strikes or other labor protests during his decade-long reign as CEO, including one last year in Ontario, Canada, that ended with Safeway shutting down the three stores involved, rather than agreeing to workers’ demands.

“He has taken a very hostile approach,” threatening employees “with store closure or job loss” if they didn’t accept concessions, said Greg Denier, a spokesman at the UFCW’s headquarters in Washington.

A calculating executive known for paying attention to the smallest details at his stores, Burd is unmoved by the union’s complaints or the strike. He declined to be interviewed for this article but told analysts Thursday that he, Albertsons and Kroger were willing to accept a short-term loss of sales and profits for long-term cost savings.

“I’m not troubled by this,” he said, referring to the losses the company is sustaining during the strike. “Does it drive me up the wall? The answer is no. We view this as an investment in our future, and I’m confident that my bargaining partners view it exactly the same.”

After taking the helm at Safeway, Burd, a former management consultant, turned the once-struggling chain into a top performer. But now the 1,702-store chain is faltering again, as the supermarket industry is facing heightened competition from low-cost mass-merchandisers such as Wal-Mart Stores Inc. and Costco Wholesale Corp.

To meet that threat, Burd -- and many Wall Street analysts -- contend that Safeway and the other two grocery chains must cut their labor expenses if they hope to keep their prices competitive with those of nonunion rivals. Wal-Mart, for instance, is rolling out so-called Supercenters that sell a full line of groceries, and the first of 40 such stores in California is expected to open next year.

That makes the stakes higher for Burd than for his peers, because Pleasanton, Calif.-based Safeway has more stores in California than do Albertsons or Kroger.

The UFCW maintains that Safeway and the other supermarket chains are inflating the threat of competition, and that Safeway’s problems stem in large part from Burd’s own management missteps in recent years. Even the industry analysts pressing for Burd to win concessions blame him for part of Safeway’s troubles. The result: a standoff, with 70,000 employees off the job at 859 stores in Southern and Central California, and the region’s consumers grappling with its first supermarket strike in 25 years.

“What we have here is an irresistible force meeting an immovable object,” said Gary Giblen, research director at investment firm CL King & Associates in New York. “This is the big showdown.”

Tapped as Safeway’s CEO in 1993, Burd became emblematic of a new wave of supermarket executives. Unlike most of his predecessors, who worked their way up through the grocery business, Burd was an outsider who had never held an hourly-wage job at a supermarket.

The son of a railroad manager in Minot, N.D., Burd has a master’s in economics from the University of Wisconsin. He worked for management consulting firm Arthur D. Little in the 1980s and then handled various management assignments for Kohlberg Kravis Roberts & Co., a firm that specializes in buying companies via leveraged buyouts, or with mostly borrowed cash.

One of their properties was Safeway, and it was in trouble and buried under debt. Burd was brought aboard to restore order, and he did so in spectacular fashion.

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Safeway Transformed

In a business notorious for skimpy profit margins, Burd launched a massive effort to cut costs and improve Safeway’s service and efficiency.

His changes were major and mundane. He made Safeway more efficient in buying supplies, saving millions of dollars. He became legendary for being fastidious about the smallest details, such as the costs of Safeway’s carry-out bags and the ribbon in its floral departments.

Burd also took a lead role in the supermarket industry’s massive consolidation in the 1990s. Safeway’s acquisitions included the Vons chain in Southern California in 1997 and Dominick’s Supermarkets in the Chicago area in 1998.

Aided by a robust economy, Safeway thrived. From 1993 to 2001, its annual sales more than doubled. (They totaled $32 billion last year.) The chain’s profit margin swelled from less than a penny per dollar of sales to nearly 4 cents.

Safeway’s stock soared nearly 20-fold, adding $10 billion to the company’s total market value. In 2000, one analyst termed Safeway the “best of the breed.”

But the title wouldn’t last long.

As the new millennium arrived, the economy weakened and competition from Wal-Mart and other grocery retailers intensified. Inflation dropped sharply, making it tough for Safeway and other grocers to push through price increases that could boost earnings.

Safeway’s multibillion-dollar debt, which was manageable during the ‘90s, became a burden yet again. The company’s health-care and pension costs kept moving up.

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Facing Complaints

Burd’s strategies also came under fire. Analysts complained that Safeway paid too dearly for acquisitions such as Dominick’s, Randall’s Food Markets Inc. in Houston and Pennsylvania-based Genuardi’s Family Markets Inc., and altered them too much to fit Safeway’s cookie-cutter image.

Safeway even launched an advertising campaign last fall apologizing to Genuardi’s customers for making too many changes too quickly, and promising to do a better job in the future.

“Safeway has had a problem with its acquisitions,” said Andrew Wolf, an analyst with BB&T; Capital Markets in Richmond, Va. At each of these chains, Burd cut back on store labor, making checkout lines longer, and added a flood of Safeway’s private-label products that replaced many popular regional items.

“Both were designed to boost short-term earnings, but they were bad for the franchise health,” Wolf said. “They were big stumbles.” Now, Safeway is trying to sell Dominick’s.

Critics also chided Safeway for its ambitious effort to reduce spoiled and damaged goods, or “shrink,” which prompted many store managers to stop carrying certain perishable goods so that they could meet Safeway’s agenda.

“Safeway has been a victim of overconfidence that is bred out of a decade of success,” analyst Mark Husson of Merrill Lynch & Co. said in a report last year.

Safeway’s sales and earnings suffered. Last year, for the first time since Burd arrived, Safeway reported a year-over-year drop in its “identical store” sales, a key industry gauge because it excludes new, closed and replacement stores.

Burd, who earned a salary of $1 million in each of the last two years, had his bonus slashed 78% in 2002, to $258,000, as Safeway posted an $828-million loss as it wrote down the value of two acquisitions.

The company’s stock has lost about half its value in the last two years. Safeway closed Friday at $22.90, down 44 cents, on the New York Stock Exchange.

And the trend has continued.

Last week, Safeway said its third-quarter identical-store sales, excluding sales of gasoline, fell 1.5% from a year earlier. Its third-quarter profit dropped 28% from a year earlier, to $202.5 million, or 45 cents a share, as sales edged up 4% to $7.8 billion.

Burd also lowered Safeway’s guidance for its fourth-quarter earnings to 66 cents to 69 cents a share -- and that’s before counting whatever damage is done by the strike. Analysts surveyed by Thomson First Call had forecast that Safeway would earn 71 cents a share.

Burd put most of the blame on the sluggish economy and “a rapid escalation” in prices of meat and dairy products. He said Safeway was working to improve its produce departments with a wider selection and more eye-catching displays.

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Tough on Labor

But it’s the rise in Safeway’s labor costs that preoccupies Burd and the other supermarkets involved in the strike.

“We all compete with nonunion operators and we all have a situation that we can’t sustain,” he said. “The idea here is to get costs down to be competitive.”

Burd said he planned to reduce costs in every labor negotiation around the country “without exception.” And he has been willing to take a hard line with employees in order to get his way.

Almost two years ago, when the two UFCW locals that represent Dominick’s workers voted to authorize a strike, Burd threatened to close all 113 Dominick’s stores if the workers walked off. Since then, the two sides have been at a standoff, with workers abiding by the terms of their old contract while Safeway works to sell the struggling chain.

Burd also made good on a promise to permanently close stores last June when he shut three stores in Thunder Bay, Canada, after a UFCW strike there kept them closed for eight months.

But negotiations in Southern California, analysts said, will be Burd’s biggest and most important labor fight yet. They said he could be willing to wait out the strike for weeks, if not months, to get what he wants, because negotiations here will influence others around the country.

Burd has to “stand up and draw a line in the sand,” Wolf said. “This is a big deal. No pain, no gain.”

UFCW officials, however, said they would fight Burd and the other large supermarkets to protect their workers’ wages and benefits.

Burd “made some bad decisions,” said Rick Icaza, president of Local 770 in Los Angeles, “and now he wants to pass that on to workers. He is using his mistakes to justify this revolt against our health care and not funding our pensions. We’re going to be out there as long as it takes.”