Grocery Strike Cuts Deeply Into Sales at Ralphs

The Ralphs grocery chain lost as much as $145 million in sales in its fiscal third quarter because of the Southern and Central California strike and lockout, Ralphs’ parent, Kroger Co., said Tuesday.

The amount of forgone sales was similar to that reported last week by Albertsons Inc., which joined Kroger in locking out workers Oct. 12, the day after the United Food and Commercial Workers union struck Safeway Inc.’s Vons and Pavilions stores.

“The strike hurt Kroger about as much as Albertsons” in the quarter, analyst Mark Husson of Merrill Lynch & Co. said in a note to clients.

Kroger and Albertsons, meanwhile, for the first time provided a glimpse into a controversial mutual-aid pact among the three supermarket companies. The pact effectively calls for Kroger to share the windfall in business that Ralphs has received since Oct. 31, when the UFCW removed its pickets from Ralphs’ stores to focus pressure on Albertsons, Vons and Pavilions, analysts who follow the chains closely have said.

The money won’t change hands until the labor dispute ends, Albertsons said Tuesday, and so far, the amount it is due to collect hasn’t had a “material” effect on its financial results.

Although the labor dispute is about to enter its third month, the sales-loss figures from Kroger and Albertsons reflect only the first few weeks of the strike and lockout. Total sales losses to the three chains may exceed half a billion dollars so far.

A big chunk of those forgone sales are going to smaller grocers and mass merchandisers. Costco Wholesale Corp. got a sales boost of $50 million to $80 million in its fiscal first quarter ended Nov. 23 because of the dispute, Richard Galanti, Costco’s chief financial officer, said Tuesday.

Those gains helped the Issaquah, Wash.-based discount chain post a 9.9% increase in its first-quarter profit, to $160.2 million, or 34 cents a share, trumping analysts’ expectations.

Kroger said the strike and lockout were the main reason its fiscal third-quarter profit plummeted 57% from a year earlier, to $110.2 million, or 15 cents a share, from $254.6 million, or 33 cents. That was well below what analysts had forecast.

“The results constitute a disappointment both on the top line and on the bottom line,” said Edouard Aubin, an analyst at Deutsche Bank in New York.

Kroger’s stock tumbled 3% after the announcement, falling 58 cents to $17.31. Albertsons fell 41 cents to $19.77 and Safeway lost 7 cents to $19.92. All three trade on the New York Stock Exchange. On Nasdaq, Costco fell 14 cents to $36.

Cincinnati-based Kroger, the nation’s largest supermarket chain with 2,530 stores in 32 states, has 300 Ralphs stores affected by the dispute in Southern and Central California. Albertsons has 259 stores involved, and Vons and Pavilions 293 stores. About 70,000 workers overall have been idled.

Talks between the parties and a federal mediator broke off late Sunday and no new negotiations were scheduled. The chains and the union are sharply divided on how much the companies should pay for workers’ health insurance.

David Dillon, Kroger’s chief executive, told analysts in a conference call that “we look forward to the day when we welcome back our employees in Southern California.” But he added that “Kroger can no longer fund 100% of the uncontrolled growth of health care and pension costs if we are to remain competitive with lower-cost competitors” such as Costco and Wal-Mart Stores Inc.

Kroger said that in its third quarter it lost $135 million to $145 million in sales because of the dispute. Its overall sales rose 4% to $12.1 billion from $11.7 billion a year earlier.

But Kroger said that its “identical-store sales,” which are closely watched because they exclude new, closed and replacement stores, fell 0.6% from a year earlier in good part because of the lockout. That figure also excludes sales of gasoline.

Until Tuesday, all three companies had declined to provide details about their mutual-aid pact, except to acknowledge its existence and contend that the agreement was legal. The pact is under investigation by California Atty. Gen. Bill Lockyer for potential antitrust violations.

Asked about the pact during the analysts’ call, Kroger Vice Chairman W. Rodney McMullen was guarded in his answer, noting that Kroger lawyers were nearby to monitor his comments.

McMullen said the mutual-aid payments would follow an unspecified formula based on the chain’s recent sales as “compared to our historical sales.”

Those comments suggest that the three chains will split any increase in sales at Ralphs stores, as opposed to a simple sharing of profits.

McMullen said Kroger would account for the payments by including them in its operating costs. The company did not break out the costs of the mutual-aid pact so far but said third-quarter expenses related to the labor dispute overall totaled $45.6 million. That figure included expenses for moving Kroger workers from other sites to Southern California and for training new employees.

Payments to the other chains under the mutual-aid pact apparently would not be made until the strike ended, according to a government filing by Albertsons on Tuesday.

In its quarterly filing with the Securities and Exchange Commission, the Boise, Idaho-based chain said it would not get any money under the pact “until the conclusion of the labor dispute.”

Albertsons also vowed to “vigorously defend itself” in the probe by Lockyer. Under a subpoena issued by Lockyer, the companies are supposed to give the attorney general a copy of the agreement by Dec. 22.

--- UNPUBLISHED NOTE ---

On February 12, 2004 the United Food and Commercial Workers Union, which had stated repeatedly that 70,000 workers were involved in the supermarket labor dispute in Central and Southern California, said that the number of people on strike or locked out was actually 59,000. A union spokeswoman, Barbara Maynard, said that 70,000 UFCW members were, in fact, covered by the labor contract with supermarkets that expired last year. But 11,000 of them worked for Stater Bros. Holdings Inc., Arden Group Inc.’s Gelson’s and other regional grocery companies and were still on the job. (See: “UFCW Revises Number of Workers in Labor Dispute,” Los Angeles Times, February 13, 2004, Business C-11)

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