Wall Street Is Chains’ Not-So-Silent Partner
When talks aimed at settling the Southern and Central California grocery strike resume, the supermarkets’ negotiators will have a staunch, if invisible, ally at the bargaining table: Wall Street stock analysts.
Throughout the bitter labor dispute, many analysts have supported the supermarkets’ effort to win wage-and-benefits savings from their union employees, even though the dispute could cost the chains $1 billion or more in combined lost sales.
The analysts have echoed the chains -- Albertsons Inc., Kroger Co.'s Ralphs and Safeway Inc.'s Vons and Pavilions -- in arguing that they need labor concessions to be competitive with discounters such as Wal-Mart Stores Inc., which plans to enter the California grocery market next year.
On Friday, the latest negotiating session broke off after the chains rejected an offer from the United Food and Commercial Workers union that would have reduced employer-paid health-benefit costs by an estimated $350 million over the term of a three-year contract. Talks aren’t set to start again until next year.
Enduring the strike by the UFCW is “one of the best investments food retailers could make,” one that “is likely to continue to pay off over a number of years,” analyst Mia Kirchgaessner of Sanford C. Bernstein & Co. wrote to the investment firm’s clients last month.
That does not mean analysts are clamoring for investors to buy the supermarkets’ stocks. Far from it.
For the time being, many have “neutral” or “hold” ratings on certain of the stocks, and others have outright “sell” recommendations on one or more of the chains.
For example, analyst Lisa Cartwright of Smith Barney has a “buy” on Kroger but a “sell” on Albertsons and Safeway. “At best, we see Safeway as dead money for now,” she wrote to clients last week.
Shares of Albertsons are up 4% since the dispute began, while Kroger and Safeway are down 8% and 13%, respectively. Even so, the analysts’ support of the stores’ negotiating stance probably has enabled the stocks -- which already were sagging before the strike -- to avoid being routed entirely by investors.
That riles the union.
“Many of them [analysts] are parroting the companies’ line,” said Sarah Palmer Amos, the UFCW’s director of collective bargaining. “The analysts are only looking at this from the side of cost savings, not at the revenue side.”
The union maintains that the strike and lockout will cost the three stores valuable market share and lost future sales, and that the analysts aren’t fully taking that into account.
“We do not believe the analyst community has provided investors with accurate information about the impact of this strike,” UFCW spokesman Greg Denier said.
Analysts have said that uncertainty about how long the dispute will last, and what it will ultimately cost the stores in dollars and market share, is one reason for their caution toward the supermarkets’ stocks. So too is the stores’ decision to stop giving analysts guidance about the chains’ future results because of the strike.
“The SoCal strike has become very costly to all of the big three” chains, analyst Jack Murphy of Credit Suisse First Boston Inc. said in a report last week, and a protracted dispute “is likely to make 2004 another year of earnings disappointment and share-price underperformance.”
Before negotiations broke off Friday, federal mediator Peter J. Hurtgen underlined the deep divisions between the sides. “We are dealing with particularly difficult issues,” he said.
Unable to reach a new contract, the union struck Vons and Pavilions on Oct. 11. The next day, Ralphs and Albertsons -- which are bargaining jointly with Safeway -- locked out their UFCW employees.
About 70,000 workers have been idled at 852 stores in Southern and Central California. It is the region’s first supermarket strike in 25 years. The key impediment is the parties’ clash over how much the companies should continue paying for the workers’ health-care coverage.
Some analysts are looking past the strike. Mark Husson of Merrill Lynch & Co. -- who recommends buying Kroger and Safeway shares -- wrote this week that “the stocks have stopped reacting negatively to bad news on the California front” and investors are focusing “on what will be an up year in 2004" for the chains after the strike is settled.
Regardless of their ratings on each stock, many analysts support the supermarkets’ bid to corral labor costs. That position is a matter of dollars and cents, not ideology, BB&T; Capital Markets analyst Andrew Wolf said.
“I definitely think it’s in their [the stores’] economic interest to get concessions” to better compete with Wal-Mart and other nonunion stores, Wolf said. “Do I have anything against unions? No. Why try to fight Wal-Mart with an unlevel cost structure? That’s why it’s economically imperative that they do something about it.”
Analysts have reasons besides labor expenses for not recommending the stocks. Among them: sluggish sales growth for the chains even before the strike, eroding profits because of price cutting, management gaffes at some chains and rising operating costs overall.
“Until we see a change in strategies or a marked improvement in the operating environment,” analyst Mark Wiltamuth of Morgan Stanley said in a report last month, “we intend to advise investors to avoid the group.”
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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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