Labor Pains Complicate Albertsons’ Prognosis

Two years ago, an ailing Albertsons Inc. tapped Lawrence Johnston as its first chief executive from outside the company’s ranks, and Johnston launched a massive overhaul.

The supermarket chain was struggling to digest its $9.5-billion purchase in 1999 of American Stores Co., which gave Albertsons Lucky markets and Sav-on drugstores and a much stronger presence in Southern California.

Johnston, a former General Electric Co. executive with no experience in the grocery business, rolled out several initiatives. Among them: a bold plan to slash $750 million from annual costs and more price cutting to match rivals and maintain market share.

But Albertsons still has a long way to go. The company’s stock has lost one-third of its value since Johnston, 55, took the helm in April 2001. Its sales growth remains weak, earnings are down, and its lower prices are eating into profit margins, which are razor thin in the grocery business. Citing those concerns, Moody’s Investor Services Inc. downgraded Albertsons’ long-term debt last month.

And despite Johnston’s cost- cutting efforts, many of Albertsons’ expenses -- mainly its workers’ health-care and other benefits costs -- keep going up.

Which is why Johnston and Albertsons find themselves smack in the middle of the supermarket strike, now entering its fourth week, in Southern and Central California. Kroger Co. and Safeway Inc. also are involved, but the strike’s timing is especially uncomfortable for Albertsons, which has yet to overcome all the kinks involved in merging Lucky and Sav-on into the Albertsons family.

Albertsons “is least well-prepared to go forward,” said Merrill Lynch & Co. analyst Mark Husson in a recent report, given the company’s “weaker market shares [and] brand loyalty than either Kroger or Safeway.”

Along with Kroger, the parent of Ralphs supermarkets, Albertsons locked out its workers in a show of corporate solidarity after the United Food and Commercial Workers union went on strike against Safeway, owner of Vons and Pavilions, on Oct. 11. About 70,000 workers at 859 stores are affected.

A key dispute in the strike is the grocers’ demand that workers start paying for part of their health insurance. The supermarkets say they must have relief in paying those costs if they hope to keep prices low enough to compete with the non-union mass merchandisers, including Wal-Mart Stores Inc., that are pushing deeper into the grocery business.

Johnston and other Albertsons executives declined to be interviewed, but people familiar with their thinking say Albertsons, like the two other chains, is willing to sacrifice near-term sales at its Southern California stores to win long-term savings in its health-care costs.

Those lost sales are adding up rapidly. Albertsons is losing $34 million a week, Husson, who has a “sell” rating on Albertsons’ stock, said in a report last week. The three supermarket companies are losing a combined $131 million a week, he estimated.

A shift in the union’s tactics Friday might inflict more damage on Albertsons and Safeway. The UFCW said it was removing pickets from Ralphs -- to assist inconvenienced consumers who have been honoring the lines, the union said -- but not from the two other chains. They could feel a deeper pinch as their regulars are free to shop at a picket-free Ralphs.

But an Albertsons spokeswoman, Stacia Levenfeld, said the company would not try to reach its own contract with the UFCW. Albertsons “has no intention of striking a deal different from” Kroger or Safeway, even though it is free to do so, Levenfeld said.

Albertsons has about 16% of the Southern California supermarket business, as does Kroger, which owns Food 4 Less in addition to Ralphs, Husson estimates. Safeway’s Vons and Pavilions lead the group with 24% of the market, he says.

Figures from research firm Trade Dimensions International in Wilton, Conn., show that each chain has its strengths in certain counties. In Orange and San Diego Counties, Albertsons is the second-biggest operator behind Ralphs and Vons, respectively. But Albertsons does not have the top share in any of the major Southern California counties, figures show.

Albertsons also stands out because, unlike Ralphs and Vons, it does not offer “club” or “loyalty” cards in Southern California that provide discounts to returning shoppers. The company prefers to promote its prices as being routinely low, without the cards.

With 2,305 stores in 31 states, Albertsons is the country’s No. 2 supermarket chain by revenue, behind Kroger, with sales last year of $36 billion. The chain was founded by Joe Albertson in 1939, when he opened a single grocery store in Boise, Idaho, where the company still has its headquarters.

Besides the Sav-on drugstores, the company also operates stores under names such as Jewel-Osco and Acme. All of its Lucky supermarkets were converted to Albertsons stores. There are 447 Albertsons food stores in California, including 259 affected by the strike and lockout. The Sav-on stores are not involved.

When Johnston was plucked as CEO, he was a veteran manager at GE. He had been president of GE’s medical systems group in Europe and was heading its major-appliances group when Albertsons came calling.

He brought with him some familiar GE tenets, including that Albertsons strive to be No. 1 or No. 2 in its major markets and that under-performing assets be fixed or sold. Indeed, Albertsons has shed more than 160 stores since he arrived.

Yet Albertsons’ earnings are still sliding. In its fiscal year ended Jan. 30, Albertsons’ profit was $485 million, down 3% from $501 million the prior year and down 36% from $765 million in its fiscal year ended Feb. 1, 2001.

The trend has continued this year. In the six months ended July 31, Albertsons’ profit from continuing operations -- and before an accounting-related charge -- tumbled 30% from a year earlier, to $334 million. Sales were little changed year over year, at about $18 billion.

But in the latest quarter, Albertsons also saw a 1.3% decline from a year earlier in “identical-store sales,” which are closely watched because they exclude new, closed and replacement stores. It was the fifth straight quarter in which Albertsons reported such a drop.

Safeway and to a lesser extent Kroger are struggling with some of same problems afflicting Albertsons, such as the weak economy and low inflation that makes it tough to push through any price increases that might swell profits. Yet some analysts still see Albertsons as the weakest of the trio financially and perhaps with the most to lose from the strike and lockout.

Albertsons shares gained 21 cents Friday to $20.29 on the New York Stock Exchange.

The company’s per-share earnings growth also lags behind those of the two other chains, and “it has fewer loyal primary shoppers than Kroger or Safeway, and its price image is weaker,” Husson wrote.

Yet Albertsons’ effort to be a low-price leader also carries risks, Moody’s said when it downgraded the company’s debt. The strategy “has not yet generated an increase in traffic ... sufficient to compensate for the lower revenues from lower prices,” Moody’s said.

Still, analysts give Johnston high marks not only for his cost-cutting plan but also for remodeling and closing many tired-looking stores, generating more cash flow, smoothing the culture clash among Albertsons, Lucky and Sav-on, providing more ethnic groceries in selected cities and upgrading the technology throughout the company.

Johnston, by coming from outside the grocery business, “brings a creativity and flexibility that is rare in the industry,” analyst Robert Campagnino of Prudential Securities said in a recent report. But Campagnino added: “Management will need every bit of that creativity as it attempts to turn around a company that we see as lacking critical share in its core markets.”

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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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