Safeway Faces Brawls In Every Aisle

Juicy New York strip steak. Mouth-watering filet mignon. Just a couple of years ago, those were the kinds of fancy cuts Safeway Inc. trumpeted on the front page of its weekly newspaper inserts. But times are tougher now, and the featured meats are more mundane. Ribs, chuck roast, and just plain hamburger are what the giant supermarket chain is pushing to lure recession-weary shoppers into the store.

And boy, does Safeway need to attract customers. Sales in its stores open 12 months or more have been off all year (chart). Operating earnings fell 15% during the first half, to $223 million, on a 1.4% sales drop, to $6.8 billion. And on Aug. 25, Safeway said it expected third quarter profits to be off 50% from the same period last year. Just about every U.S. supermarketer is suffering in the tepid economy. But Safeway, with more than a third of its business in hard-hit California and western Canada, is hurting more than most. The heavily indebted chain, based in Oakland, Calif., is up against "the biggest challenge we've faced" since its controversial 1986 leveraged buyout, says longtime CEO Peter A. Magowan.

PRIME TARGET. To weather the storm, Magowan, 50, is pushing for tighter cost controls. That's tough for a company already whipped lean from a post-buyout restructuring that included huge asset sales and cutbacks in middle management. Magowan is looking at everything from centralizing more of its produce-buying to standardizing its locally produced newspaper inserts. But his biggest cost-cutting target is labor, representing 51% of operating costs. Magowan is taking a tough stance bound to make for dicey negotiations with Safeway's unions.

A big test is coming this month. Contracts are up for renewal in Safeway's Eastern region, centered in Washington, D.C. The United Food and Commercial Workers locals there have been operating under a two-tier wage scale since 1983, with top clerks paid $12 to $14 an hour. In negotiations, Magowan will push for a third, lower tier for new hires and seek to stretch out periods between raises. He'll also try to change work rules that, for instance, prevent baggers from returning leftover merchandise to shelves, reserving that task for higher-paid checkout clerks. If he wins in Washington, Magowan hopes to spread the changes to all Safeway stores.

Union officials say they aren't about to budge. For leverage, Magowan is raising the specter of competition from warehouse clubs, such as Price Club and Costco Wholesale Corp. The union's response: Unionize the competition, too. So far, the unions have had limited success with the mostly nonunion warehouse clubs. But William J. Olwell, the UFCW's collective bargaining director, warns: "We're not going to give up without a fight."

TEAM SPIRIT. It's uncertain whether either side has the stomach for a long battle. Both have been known to give a little. When Safeway opened a new high-tech warehouse in Tracy, Calif., earlier this year and refused to transfer union workers from the warehouse it was closing, the Teamsters boycotted for five weeks. Safeway later rehired the employees, and the union agreed to arbitration for benefits and work rules.

Whatever happens on the union front, Magowan's concerns about warehouse clubs are genuine. The chains are rapidly improving their fresh-food offerings, eating fast into market share, and gaining customer loyalty. Along with low food-price inflation, they put a drag on Safeway's financials.

Wall Street has noticed. Safeway's stock, sold to the public in 1990, is at 10 3/8--off 52% from its April, 1991, peak. By contrast, rival Albertson's Inc. has fallen 16% in the same period. Analysts think Safeway's $2.9 billion debt has investors especially spooked. Magowan argues that they need not be. Safeway's $867 million in cash flow, he says, is nearly three times what's needed to cover its debt.

Instead of paying off debt, it is spending $600 million a year remodeling existing outlets and opening new ones. Changes include a better product mix to attract value-conscious consumers. For example, Safeway stores will be stocking some of the more popular warehouse items, like restaurant-size mayonnaise and 15-pound boxes of laundry soap.

But to Magowan, whose grandfather founded the supermarket chain in 1926 and was among the founders of Merrill Lynch & Co., labor changes are key. To compete with nonunion shops, he figures it's a choice between trimming labor costs or jobs. And cutting jobs, he says, would mean long waits at the checkout. With plenty of alternatives for cost-conscious shoppers, that's the last thing Safeway needs.