Will Safeway's CEO Get Locked Out?

Analysts say that when grocery employees finally do come back, Burd may have to go

For four months now, three national supermarket chains -- Safeway (SWY ), Albertson's (ABS ), and Kroger (KR ) -- have been locked in a showdown with 71,000 unionized workers in southern California.

But as the strike that began on Oct. 11 went before a mediator, it's beginning to look as if the industry's aggressive stance could backfire, maybe even leading to the ouster of Safeway CEO Steven A. Burd, who has led the campaign for the three companies.

Already, the dispute has inflicted serious damage on the companies, contributing heavily to a $696 million loss in Safeway's fiscal fourth quarter, which ended Jan. 3. Equally harmful, Burd's bold attack has enraged employees, prompting Wall Street concerns that morale woes could persist long past the dispute's resolution. "There are people on the Street who want a change" in management, says Stephen C. Chick, an analyst at J.P. Morgan Securities, (JPM ) which on Feb. 2 downgraded Safeway shares to a sell. Burd declined requests for an interview. In response to inquiries from BusinessWeek, Safeway directors said they "fully support Burd and the approach he and his management team have taken with the labor dispute."

The industry's goal is to bring its health-care costs more in line with those of nonunion Wal-Mart Stores Inc. (WMT ). The retail giant's medical plan covers less than half of its workers, and its sales clerks earn less, on average, than the federal poverty line. To match that, Burd and his counterparts want to shift to a 401(k)-style health plan that would require current workers to bear part of the burden of future medical inflation. They also want to cut contributions for new hires' medical coverage to just $1.35 per hour worked, the union says, vs. $3.85 now paid for current workers -- a 65% cut. All this has infuriated members of the United Food & Commercial Workers (UFCW). "All I want is medical insurance to take care of my baby. Is that so much to ask?" says Cynthia Hernandez, 27, a Safeway striker and single mother.

The irony is that the grocery workers might not have dug in their heels so much -- five UFCW locals have exhausted their strike funds -- if Burd had been savvier about playing them off against new hires. Since the industry's turnover averages roughly 10% a year, its new-hire demand could all but take Safeway off the hook for health coverage for up to one-third of its workforce within the next three years by attrition alone. If Burd had focused on this and asked less of current workers, they probably wouldn't have fought so hard for employees who have yet to be hired.

BRIEF PRAISE. Burd's miscalculation comes on top of several others in recent years. The former management consultant, 53, won accolades when he took over 12 years ago for leveraged buyout firm Kolhberg Kravis Roberts & Co., which had bought the struggling grocery chain in 1986. (It went public again in 1990, and today KKR owns no shares, although four KKR directors still sit on Safeway's board and collectively own 3% of the stock.) Burd had slashed costs by shutting underperforming stores and introducing higher-margin private-label items.

But the resulting turnaround faltered after Burd shelled out $3.6 billion in the late 1990s to buy two regional chains, Dominick's Finer Foods Inc. and Randall's Food Markets Inc. Their sales plummeted after Safeway narrowed product selection and introduced private-label goods unfamiliar to locals. Safeway ended up taking more than $1.2 billion in writedowns in 2002, when it lost $828 million on revenues of $32 billion. Last year, the losses lessened, but still hit $170 million. The bad news cut the stock price nearly in half since early 2002.

Safeway might still come out ahead if it can settle the walkout quickly. After no talks for weeks, the two sides resumed bargaining on Feb. 11, so a resolution could come soon. If the industry gets much of what it wants, well-paying grocery jobs in the U.S. may become a thing of the past. Even so, Burd might have to go, if only to restore morale among a resentful workforce, says Morningstar Inc. analyst Mark Hugh Sam. In that case, Burd would have won the perfect Pyrrhic victory.

By Ronald Grover in Los Angeles and Louise Lee in San Mateo, Calif.

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