There’s a long list of retail troubles in California these days. Two lawsuits charging Safeway Stores with mismanagement came in the midst of a long strike by United Food & Commercial Workers’ against Safeway. Safeway wants to eliminate health-care benefits so it can compete against Wal-Mart, which plans to open 40 Supercenters in California by 2008.
At the same time, a handful of cities have banned big-box stores to keep Wal-Mart Supercenters out. That effort remains contentious this year as San Diego and Los Angeles consider bans and Wal-Mart seeks community support to repeal current bans.
The strike and the superstore bans have repercussions for retailers and packaged goods marketers nationally, as grocers and local governments push back against Wal-Mart’s dominance. If grocers jettison traditionally generous healthcare benefits, they can better compete with Wal-Mart on price. But if unions can keep benefits in place, they remain strong and eventually could pressure Wal-Mart to accept union labor. A resolution on either end — or, more likely, somewhere in between — affects how grocers will negotiate with CPGs on merchandising and trade promotions.
Two pension funds filed separate civil suits against Safeway in November, alleging mismanagement. The suits, filed in San Mateo County Superior Court, came six weeks into the UFCW strike that began Oct. 11 and, as of press time, continues.
The Pinellas Park General Employees’ Pension Fund and the Pompano Beach Police & Firefighters Retirement System allege that Safeway’s executives and board mismanaged supermarket chains that Safeway bought (primarily by centralizing operations), then misled investors about those chains’ integration.
“There’s no merit to either suit,” says Safeway spokesperson Brian Dowling. “We believe the lawsuits are part of a union effort to discredit Safeway.”
Rivals Albertson’s and Ralphs (owned by Kroger Co.) locked out UFCW workers when the strike began against Safeway’s Vons stores, and negotiated alongside Safeway with UFCW leaders. Talks broke off in early October, then resumed briefly in December. Picket lines expanded to northern California and Washington, DC, Safeway stores.
Any precedent set in California is likely to roll out to all Safeway’s 1,487 stores nationally and could lead other grocers to follow suit.
Safeway also resumed wrestling with Chicago-area unions after taking Dominick’s Finer Foods off the block in November because its buyer couldn’t agree on a contract with the UFCW. Safeway named Randall Onstead president of the 113-store chain; he had been chairman-CEO of Randall’s Food Markets, which Safeway bought in 1999, and has consulted for Safeway since.
In November 2002, Safeway kept unions from striking against Dominick’s in part by agreeing to sell the chain to a union-friendly buyer. Safeway said it had a buyer in July; in August, losing bidder Yucaipa Cos. filed suit, alleging that Safeway passed over its $350 million bid (with union approval) in favor of a smaller offer. Yucaipa had agreed to help Safeway negotiate with union workers as part of its bid. Safeway filed a counter-suit; both lawsuits are still pending.
Packaged goods marketers already feel the pinch from the California strike, with sales at No. 2 grocer Safeway reportedly down as much as 40% in some stores during the strike. “Where do you go to get that volume back?” asks Ken Harris, partner with Wilton, CT-based consultancy Cannondale Associates. The strike “enhanced an already tough retail environment. The more attention diverted from selling groceries is a bad thing.”
Seattle likely will be the next battleground, with labor costs rising there and Wal-Mart poised to enter, Harris adds.
A wall against Wal-Mart
California grocers’ best allies against Wal-Mart may be municipal governments. Oakland’s city council banned stores over 100,000 feet in October, specifically to block Wal-Mart Supercenters. This month San Diego’s city council will consider a ban on stores over 130,000 square feet with 10% or more of sales from food or other non-taxable goods. Los Angeles is considering a similar ban.
Wal-Mart collected signatures for a March 2004 referendum to repeal a June ban in Contra Costa County. Wal-Mart also collected signatures for a referendum in Inglewood, but the city council repealed the ban before it went up for citizen vote.
“These ordinances are motivated by organized labor and competitors to limit competition and protect their market share,” says Wal-Mart spokesperson Pete Kanelos. “The choice of consumers is not to let government limit their shopping choices.” Wal-Mart has 140 standard-sized stores in California. About 36 cities and counties nationally have ordinances that limit store size.
“There are four things that can bring Wal-Mart down: Unions, the government, lawyers and international markets,” says Harris. “Wal-Mart is being challenged on all those fronts now.”
Botched promotion haunts Ralphs
Ralphs Grocery Co. is defending itself against a class-action lawsuit over its botched Great Escape promotion that broke in July. Ralphs offered a two-night hotel voucher for Ralphs Club shoppers who spent more than $400, but many consumers claim they were unable to redeem the vouchers.
Ralphs canceled the promo in October when it was overwhelmed by more than 300,000 participants. Those customers got “reservation redemption certificates” asking them to choose three travel dates for a Marriott, Marriott Courtyard or Ramada Inns hotel in one of 38 cities. The suit claims that more than 50,000 got a letter saying Ralphs’ travel fulfillment service, Travel Services, was unable to fulfill any of the dates. Ralphs then offered shoppers $50 and $100 discounts at Marriott or Renaissance hotels on the condition that shoppers sign a waiver against suing the grocer.
Ralphs’ offer was, in essence, a premium, says John Feldman, partner with law firm Collier Shannon Scott, Washington, DC. Ralphs should have had enough to fill anticipated demand, and clearly disclosed any limitations to use the vouchers. Over-redemption insurance may have prevented the cancellation, Feldman adds.
Ralphs made another mistake by including a waiver with its make-good offer, says Feldman. Such a waiver makes bad p.r. worse. Ralphs didn’t return calls for comment.
Mass Merch, Club Stores Gain Favor
Non-grocery retailers are gaining ground in packaged good marketers’ esteem. Five of the top 11 retailers in Cannondale Associates’ PoweRanking survey are mass-merchandisers, club stores or drugstores. Wal-Mart Stores and Target Stores hold the Nos. 1 and 2 spots, followed by Kroger, HEB and Safeway. Club store Costco ranked No. 7; mass-merchandiser Meijer ranked No. 9; and drugstore chain Walgreens was No. 11.
Procter & Gamble continues to lead the manufacturers’ list.
Each year Cannondale asks retailers and manufacturers to rate each other on marketing and business fundamentals. P&G and Wal-Mart consistently top the list. P&G’s composite score was 38%, up five percentage points, and Wal-Mart’s composite was 76% (up 3.4 percentage points). Respondents rate marketers on eight skills; Cannondale scores those mentioned in the top three, then combines scores for its composite.
Target moved to the No. 2 slot from No. 4, and Safeway Stores fell 12 percentage points. Respondents predict that Wal-Mart (mentioned by 99%), Kroger Co. (50%), Target (37%) and Costco (23%) will be power retailers in 15 years.
Among marketers, No. 2 Kraft earned a composite score of 35%, with General Mills at 22% (up 2.4 percentage points), Coca-Cola at 15% and Pepsi-Cola at 14%. New to the top 10 are No. 7 Nestlé (9%) and No. 10 Johnson & Johnson (7%). Nabisco and Unilever fell off the chart.
Retailers ranked Kraft tops for best combination of growth and profitability (mentioned by 30% of respondents) and most innovative marketing programs and approach (31%). General Mills scored 23% and 24%, respectively.
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