Supermarkets Can Blame Themselves

In business, as in football and magic, misdirection is often the key to success. That’s especially true when you’re trying to rationalize lousy performance, which is why 9/11, national tragedy that it was, has been such a godsend for corporate managements looking for a scapegoat for their own poor records.

This phenomenon often emerges prominently during labor negotiations in service industries, where labor costs tend to be a huge component of overall expenses. By convention, employers facing straitened circumstances insist on the need to rein in their payrolls, which justifies playing hardball with the unions. Also by convention, the missteps and failed strategies that may have brought the employer to the brink are conveniently forgotten.

The labor strife currently roiling Southern California’s supermarket business has comfortably followed much of this script. Safeway Inc.’s Vons stores (where the United Food and Commercial Workers are on strike), Albertsons Inc. and Kroger Co.’s Ralphs (where the UFCW is locked out) all contend that they have to hold down such sharply rising costs as employee health care and wages to remain competitive in a dramatically changing retail environment.

Chief among their challenges, the employers say, is the need to gird for a coming battle with Wal-Mart Stores Inc., which has turned itself into the nation’s leading food retailer in part by paying employees substandard wages and mercilessly squeezing such benefits as medical insurance. Wal-Mart has announced plans to start selling groceries in California.

The companies say that Wal-Mart -- along with other specialty retailers such as Target Corp., warehouse stores such as Costco and nonunion markets such as Trader Joe’s -- threatens to cut deeply into their shares of the regional grocery market.

“There’s been a huge change in our competition over the last four years,� Sandra Calderon, a Vons spokeswoman, told me. “There’s been a huge influx of nontraditional retailers.�

The supermarket companies have all been warned by Wall Street to get their costs under control or risk seeing their stocks shunned like sour milk. But other than Kroger, whose management appears to be widely admired by investors, the companies have been struggling with self-inflicted wounds. Safeway has been dealing for years with the results of a series of mismanaged acquisitions it made across the country and with the aftermath of a 1986 leveraged buyout, which saddled the company with debt. Albertsons, whose operational systems are less efficient than those of its rivals, has been a chronic also-ran behind its two big rivals in many cities where all three compete.

These ills hobbled Albertsons and Safeway when the economy turned down. By some measures, in fact, most of the companies’ losses of revenue over the last couple of years can be blamed on the recession, which discourages the purchase of high-profit goods such as fine wines and specialty foods. “If you look at comparable-store sales among food retailers today,� Mark Husson, a supermarket analyst for Merrill Lynch, told the trade magazine Supermarket News last month, “if they’re down 2%, I think 1.5% of that is due to the economy.�

That suggests that the Wal-Mart issue is merely a convenient stalking horse for labor concessions the supermarkets would be asking for anyway. Although Wal-Mart has announced plans to create 40 California “supercenters,� the behemoths that include grocery departments, none has been built in the state and the schedule for a rollout is murky.

There’s some question of how deeply 40 supercenters could cut into the market shares of three chains that operate 1,546 California supermarkets among them. Husson estimates that Wal-Mart’s plans might gain it a 1% share of the state market over the next four years. Any of the three chains could cede much more share than that simply by continuing some of the management policies they’ve been pursuing for a decade.

Then there’s the reality that some characteristics of California’s much-maligned business climate might even narrow the cost advantage enjoyed by cheapskate retailers like Wal-Mart. Take the notorious health-care mandate signed by Gov. Gray Davis just before the recall. Assuming it survives a court challenge, the new law would require big employers to offer workers health insurance at reasonable cost and limit the percentage of the total cost they could force employees to pay. Wal-Mart may also face a lot more resistance from local communities in California than they have in much of the rest of the country.

It may be true that the union, in insisting that the employers continue to pay 100% of their members’ health plans and shoulder an open-ended financial commitment, is demanding a benefit that has become unrealistic. (Of the people I know who are unsympathetic to the supermarket pickets many have had to pay a share of their health plans for years.)

But the unions do raise a reasonable issue in asking why, when a competitive playing field is tilted one way or another, it’s always necessarily to grade the field down to the lowest level. That’s an especially germane question when the issue is health care.

Wal-Mart has won fame recently for its innovative ways of saving medical costs. The company says it spends about $3,500 per covered employee on health care, which is well below the average in the wholesale/retail business of more than $4,800. That “does not mean we provide a lower level of coverage,� says Sarah Clark, a company spokeswoman at its Bentonville, Ark., headquarters, but that it extracts more “bang for the buck� from medical suppliers by, in essence, throwing its huge weight around.

But the company’s policies effectively discourage many eligible employees from signing up for its plans. The company candidly acknowledges that as many as 40% of its employees get coverage elsewhere, including via spouses, parents or public programs such as Medicare.

Wal-Mart workers pay about a third of their plans’ total costs, compared with nationwide averages cited in the latest Kaiser Family Foundation annual health-care survey of about 25% for family plans and 15% for individuals. Wal-Mart excludes coverage of many routine medical services and procedures, including contraceptives and child vaccinations. Instead, Wal-Mart stresses its commitment to covering “catastrophic� health problems. It notes it has paid for more than 300 organ transplants costing more than $1 million each over the last five years, for example. But such catastrophic problems strike a tiny percentage of employees. At 60 per year, for example, organ transplants were required by one-hundredth of 1% of Wal-Mart’s roughly 500,000 insured employees.

By steering coverage toward major procedures over routine benefits, which would be used by a huge percentage of employees, Wal-Mart has turned a couple of decades’ of health-care orthodoxy on its head.

One of the few laudable elements of the HMO revolution was its emphasis on preventive care. Much of this commitment failed to advance far beyond lip service but there was surely sound logic behind the idea that by promoting such things as childhood immunizations one could avoid the greater cost of treatment, the lost work hours for parents and the chance of death or lifelong debility incurred when children contracted measles, rubella, chicken pox and so on. Large deductibles discourage the regular checkups that can catch conditions before they grow into the kind of ailments that require, say, organ transplants.

The HMO system of preventive care, however, only pays off years down the line. The health plans reasoned that the money they were spending on prevention programs for their younger members would only mean money saved for whatever competitor served the same patients, 20 or 30 years later. So they lost interest.

Somewhere in there may lurk a clue to Wal-Mart’s thinking. The company says its employee turnover is about 45% a year. It’s unclear whether this is the reason for its benefit policies, or the result: whether its pay and benefits make Wal-Mart jobs relatively unattractive, or the company’s awareness that most workers won’t be sticking around for long justifies its shunning health policies that benefit more people over the long run.

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at [email protected].