Grocery Retailers Benefit from Lower Union Wages

I remember a quarter of a century ago when I was member of the UFCW's local 324 labor union. I was a journeyman grocery clerk, working for Alpha Beta, a division of American Stores (since swallowed up by SVU). At the time, I was well paid, with a base rate of $11.80 per hour, plus added compensation, such as triple time on holidays, time and half on Sunday's and night premium. There was even more, if you were bestowed the special honor of being the Key Carrier/ Person in charge during the night shift (you also got to wear the blue vest) you were paid a whopping $1.00 extra for your entire shift (Wow! an additional 12 cents an hour for the added responsibility of being in charge).

We had no scanners, ringing up the groceries on the cash register wasn't as easy, the cashier was burdened with separating the non food items from the food items, so sales tax could be manually computed. Have we ever come a long way! Today, grocery chains are trending more to self checkouts and computers work for a lot less than people, while never asking for coffee breaks.

It was a great job for me through high school and college. As a matter of fact, I liked it so much , that when I was about to leave in July 1984, to take my first "real" job, I asked the store manger if I could stay on for a while. He told me it would be better if I made a clean break. It was hard to leave, as I appreciated every facet of the job, especially the social aspects of it. I found it enjoyable, helping customers, and it was a great place to meet women (yes, I met my wife there).

I bought my very first stock at the age of 17, when I began having $15 per week deducted from my paycheck to acquire American Stores shares. I recall four or five years later my manager said the stock was positioned to skyrocket due to the success of its East Coast Acme Stores division's successful turnaround, but turned my nose up to his advice, thinking what does he know, after all, I'm the college graduate in finance. He was right, and I was wrong, as the stock skyrocketed tenfold over the next decade - unfortunately I had already sold it.

I learned a valuable lesson. The moral of the story is: it is dangerous to overestimate yourself while underestimating others. I guess I was just young and dumb. My experiences in the grocery business have had a profound effect on me and its nostalgia has prompted me to make the sector one of my favorites to invest in and follow.

Wage progression has been poor: Management has done a good job negotiating labor agreements with the union. The grocery chains have certainly came out ahead in this department.. The current top wage for a grocery clerk in Southern California is $17.90 per hour, which represents an increase of about 52% over the past twenty five years. If you do the math, you will determine organized labor has truly received the short end of the stick, as their pay has actually dropped significantly when you factor in the effects of inflation. Their average wage hike per year for the past 25 years has equated to about 1.5%, including the power of compounding.

If you adjust for inflation, UFCW 's workers are really earning less than they did 25 years ago when considering their reduced purchasing power. In 1984, the CPI was at 103, at the close of 2008, the index stood at about 215, meaning prices have roughly doubled. Inflation has accumulated to about 112% within the period, yet the UFCW wage increase of 52% has risen less than one half of accumulated inflation. In layman's terms, a worker 25 years later is making $150 a year versus $100, but now his costs have risen to $200, so in essence his purchasing power is $50 short.

In addition, management has also been effective in reducing member healthcare costs by allowing phrasing in the union contract which mandates members to begin paying a portion of their own healthcare insurance premiums. In addition, the contracts now include a stipulation creating a two tier wage system, with longer tenured workers grandfathered into their current wages while new employees are hired into a lower wage category.

White collar pay cuts: I recall in 1990, as a low level white collar worker in the aerospace business, being forced to absorb a 5% pay cut. At the time, I didn't mind it too much. My thinking was, it's much better to get 95% of my salary rather than nothing at all if I was to be laid off. Today's harsh economic environment warrants more white collar pay cuts, and surveys show 10% of Fortune 500 companies plan on some type of this action in 2009. After all, desperate times require desperate measures, and in the scheme of things, a pay cut of 5% isn't going to put too many in the poorhouse. FDX and CAT have already announced this action, and it can be a very good thing, as both their stocks rallied on the news. The employees will probably more than make up for it by the appreciation they sustain in their companies' share price.

Union position weakening: Due to the poor economy and the continued threat of Wal-Mart (WMT) taking market share away from traditional grocers, the unions will have less bargaining power in the future. This fact should enable management to obtain even more favorable contracts, resulting in labor concessions, ultimately benefiting the entire industry .

Shareholder activism: As a shareholder, you should get more involved with your company by rolling up your sleeves and trying to make a difference. One avenue to accomplish this is by taking an activist role, such as submitting a shareholder proposal for vote at its next annual shareholders' meeting. It is imperative you follow the guidelines set forth in SEC Rule 14a-8, "Proposals of Security holders."

Potential proposal suggestions could be (1) eliminating dual classes of voting shares, (2) abolishing poison pill provisions, (3) cutting executive/white collar wages, (4) requesting stock buybacks and cash dividends representing at least 50% of a company's free cash flow, or (5) the hiring of an investment banker to improve shareholder value by exploring avenues such as the potential sale or spinoff of a division or special cash dividend. Remember Gordon Gecko's legendary speech to Teldar's slew of pice presidents? He did the right thing by calling out the company's gross inefficiencies. Be a "Gordon Gecko" and take action. It could result in a very happy ending.

Summary: Union wages are well under control in the grocery industry, but white collar salaries need to be trimmed to make Grocers more competitive against the Wal-Marts and Costcos (COST) of the world. Exert pressure on management to consider the idea of getting leaner and meaner through the aid of pay cuts. Submit other relevant proposals for vote that will benefit the share price, after all, it's the Board of Directors' fiduciary responsibility to keep their shareholder's best interests their overriding priority. They just might need a little prodding from time to time.

Disclosure: Long SVU, GAP, WINN, SWY, and KR.

Comments

[User 336678:]

I work for a big grocery chain and I think there is a terrible inequity going on. While I most certainly don't want anyone to lose their job, I think it is ridiculous how many mid evel office posistions there on. Its time to cut the fat! Its not 1975 anymore. We don't need pencil jockeys any more, everything is done on computers. Why is that there is more help in the area zone office than in the store itself. If all the zone staff were to go on vacation for a week the stores would not miss 1 sale because of it. Its time to cut the fat! Enough is enough. I overheard in the store that the produce specialist for my zone purchased his new truck from his gasoline expense account. Now how is that suppossed to make me feel?

Jan 13 03:56 PM

[mrhonesty:]

Mid level management isnt what needs to be cut..Lets check out Safeways UPPER management and then tell me where fat needs to be trimmed..A corporate jet huge bonus for the higher ups and then a mini raise for others??..When i worked as a stocker many many years ago i made as much as they start kids off at in the stores now. Then look for service at a store?? All you will hear is "gotta watch my budget" cant afford more workers..Then the always popular out of stocks...cant have too much on the shelves,someone may buy it hahahaha..hey little Stevey Burd give back some of your millions,then you can complain about money

Jan 13 05:01 PM

[kk73:]

AS a dept mgr for over20yrs Ive seen alot.The same things happen year after year. loads of help in the summer@basically zerohelp in the winter. The boss is happy when I call in sick as it helps cut the payroll.Its feast or famine.

Jan 14 05:51 AM

[douggman:]

The grocery business in Southern California(local 324) is basically being held up on the backs of the older higher paid workers.When these folks quit or retire the big 3(Vons,Albertsons,Ralp... going to have an EXTREMELY hard time staying open.The wages and benefits for the new hires is so low that the only folks that take the jobs are druggies,misfits and folks that just cant add 2+2.The new hires are (generally speaking) rude,clueless,lazy and are constantly late or"sick".I've been in the industry for 32 years and used to love my job,but now am just counting the days till I can get out.So sad.The big 3 think they are saving money-and they are(short term).What they are really doing is flushing their companies down the drain!I wouldnt buy any of their stocks!!!!!

Jan 17 04:52 AM

[rickjames:]

well see i work for supervalu as of right now i have been working for them for about 10 months, the union sucks i mean a 10 cent pay rasie every 6 months who cares when the managers at the store i work at make 21 an hour, compare that to the little 7.95 i am making, they have too give all the workers a min of 12 hours or less if they request one day off, s a 12 hour check at 7.95 is about 95 a wee before taxes, after taxes it is 75 a week, then minus anything you put in the bank so really you dont have alot of money, and coming by a 16 hour week is pretty hard ow to just barely make 100 bucks, also that with one 6 month pay raise and seniority over others, but all in all shop at a local supermakert not at walmart or a big discount food place, sure the prices might be a big higher but at least you are putting your money too a good cause

Jan 27 11:46 AM