To those who believe that unions are nostalgic relics and that America must support it’s massively over indebted businesses at all cost, consider the curious logic of Wall Street food and drug analyst Mark Husson for Merrill Lynch Global Securities. It is his report that was so often quoted in the press as evidence that there is simply no other way for supermarkets stave off the Wal-Mart threat than phasing out full-time employment and shafting workers on benefits. Husson’s report is no doubt quoted for its deft cliché-ridden pithiness: “Wal-Mart is soon going to be the lowest common denominator in the food business, and everyone has to move towards that level.”
What does Husson believe Wal-Mart’s main competitive advantage is? Is it the computer inventory system that is so efficient that entire books have been written about it? No. Is that Wal-Mart has leveraged its market position to demand the extortionistic, anti-competitive, but completely legal “vendor allowances”-the kickbacks manufacturers pay for their products to remain on these shelves? Wal-Mart doesn’t use them. It is their one anti-monopolistic policy. The supermarkets, on the other hand, received so many of them in 2001 that they surpassed total profits. The kind of extortion, however, did not even help the supermarkets’ competitiveness. Husson explains Wal-Mart is the once and future king for one reason: insidiously low wage costs.
But if this is Wal-Mart’s main advantage, then the solution is self-evident: more unionization.
The UFCW has lobbied to keep Wal-Mart out of local municipalities such as Pasadena. Rick Icaza, head of the UFCW, successfully ran his own candidate for city council in one case. These efforts have kept Wal-Mart out of some towns entirely. When they haven’t, they’ve still managed to win concessions. Why aren’t the supermarkets harnessing this energy? Why aren’t they joining the union’s efforts to force Wal-Mart to engage in First World labor practices? Why aren’t they attempting to channel the world-wide anti-Wal-Mart backlash rather than whole-heartedly embracing their rival’s tactics?
As Husson said, “All employers need a level playing field.” At some point, “you have to make a violent change to get a chance at surviving.” He, of course, was advocating for fewer unions, but the idea of universal unionization in the retail sector would “level the field” not just against Wal-Mart, but also the smaller supermarkets like Trader Joe’s and, Super A, and Costco, most of which are currently “unsullied” by union labor.
The supermarkets won’t adopt this course because they are not really worried about Wal-Mart. On September 3, 2003 at Goldman Sachs Conference, Safeway CEO Burd even admitted as much:
“For us, it’s not the supercenters, it’s not the clubs that are creating the soft sales that we had in 2002 and certainly in the first part of 2003. It’s really predominately the business slowdown that has affected our top line sales growth and not either the supercenters or the clubs that we have competed with, really, for decades.”
Corroborating Burd’s position are two recent analyses that suggest that dominant supermarket chains can actually benefit when Wal-Mart comes in by effectively dividing up the market. A Bernstein Research analysis of 339 markets found that, “If a company has a dominant position, even if Wal-Mart enters, the supermarket gains share in 71% of the cases”
A Deutsche Bank analyst came to a similar conclusion in a report on February 11 of this year:
“We believe that traditional supermarkets that focus on convenience and service can coexist with supercenters that focus on price and assortmentWe believe that over the next 18 months, Safeway should be the conventional operator that is the least affected by the rollout of the Wal-Mart’s supercenters…While we believe that in the longer term Safeway will inevitably feel the pressure from Wal-Mart’s expansion in California and other markets, a No. 1 position in California with a 24% market share should allow the company to better withstand competition from discounters relative to the other retailers. We are certainly not implying that Safeway’s profitability over the next few years will not be affected by the growth of discount formats on the West Coast. We are simply saying that Safeway will be better able than others to establish duopoly type of situation with discounters in a large number of markets on the West Coast. As an example, Safeway holds the No. 1 position in the following markets in California: San Francisco-Oakland (41% market share), Santa Barbara-Santa maria (30%) or San Diego (30%). … Taking into account that the company’s capital spending will be mostly allocated toward in-market store openings, Safeway’s market share in the above markets could evolve favorably, despite the increase of discounter penetration.”
This report is important for two reasons. First, it goes to explain tactics supermarkets could use to remain competitive. Second, it reveals that labor is not the problem.
So what about the market share losses that supermarkets have reported recently? Are they lying? No. The same analysts supply the clue. The Deutsche Bank report says that the dominant supermarket in each region should be emphasizing its difference from the Wal-Mart food stores. They suggested enhanced delis, full-service butchers, more specialty items, more higher-end products, even better lighting, anything at all to enhance the shopping experience. None of these will be found in Wal-Mart. The Wal-Mart customer is simply not the same as the Safeway customer.
But Safeway failed to remodel their stores as quickly as their competitors. They have been slow in making niche-adjustments. In the midst of Safeway’s timidity (perhaps management was simply preoccupied with filing all those insider stock trades), several smaller chains have stepped-up.
Gelsons, a chain specializing in the high-end, quickly expanded through Southern California, did so without acquiring debt, and without compromising its unionized workers. The slow economy that Steve Burd cites did not stop this Chardonnay-class retailer.
The supermarkets simply have not transformed quickly enough. In order to make up for the lost time, the Burd has focused on the unions with the single-mindedness of thief blowing a safe. His repeated mantra about rising healthcare costs is a PR move, chosen because healthcare is complicated, dull, and frustrating. Everyone knows it is expensive, but knowing why that is the case in the US and not so much in the civilized world is even more complicated. The media can’t possibly account properly for these variables on the nightly news or even in a newspaper article. It’s classic sleight-of-hand.
The official line continues to obscure the issue, citing the soft economy for allegedly prompting customers to cut back on higher-margin items, from choice steaks to better bottles of Chardonnay. “Five years ago, it was a bull market,” said Husson. Now, retailer costs have “shot upward just as sales have collapsed downward.” This is true, sort of. Healthcare costs continue their moonshot, but these are relatively small compared to the costs of carrying such an enormous long-term debt. The nation’s three largest chains reported lower same-store sales for their most recent quarters. But citing weak economic conditions doesn’t explain how it is that these store’s competitors like Gelson’s have cleaned the supermarkets’ clocks.
The Deutsche Bank report also says (in the murkiest of terms): “company spendingallocated toward in-market store openings”. The analysts mean that opening new stores and buying independents within the stronghold regions like the Bay Area could offset the threat of employment losses for employees of specific stores closest to the sites of future supercenters. Why isn’t this going on? The Deutsche Bank report fails to adequately explain that to do so the grocers would have to take on even more debt. Of course, if the supermarkets take on more debt the main beneficiaries are the banks.
There is a serious contradiction here. Wall Street loves to sell debt because it is largely guaranteed a return whereas their buying stock is a gamble. At the same time, supermarkets are not seriously courting consumer’s dollars. They are courting Wall Street’s. And Wall Street owns the supermarket debt. It collects fees for structuring it and then collects interest on the actual loan, so it doesn’t want to see either default or early re-payment. It wants a gradual repayment that simultaneously improves the company’s ability to borrow more and gives the illusion of austerity so important to stock holders. In actuality, it simply siphons off money that could go into direct capital investment-all things these reports cite are necessary for the supermarkets to compete.
Deutsche Bank is right that the supermarkets could do more to compete with Wal-Mart, but is its suggestion to make more acquisitions is self-serving since to do so would increase supermarket debts. The supermarkets are already highly in debted. Arthur Levitt, former chairman of the SEC, considers a debt-to-capital ratio above 20% a warning sign about of an overleveraged business. Safeway’s is 61%. Kroger’s is 66%. Alberton’s is 49%. In contrast, the parent company of Gelson’s, the high-end supermarket, is 2%.
Large debts make companies more susceptible to Wall Street pressure. Take Safeway, for example, they took on massive debts from a series of bad takeovers. In the meantime, to please Wall Street, they tried to bolster their share price with a stock buyback program. It began with the stock around $43, continued during its slide to the $23 level where it was temporarily put on hold. In addition to the capital loss, the stock buy-back was financed on borrowed funds. As result, it increased their interest expenses during the disastrous drop. The stock drop itself only adds pressure. And yet the stocks slide has fairly well stopped since the strike. This confirms “the Husson problem”. The recent action of Safeway’s stock signals that Wall Street approves of management’s age-old anti-union tactics.
Wall Street elite clearly prefer smashing the union as an intermediate term way of cutting costs across this whole sector of retailing, rather than seeing the supermarkets compete properly in a free market for customers. And, of course, Wall Street likes the idea of the consumer (supermarket worker) paying their own health expenses, since the consumer-worker would have no leverage against rising health costs. We cannot forget that Wall Street’s elite also own the stock and the debt of that other sector that stands to benefit from the supermarket’s anti-union stance.
Wall Street’s pressure on the supermarkets has been relentless. On Oct. 1, 2003 Moody’s Investors Service downgraded Albertson’s long-term debt, giving the company its second-lowest mark. Moody’s, a credit-rating service, said it feared that Albertson’s efforts to improve sales and market share might not yield results anytime soon. This is Wall Street’s way of insisting that Albertson do more to prove it can and will pay its debts. The reward for doing so is a better credit rating, an improved ability to borrow without regard to how this affects the company over the long term. By locking out workers, Albertson’s signals its commitment to Wall Street, not sales growth.
Wall Street is famously short-sighted, but it has to be pointed out that Wall Street analysts widely considered Safeway CEO Steve Burd a brilliant manager while the stock went up 52% in bubble of 2000. Since the slide, the same analysts have been largely silent about his increasing debt load and interest expenses during the economic slowdown. Why? They knew that a sluggish economy could be used as a cover story to squeeze the workers, to cast them as greedy children, and to win concessions that would insure Safeway paid its debts back. Burd is now blaming the economy for his lost market share only to divert attention from his mismanagement. Placing the blame on something he cannot control allows him to argue that he should have a chance to steer the company during the expected rebound, cashing in his options all the way.
The “slow economy” myth that the supermarkets are using has one legitimate angle. What we’re seeing here is the bubble’s hangover. Safeway’s failed takeover of Dominick’s occurred during bubble-era asset pricing. Among a number of missteps, they began by paying too much.
The supermarket battle must be seen in terms of the debt bubble that continues to this day thanks to Greenspan’s engineering and Bush’s dividend tax cut. Since the supermarkets cannot afford to pay much of a dividend, they cannot compete as well for Wall Street dollars. If they were not so indebted and could pay dividends, then the insiders who have been selling their Safeway stock would gladly hold on to it, enjoy the fact Uncle Sam would be taking little of their dividend income, and they would not be as inclined to short-term thinking.
America is just now dealing with the lower living standards that are inevitable after a bubble. The question is should workers’ living standards drop or should CEOs, particularly flailing ones such as the case here, accept a lower standard of living?
Recent revelations that the supermarkets have colluded to share revenue during the labor stoppages confirms their fear of losing Wall Street’s favor. It is not labor’s fault that the supermarkets are failing. It is Wall Street’s and the speculative mindset it perpetuates. This mindset has come even to the allegedly sober-minded corporate managers. What we are witnessing is the increasing ability of the finance sector to gain control over the real economy. To support the unions, to support improved working standards across the board is the stand up against financialization of America and the slavery of unproductive debts.
One thing is clear: the unions are not the problem. They are the solution to a world where high finance, stock market speculation, and monopolistic business practices scapegoat the diminishing middleclass and only increase the wrong kinds of competition, the wrong kinds of cooperation-the bright, wide-open collusions that are impoverishing us all.
STANDARD SCHAEFER is an independent financial journalist, an editor of The New Review of Literature, a poet, essayist, and an instructor at Otis College of Art and Design. He can be reached at email@example.com.