Capping a troubled four-year run in the Chicago area, Safeway Inc. reached a tentative labor deal Tuesday night with its workers that gives the grocery giant time to find a buyer for its 113 Dominick’s stores.
The agreement came after weeks of fighting between Safeway and about 9,000 unionized Dominick’s workers. The battle, which had escalated in recent days after Safeway threatened to close the stores, had begun to worry shoppers. Many wondered whether their neighborhood groceries would remain open as the holidays approached.
Tuesday’s deal ensures that the stores will remain open–though not in Safeway’s hands for long. The Pleasanton, Calif., company has struggled to manage the area’s No. 2 grocery chain in the face of aggressive competition from market leader Jewel Food Stores and a dramatically changing retail grocery industry.
In recent days, Safeway executives have said they would close and sell all Chicago-area Dominick’s stores if they couldn’t reach an acceptable deal with the union.
The new agreement allows Safeway to exit the Chicago market but also buys the company the labor peace it needs while it searches for a new buyer or buyers.
Dominick’s workers still must ratify the pact. But union officials said they expected no problems and believed that they could complete that process by Thanksgiving.
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The deal calls for Dominick’s employees to continue working under terms of their old contract, which ended Nov. 9. But Safeway will pay workers an unspecified “ratification bonus” if they agree to the deal.
“It is the opinion of the leadership that this is the best outcome in a very difficult situation,” said Stephen Powell, treasurer of Local 881 of the United Food and Commercial Workers.
Dominick’s President Scott Grimmett said Tuesday night that the grocery chain had hoped until the end to reach a long-term agreement with the union.
“When it became clear this outcome was not in the cards, we chose to work out a new contract and begin working on an orderly sale of the Dominick’s assets,” he said. “The alternative was a strike and an abrupt closure of the stores.”
Union leaders had pressed Safeway to agree to sell Dominick’s to a single buyer within six months, a request that Safeway called unacceptable last week.
While the new offer from the company was along similar lines, it differed in one key respect: Safeway plans to “look at all the options because the company had an obligation to get the best value,” one high-ranking Safeway executive said.
Those options, the executive said, include looking for more than one buyer to take all or part of the Dominick’s chain. Another option may be to close some unprofitable Dominick’s stores.
Workers express relief
Gathered outside the Oak Brook hotel where negotiators were meeting, Dominick’s workers expressed relief at news of the tentative deal.
“Excellent,” said Sharon Mrohen, a cashier at Dominick’s Lake Zurich store, who has worked for the company for 24 years. “Our children, our families will all have a happy Thanksgiving and a very merry Christmas.”
Union leaders credited pressure by their members for bringing Dominick’s back to the bargaining table after talks had broken off. Union leaders estimated the chain had lost more than 25 percent of its business over the last few weeks as shoppers went elsewhere in the midst of the labor unrest. Dominick’s officials have declined to discuss how the problems affected sales.
But since acquiring the chain for $1.9 billion in October 1998, Safeway has struggled to manage Dominick’s. Same-store sales have fallen each year since the acquisition.
Safeway’s decision to pull out of its only Midwest market can be traced not only to the current dismal conditions in the retail grocery industry, but also to Safeway’s alienation of many Dominick’s shoppers and employees through a series of operational blunders.
Safeway, which has long been prominent in the Western U.S., tried to cut costs by heavily promoting its “Safeway Select” house brand of food products in Dominick’s, for example. But the cost-cutting move sliced into sales: Many Chicago shoppers–unfamiliar with the Safeway brand and unhappy at the disappearance of certain traditional Dominick’s items–have turned up their noses.
And while Safeway has a strong presence in the West, allowing the company to reap economies of scale through centralized storage and transportation, its Dominick’s stores were an operational island hundreds of miles from the parent’s other businesses.
A Midwestern presence
In effect, industry observers said, Safeway got a Midwestern foothold by acquiring Dominick’s, but it failed to build up its presence sufficiently to garner economies.
Safeway officials have acknowledged that the company made some mistakes, but said the chain had problems before the acquisition. Safeway had invested more than $300 million trying to remodel the stores and better equip the chain.
Because the 113 Dominick’s represent only 6.3 percent of Safeway’s 1,793 stores, industry experts said jettisoning the stores wouldn’t cripple Safeway.
Four years ago, when expansion-minded Safeway snapped up Dominick’s and entered the Chicago market, conditions in the grocery marketplace were very different. The economy was stronger. But mass-merchant retailers such as Wal-Mart Stores Inc. hadn’t yet mounted their aggressive push into food sales. Wal-Mart’s Supercenters have altered the competitive landscape of the grocery industry nationwide and reduced profits for traditional grocers such as Safeway.
A confluence of factors has thrown the entire industry into a turbulent period in which players are seeing some of the worst competitive pressures ever, industry consultant Bill Bishop said. As a result, he said, the assumptions that went into Safeway’s decision to buy Dominick’s “are now being challenged as being less realistic.”
Safeway’s trouble with its Dominick’s acquisition is relatively new for a company that traces its roots to American Falls, Idaho, where M. B. Skaggs bought his father’s grocery store and launched a chain of Skaggs stores. In 1926, Skaggs merged his business with a chain of California stores to form Safeway.
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In 1988, Safeway escaped a hostile suitor by going private through a leveraged buyout. To help pay down the debt, management quickly slashed the company’s workforce and sold off some units–often to companies that paid the workers less than they had earned at Safeway.