by John M. Curtis
(310) 204-8700

Copyright October 21, 2003
All Rights Reserved.

aced with spiraling health care costs, California's biggest publicly traded supermarkets have decided to sock it to union employees, now enjoying some of the nation's best benefits. Trying to augment the bottom line, Safeway [the parent of Vons], Kroger [the parent of Ralphs] and Albertsons have sought to reduce escalating health care costs by asking employees to contribute to monthly premiums. “The pressure our companies are facing won't go away simply by these community leaders weighing in on the labor dispute,” said Ralphs' spokesman Terry O'Neil, commenting about Rev. Jesse Jackson joining the picket lines. Current union wages for supermarket clerks max out at $17.90 for regular pay, $26.85 for overtime and $35.80 for holidays. Health care adds about $3.85 an hour on top of existing hourly rates. Concerned about future earnings, something had to give.

      Hoping that today's lockout results in future savings, the major chains rolled the dice, watching perishable inventories rot and sales plummet. Heading into the holidays, management hopes to win major concessions from cash-strapped employees, unable to wait-out a protracted job action. “It's as good as it gets,” said Safeway CEO Steven A. Burd, talking tough and telling the union to accept the chain's final offer. Missing holiday sales would seriously hurt Q-3 and Q-4 earnings, putting downward pressure on stock prices. So far, Kroger, Safeway and Albertsons have averted a major meltdown—but that could change. “The financial impact is going to be significant,” said Edouard Aubin, at Deutsche Bank in New York, concerned that reduced quarterly earnings will eventually hit stock prices. Playing hardball today might boomerang, causing more devastation down the road.

      In today's economic climate, share prices get hammered with disappointing earnings. Watching stock prices plummet would hurt market chains far worse than paying higher health care premiums. Worries about encroachment from mass merchandisers like Wall-Mart or club stores like Cosco are largely overblown, since most shoppers go to local stores. With thousands of conveniently placed supermarkets, it's unlikely that mass merchandisers and club stores will take away significant market share. Before the strike and lockout, all major chains enjoyed expanded earnings. Wall Street showed little concern until the current job action. While Wall Street would like a better contract, they don't want earnings decimated by a prolonged strike. Bucking years of history, Kroger, Albertsons and Safeway badly miscalculated the union's response to forfeiting health benefits.

      Negotiating years of collective bargaining agreements, the United Food and Commercial Workers union isn't about to cave in to management's demands. Management shouldn't have signed past contracts if they couldn't afford today's agreements. Yet management can't control the health care inflation, now averaging about 13% a year. In recent years, health costs have wildly escalated, leaving employers exposed. Management now seeks a way to cap spiraling costs, either by reducing benefits or getting employees to share the expenses. Like California's runaway power market, health care threatens all businesses by attacking the bottom line. Without reining in costs, both private and public enterprise won't be able to afford quality health benefits. Instead of digging in their heels, both labor and management must find way to fix the problem.

      Whether structuring wages or benefits, employers and unions must deal with fiscal realities in the new age of spiraling health care costs. During the ‘90s, managed care contained runaway health care costs. Losing their grip, insurers have been forced to give significant concessions to hospitals and medical groups, contributing to the latest spike in health care premiums. Neither management nor labor has anything to do with the rapid escalation in health care costs. Yet both must now work out a compromise until legislators can find a way to control escalating costs. So far, legislators haven't tried to cap premiums, now spiraling out of control. “Kroger, Safeway and Albertsons are looking at this strike and its cost, as an investment in improving profitability,” said Charles Cerankosky of McDonald Investments, missing the crisis that now confronts the national health care picture.

      Squeezing the bottom line, spiraling premiums now threaten publicly traded companies and workers alike. While employers look to slash benefits, both labor and management must turn to legislators to get a grip on how best to control runaway health care costs. Kroger, Safeway and Albertsons know they can't charge $10 a pound for tomatoes to underwrite inflated health premiums. Inside Calfiornia, the Departments of Insurance and Managed Care can install price-caps on yearly increases in health care premiums. Insurers can't continue to inflate prices beyond the published Consumer Price Index. Like the Public Utilities Commission, health care costs must also be regulated to prevent market forces from getting out of hand. Neither management nor labor caused the current run-up in health care prices. But before elected officials can fix the problem, both must bite the bullet and work it out.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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