Supermarket Strikeout

Big Three supermarket giants Kroger (NYSE: KR), Albertson's (NYSE: ABS), and Safeway (NYSE: SWY) are playing hardball with their Southern California clerks. The result is a strike that is going to be a strikeout for the supermarkets.

Strike One: The Motley Fool has covered the peril Wal-Mart (NYSE: WMT) poses with its pricing power. Jeff Hwang's recent story clearly shows that from supplier control to potential monopoly pricing, Wal-Mart is the power hitter of all power hitters.

Strike Two: How do you find 70,000 well-trained and customer-friendly temporary replacements? You don't. Although the Big Three own 60% of the Southern California markets, there are still hungry warehouse stores such as Costco (Nasdaq: COST) and food-too stores such as the rapidly growing 99 Cent Only Stores (NYSE: NDN) to service customers with their trained staffs. When the other team has their regular lineup and you're using substitutes, don't expect to impress.

Strike Three: It is extremely difficult to get anyone to change their habits. The Big Three have created a reason for customers to take the intentional walk to the competition. There are picket lines staffed by the friendly employees your customer knows -- and may love. And there is the threat of poorly stocked shelves if the teamsters do not cross the picket lines. Once customers explore the other team, they are in a position to form new habits.

The situation gets worse if you own Albertson's or Kroger. The union, which has filed a $600 million lawsuit charging an unlawful lockout, struck Safeway. Solidarity with your competitor may have a big price tag -- and be hard to explain to shareholders.

Retail is a low-margin, highly competitive business. As LouAnn Lofton noted in her supermarket story, the Big Three's stocks have not been standout performers over the last five years. This chart shows just what underperformers they've been.

To be fair, the strike is confined to Southern California. But the contract there is likely to be the negotiating point from which other union contracts will be crafted. If the Big Three are taking big swings, and missing, it's safe to say that the lean and mean competition is suited up and ready to score at the cash register.

W.D. Crotty does not own stock in any of the companies mentioned. He did, many years ago, work for Ralph's, the Kroger chain that locked its clerks out. He can be reached at HawaiiFool@hawaii.com .

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