Last week, we took a look at the impact a grocery workers' strike has had on Safeway (NYSE:SWY) and its collective bargaining partners Kroger (NYSE:KR) and Albertson's (NYSE:ABS). Today, Washington Post writers Michael Barbaro and Neil Irwin added substantial color to the picture with a lengthy feature on the story surrounding grocery workers and the companies that employ them.
"The Health of Grocers, Workers" isn't another media swipe at Wal-Mart (NYSE:WMT), though there's certainly fodder there for those who want it. It's probably better read, however, as a useful illustration of how the mega-retailer -- and also companies like Target (NYSE:TGT), Costco (NASDAQ:COST) and even, the article argues, convenience stores such as 7-Eleven (NYSE:SE) -- can impact markets. In the grocers' case, it's happening (very simply put) in two ways.
Massive scale allows Wal-Mart, Target, and Costco to pay less for the products they sell than many local, regional, and national grocers. Those savings are passed to customers. There's little differentiation in the food business unless you're a high-end retailer like WholeFoods Market (NASDAQ:WFMI), so price really does matter.
Attempts to compete on price can, naturally, hurt any retailer. (This happened from a different perspective during the burger wars.) When there's a "second front" -- in this case, compensation and health care costs -- it means a troubling squeeze on profits. Wal-Mart, for example, spends considerably less per employee in both pay and benefits than do the grocers. (Again, some of this is attributable to scale.)
While more money and better benefits logically attract grocery workers, it puts their employers in a pinch when their already-slim margins come under fire because of price competition. And so you've got grocers and their unionized employees going toe-to-toe (with varying degrees of unpleasantness) across the nation to find common ground. In short, it's not hard to understand why investors are largely wary of grocery chains. They've got carloads of challenges facing them -- many very much outside their control.
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Fool contributor Dave Marino-Nachison doesn't own any of the companies in this article. He can be reached via email.
