Strike Leaves Grocers More Vulnerable to Wal-Mart

Updated from 7:05 a.m. EST

A strike in Southern California involving 70,000 workers is already squeezing the nation's top grocers, and threatens to do them serious long-term damage. Ironically, the labor dispute arose from industry attempts to steel itself against competition from Wal-Mart (WMT Quote), and wound up weakening the chains even before the retail giant arrived.

Even if the strike is settled shortly, it demonstrates the daunting long-term challenges faced by unionized chains as they encounter ever-increasing competition from the steadfastly nonunionized Wal-Mart, already considered to be the nation's largest grocer.

In a statement Thursday, Safeway (SWY Quote) said "the impact of the strike cannot be estimated at this time." But the No. 2 grocery chain, Albertsons(ABS Quote), said labor issues, primarily the 2-month-old California walkout, "materially impacted" its third-quarter earnings, which fell to $92 million, or 25 cents a share, from $188 million, or 47 cents a share, a year ago. Were it not for labor issues, Albertsons said it would have matched the 37-cent analyst consensus for the quarter.

Kroger (KR Quote) reports its earnings Monday.

Analysts already project that each of the three big grocery chains will suffer big hits to their earnings because of the labor dispute. Earlier this week, Bob Summers of Banc of America Securities projected the strike will slash Albertson's earning per share for the quarter by 7 cents to 10 cents, and Kroger's by 10 cents to 14 cents. Mark Wiltamuth of Morgan Stanley projected the strike will cut earnings at Safeway by 20 cents a share, Kroger by 12 cents a share and Albertson's by 4 cents a share. (Both Morgan Stanley and Banc of America have done investment banking business with Safeway in the last 12 months.)

"I don't think they ever expected the strike to be this long," said Mark Hugh Sam, who covers the grocery companies as an analyst for Morningstar. "They will probably lose more customers than they previously expected." (Morningstar does not do investment banking and Hugh Sam does not hold shares in the companies he covers.)

On its surface, the labor dispute has been about health care. The three grocery chains have asked their unionized workers to bear a greater portion of their health insurance than they currently pay. The grocery chains have also attempted to set up a second, less generous class of health care coverage for new workers. The United Food and Commercial Workers union, which represents the striking workers, has rejected both proposals.

The grocery chains' moves to lower health care spending have been widely seen by industry observers as an attempt to compete with nonunion rivals. Safeway spokesman Brian Dowling cited Wal-Mart as one of the factors in the strike.