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Two Stores Refuse to Join the Race to the Bottom

January 14, 2005
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H arvey Solis, a grocery manager at one of the Safeway chain’s Vons supermarkets, says that he and his coworkers will no longer go the extra mile. "The loyalty toward the company has pretty much been dissipated, they’ve created so much resentment," he says. Solis is a 15-year veteran of the company who has been on strike in Anaheim, California, since October 11 to protest Safeway’s plan to dramatically slash health-care benefits and raise premiums. "They’re trying to be on an even playing field with what Wal-Mart pays, and that’s not enough to live on," he says.

    His counterpart at Wegmans Food Markets Inc., three thousand miles away on the opposite coast, doesn’t have the same beef. Wegmans’ employees receive affordable health insurance, and the company believes it’s in its best interest to keep it that way, says Jo Natale, manager of consumer services. Wal-Mart may be a competitive threat, but Wegmans doesn’t think that cutting the labor costs for its 31,000 employees is the competitive answer. The company’s bedrock philosophy is that taking care of employees will lead to greater profits, she says.

    In the supermarket industry, Wegmans’ profitability figures are impressive. Annual sales in 2002 were $3.02 billion, and 2003 sales are projected to jump 9 percent. Its largest stores average about $950,000 a week in sales, compared to a national median average of $361,564. And each of Wegmans’ 65 stores average about $46 million in sales annually, according to Supermarket News data. By comparison, Wal-Mart averages $23.5 million in grocery sales at each of its 1,243 stores, and Kroger averages $14 million at each of its 3,685 stores. And while the other supermarkets contract in the face of the Wal-Mart threat, Wegmans is expanding into new markets with the opening of two stores last year and plans for three more in 2004.

    "If we take care of our employees, they will take care of our customers," says Karen Shadders, vice president of people. "If employees can’t take care of their families, they cannot do their jobs. The focus is on freeing up people so that they can be more productive." The Rochester, New York, chain gives most full-time and part-time employees free single health coverage and generous retirement benefits. "Our pay and benefits are at or above our competition’s," Shadders says. "It helps us attract a higher caliber of employee." Good employees assure higher productivity, she says, and that translates into better bottom-line results.

    Wegmans’ focus on keeping employees happy is also reflected in its retention figures. For part-time employees, turnover is 38 percent; for full-time employees, it’s 6 to 7 percent. FMI data shows that turnover for both full-time and part-time employees in the supermarket industry was about 47.4 percent in 2002, down from 63 percent in 2001, when the economy turned sour. And for six consecutive years, Wegmans has been named one of the best companies for working moms by Working Mother. It also ranked ninth on Fortune magazine’s 2004 list of 100 Best Companies to Work For in America.


"If we take care of our employees, they will take care of our customers. If employees can’t take care of their families, they cannot do their jobs."


    Although Wegmans doesn’t look first to cutting labor costs, it is always trying to improve processes and services, and depends on all employees, from baggers to supervisors, to help find ways to save. Natale says that a dairy department employee, for example, created a new system to organize the cooler, which led to better ordering decisions and inventory control. The new procedure positively affected sales, and reduced the need to discard products.

    Wegmans also enlists employees in its drive to control health-care costs in its self-insured plan, Shadders says. When the company wanted employees to switch from prescription to generic drugs, it engaged in an aggressive communication campaign. Within six months, use of generic prescriptions had risen 5 percent and saved the company about $2 million, Shadders says. "They were willing to go the extra mile for us because we never broke the trust with them."

    Wegmans’ approach to greater profitability has proved to be sustainable in the long run. "Those companies that focus on the people side of the organization are the ones that in the long run succeed," says Jodi Simco, a consultant with the Hay Group. "There are strong links between employee and customer satisfaction and customer loyalty and profitability." Hay Group research backs this up. Kusum Ailawadi, associate professor of business administration at the Tuck School of Business at Dartmouth College, adds that good wages and benefits are key factors in building employee loyalty. "It is employees, not management, who interact with customers," she points out. "And if employees feel good about the company, they will make customers feel good."

    Conversely, cutting wages and benefits is not sustainable and will not help long-term profitability because it reduces loyalty, Ailawadi says. "Cutting wages and benefits to complete with Wal-Mart is definitely a losing strategy, even in the short run." She adds that the sight of unhappy employees on the front lines is not good for business either.

    Another food retailing chain with great benefits and excellent profitability is Stew Leonard’s. In 1992, Guinness World Records listed the Norwalk, Connecticut, store as having "the greatest sales per unit area of any single food store" in the United States, and it’s been named one ofFortune’s 100 best places to work. The grocery chain provides full-time employees with free medical insurance as well as dental, vision and legal plans and a retirement plan with a generous match. Turnover is an incredibly low 14 percent, and employee tenures of 10 to 15 years are common. Annual sales at the Norwalk store are $98 million, and $100 million at a store in Yonkers, New York. The weekly sales average per store is an eye-popping $1.7 million, compared to the FMI industry median average of $361,564. Its weekly sales average per square foot of selling area is $27.71, compared to an industry median of $11.13, FMI reports.

    Like Wegmans, the company maintains that good employees are the key to its success. "You can’t have a great place to shop without first making it a great place to work" is the motto of founder Stew Leonard Sr. The company still focuses on the bottom line and tries to control health-care costs to keep insurance premiums low, says Karen Mazako, vice president of human resources. But, like Wegmans, Stew Leonard’s prefers to use a carrot rather than a stick to induce employees to choose cost-containing strategies such as using generic drugs. The company ran a "benefits jeopardy" game so that employees could see how they can save money by using generic drugs. It also provides on-site flu shots, blood-pressure screenings and other employee health services.

    "If everyone is trying to compete on low prices, then only the lowest-cost competitors will hang on, and the rest will fall by the wayside," says Ailawadi. Referring to the strikes in California, she notes that cutting benefits and wages isn’t a sustainable long-term strategy for food stores. "Even if these chains can wring concessions out of labor, they will never be able to compete with Wal-Mart," Ailawadi says, arguing that cutting wages and benefits can actually worsen problems for Wal-Mart’s competitors. "Supermarkets have to focus on things that Wal-Mart doesn’t do well, such as offering produce from local farms, sushi bars, good deli sections and good customer services. These are things that you can’t get at Wal-Mart." While good wages and benefits will not guarantee success, she says, they can be an important element in designing a strategy for long-term profitability.

    Investors agree. In December, the California Public Employees’ Retirement System sent letters to the CEOs of Safeway, Kroger and Albertsons stating that providing reasonable health-care benefits for employees is a critical element in creating long-term value for shareholders. The California retirement system has more than $150 billion in assets and a $179 million stake in the three supermarket chains.

Workforce Management, February 2004, pp. 57-59 -- Subscribe Now!

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