Rising employee costs directly affected the profitability of Safeway

The total labor costs consisted of about two thirds of the non merchandise operating expenses, and the restructuring program before the LBO had little effect on the wage structure for the enterprise. By the year 1980, the about 54% of the store employees in the grocery industry comprised union membership. The industry had seen an increase in the number of nonunionized chains that intensified competition driving the above figure down. Cheaper nonunionized chain labor costs were threatening the existence of unionized chains like Safeway, A&P and Kroger. Unionized chains at the same time experienced challenges in terms of costs of supplies. The law prohibited such chains from soliciting for product discounts above the amounts offered by regional chains meaning that these chains had little purchasing advantage compared to independent or regional operators. From the year 1980 to 1985, the chain’s average employee hourly costs rose at a higher rate than the industry average. The chain experienced a rise in the hourly costs from 13% to 33% within the span of the three years. The labor cost is among the largest controllable costs in the chain, and the industry has an average of 1% in profit margins. The chain is committed to paying higher rates to productive employees, but the current wage bill is uneconomical to the chain even if productivity is improved. Number of employees at the end of the year 6,367and on average an employee works for 1,800 hours per year. This means that the total hours for alpha division are 11,460,600. Using the estimated wage premium of $4 implies that the total wage bill would be 45,842,400. Annual sales for the division are $735 million while the annual operating profits are $6 million. A competitor can reduce its prices to achieve the projected cash flows of $20 million by (735-45.842400+6+ operating expenses +additional wage rate). Eliminating the wage premium would imply that a competitor could sell the products at an amount less than Safeway by a factor equivalent to the wage bill. The company measurement systems changed following the LBO because a new way of assessing the divisional performance was required. The amount of assets that the company had reduced while the number of employees had to be reduced meaning that Safeway had incurred additional expenses in counselling and handling the loss of jobs. The share price for the company also reduced following the reduction in the asset base and the diminishing competitiveness. Competition from nonunionized chains made it less attractive to invest in the enterprise because of the wage premium. The LBO was not necessary for Safeway because as opposed to solving its problems, it resulted to problems because the level of control reduced and the public perceived that the supermarket was headed for troubles. The LBO gave companies an opportunity to buy the company using borrowed funds. This speculative tendency by the buyers diverted the gains from Safeway to the buying entities. The LBO made it less attractive for …
Posted by: Gwendolyn Contos

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