Big Change in the Grocery Industry: The California Grocery Strike Article from January-March 2004 issue of Business Strategies Newsletter By Bill Birnbaum, CMC The United Food and Commercial Workers Union went on strike against Southern California supermarkets on October 11, 2003. As we upload this article onto the Business Strategy Web Site in February 2004, that strike continues. The major point of contention is the cost of employee health insurance. Seems that UFCW members have been enjoying 100% employer-paid health insurance. Certainly, in this era of rapidly increasing health care costs, such 100% employer-paid health insurance is a rarity. The grocery chains are hanging tough at the bargaining table. They simply can't afford to pay for such generous health insurance coverage. But why? They were able to afford it earlier; what's changed? For one, health insurance has grown far more costly. Double-digit increases in premiums, year after year, have made health coverage a major expenditure no matter who pays for it. Second, the grocery business has become extremely cost competitive. That’s because of Wal-Mart's entry to the industry. Known within the industry as "The Black Death," Wal-Mart has created a far lower cost structure than any of its rivals. Because of its vast size, Wal-Mart enjoys enormous buying power. And by establishing annual purchasing contracts with suppliers, the company has done away with the need to issue numerous purchase orders all year long. Instead, Wal-Mart uses technology to link its inventory information with suppliers. Per their annual contract, suppliers are authorized to ship additional product when inventory reaches a pre-determined low level. Thus, Wal-Mart has turned an entire purchasing function into a much smaller, annual contracting department. The cost savings are enormous. Also, Wal-Mart is non-union. It therefore is able to pay significantly lower wages. Wal-Mart, already the nation's largest retail grocer ($82 billion annually), plans to open 40 giant (200,000 square foot) Supercenters in California alone. The first is scheduled to open in La Quinta in March. So California grocers are particularly terrified. Competing with this "800-pound gorilla" is certainly tough. Grocers today, like the department stores (Sears, JC Penney, Target) before them, are looking "here and there and everywhere" for cost savings. So the supermarkets' battle with the UFCW in Southern California isn't so much a problem as the symptom of a problem. This is why the grocery chains are hanging tough. They're intent on cutting costs. OK, so what's the strategy for the chains? Should they play Wal-Mart's game in trying to compete on price? Well, let's first recognize that some stores are more vulnerable to Wal-Mart than are others. If a chain store operates in a region not targeted by Wal-Mart, that store would be more likely to remain a successful competitor. Perhaps the area’s population is too small for a Wal-Mart Supercenter, or perhaps the region's income level is too high. Grocers in all other regions had better get their cost structure down so they can compete on price… or they'd better differentiate. That is, they'd better offer something different. Different either in product or in service. For example, a grocery store - or for that matter, a chain of grocery stores - might cater to a specific market - like the health conscious, or an ethnic market. Oh yes, ethnic market. Let me tell you about the B & B Food Market. The B&B Food Market Back when I was a small boy, my dad owned and operated a grocery store in New York City. Like most other independent grocers, he worked long and hard to eek out a modest living. Then, about 1950, supermarkets started becoming a major force in the grocery industry. And guess what? Just one block away from my dad's store, a new A&P Supermarket opened for business. At the time, A&P was the major supermarket chain in New York - and growing fast. Driving out the independents one after another. Sure enough. With the opening of the A&P Supermarket just a block away, my dad's business suffered immediately. In fact, it initially looked as if my dad would have to close up shop. However, at the same time that the supermarkets were expanding rapidly, an interesting demographic change was occurring in New York. Puerto Rican people were beginning to immigrate to New York City. And my dad's store was right in the middle of the neighborhood where they were moving. Dad recognized this as an opportunity. I'm sure he'd never heard the term "niche market," but that didn't slow him down at all. He found importers who'd supply tropical fruits and vegetables. He bought rice in hundred pound sacks. And he got Del Monte and Hunt's to deliver canned goods with Spanish language labels. And it wasn't just the products. Seems like overnight, Dad learned to speak Spanish. The way I remember it, on Tuesday morning he couldn't speak a word, and by Friday evening he was fluent. Dad hired two helpers, Jerry and Charlie, both recent arrivals from Puerto Rico. And dad had all his signs - both inside the store and outside the store - printed in Spanish. He changed the whole ambiance of the store. His customers, all recent immigrants from Puerto Rico, felt right at home (en su casa) shopping in his store. As the neighborhood grew more and more ethnically Puerto Rican, my dad took lots of business away from the A&P Supermarket. In order to thrive - let alone survive - into today's fiercely competitive grocery industry, grocers will have to be every bit as creative as my dad was a half century ago.    Originally published in Bill Birnbaum's Business Strategies Newsletter