By Randy Tucker
The Cincinnati Enquirer

The recent grocery workers lockout and strike in Southern California torpedoed Kroger Co.'s fourth-quarter results and led company officials to tell Wall Street that 2004 earnings would be lower than in 2003.

The Cincinnati-based supermarket giant lost $337.4 million in the quarter, with labor disputes in Southern California and West Virginia reducing earnings by $156.4 million, Kroger reported Tuesday. The California dispute lasted through the quarter and accounted for 95 percent of the loss, the company said.

Health-care costs were at the center of the Southern California dispute, which affected about 70,000 workers at Albertsons, Safeway's Vons division and Kroger's Ralphs chain.

It was resolved about two weeks ago when members of the United Food & Commercial Workers ratified an agreement with the three chains that gave the grocers some of the labor concessions they were seeking.

"The final contract in Southern California is less costly to Kroger than the offer that was on the table when the strike and lockout began last October," Kroger CEO Dave Dillon told investors Tuesday.

"These contract changes were essential to improve the competitiveness of our cost structure in this market, and they continue to provide our employees with excellent wages and benefits."

But the union is still simmering with unrest, and Kroger has contracts expiring this year in eight major markets, including Cincinnati in October.

"Every area has its own issues, and we're going to have to address those issues in specific contracts," union spokeswoman Ellen Anreder said after the Southern California pact was signed.

On the other hand, Kroger has pledged to stay focused on cutting costs, including health care.

"We are committed to achieving a cost structure that enables us to grow our business while providing competitive wages and benefits to our associates, market by market," said Kroger's chief financial officer, Rodney McMullen. "We hope to do so without further work stoppages, but it will require creativity and tough choices from everyone involved."

Kroger also cited other expenses that collectively reduced after-tax earnings in the fourth quarter by $663.1 million, or 89 cents a diluted share, including a $444.2 million charge for its Smith's division a $75 million write-down for 74 underperforming stores.

Wall Street had anticipated a significant loss in the fourth quarter stemming from the labor disputes, but that didn't drive investors away. Many analysts say Kroger will achieve significant cost savings as a result of the negotiations.

Shares of Kroger fell 35 cents to $18.56 Tuesday - just $1.14 shy of its 52-week high of $19.70.

Still, some industry watchers remain cautious.

"We're still concerned about competition in the overall industry, mainly from Wal-Mart,'' said Tom Razukas, a retail analyst with Fitch Ratings in Chicago. "Just because the strike is settled and it looks like it may be beneficial to the company, we still have reservations."

Razukas was referring to Wal-Mart's aggressive expansion into many of the same markets.

Wal-Mart, the nation's largest retailer and No. 1 food seller, can use its massive buying power and its nonunion work force to keep costs low, he said.

"Wal-Mart moving into California was one of the main reasons the strike lasted as long as it did," Razukas said. "The supermarkets know they need to be as competitive as they can on the labor side so there was not a lot of giving by the grocers, and that was part of the reason for the length of the strike."

Kroger seems to have maintained the loyalty of its customers overall. Sales for the latest quarter increased 4.5 percent to $13 billion, including stores affected by the strikes. For the full year, sales increased 3.9 percent to $53.8 billion.

E-mail rtucker@enquirer.com