By Randy Tucker
Enquirer staff writer

Kroger CEO Dave Dillon (left) with outgoing chairman Joseph Pichler after Kroger's annual meeting Thursday. The Enquirer/MEGGAN BOOKER

Kroger Co. CEO Dave Dillon told shareholders Thursday that earnings for the year would fall below last year's profits because of rising health care costs for employees and competitive pressure.

That's after the company reported Tuesday that first-quarter earnings were down by 25 percent.

Last year was a tough year financially for Kroger, which suffered through costly strikes in West Virginia and Southern California and stiff competition from supercenters and other low-cost food sellers. Last year's profits were $314.6 million.

Still, Dillon - who added chairman to his title Thursday following 24-year veteran Joseph Pichler's retirement that day - told shareholders at the company's annual meeting at Music Hall that Kroger is making progress.

"We're going to continue to invest in lower prices, customer service and product variety to deliver strong sustainable sales growth," Dillon said.

But that will be easier to say than to do as the company continues to face the aggressive expansion of supercenters, discounters and other low-cost operators into many of its markets as well as rising product and labor costs.

Health care was the key issue in the strikes in California and West Virginia, which reduced Kroger's earnings by $246 million last year, Dillon said.

The 141-day California strike continued to eat into Kroger's earnings in the first quarter this year, reducing profits by $71.6 million, or 10 cents per share.

Kroger eventually received health care concessions from the United Food and Commercial Workers Union in each of those markets, and new contracts recently approved in central Indiana and the Houston and Detroit areas also have reduced Kroger's health care costs.

But Dillon told shareholders at the annual meeting the cost of paying health benefits was still expected to rise 12 percent in 2004.

The company paid more than $1 billion in health care last year.

"We had expected that Kroger would be able to pass on a portion of the (health) benefit cost increases through higher gross margins during 2003," Dillon said. "Instead, the competitive environment required Kroger to reduce margins in order to defend our market share."

At the same time, Kroger is facing even more competition as the market has become more fragmented and everyone from dollar stores to drugstores have begun to sell groceries.

"Today, shoppers have more choices than ever," Dillon said. But "we believe that customers are recognizing our more competitive prices."

Also at the meeting, shareholders voted down a proposal to switch from staggered elections to annual elections for the board of directors and a proposal for the company to rewrite its bylaws so that the CEO cannot also serve as director.

Shareholders also re-elected six directors.

E-mail rtucker@enquirer.com