The action supermarkets can't afford as trolley rage erupts at the depots

While they have to cut costs, the effect of strikes on their reputations could be even more damaging to the bottom line, write Ben Schneiders and Abigail Townsend

p until now, workers and managers in supermarkets have tended not to smash their trolleys into each other. Industrial action has not broken out in the aisles.

But all that may be about to change as unions look to fight attempts by the big players to cut costs from their supply chains. The news that employees at a number of key Wm Morrison distribution depots are set to strike this week follows on from recent industrial problems at both Asda and J Sainsbury.

Unions claim they are the victims of an intense cost-cutting campaign by the big supermarkets. "Our people have been caught up in this race to the bottom," says a spokeswoman for the GMB, which represents depot workers at Morrisons. "All the time, it's cut the costs, cut the costs, cut the costs."

One common theme of the recent disputes is that none are centred on the shop floor. Analysts say stores are reluctant to cut from this area, where normally around 80 per cent of their employees are found, as they don't want customers to gain a bad impression.

"Sector wide, they are looking to reduce staff costs," says Gavin Rothwell, senior analyst at the Verdict retail consultancy. "They are looking at their cost structures [and saying] 'what's core, what isn't?'." That has put the focus on distribution depots, which are heavily unionised and make up around 10 per cent of a typical supermarket workforce.

Unions say this focus is all too predictable. "They've squeezed wages down to such a rate, and that also goes for contractors and for farmers; possibly now, the only place to turn is distribution," explains a spokeswoman for the Transport and General Workers' Union.

The obsession with costs at all the major supermarkets, however, is not surprising. Margins in the sector have fallen from 6.1 per cent in 1995-96 to 4.2 per cent in 2004-05, according to the British Retail Consortium. "It has been extremely competitive for quite some time. The downward pressure on costs has been consistent for three or four years," says Kevin Hawkins, director-general of the BRC. "There's not a lot of fat [left]."

But they will have to find some, because data released by the Office for National Statistics last week showed that food sales in August were down 1.2 per cent on the previous month. It came as a shock to many: until now, food has been holding up in an otherwise tough retail environment. And compounding the gloom is the increase in fuel and property costs.

But it is labour where supermarkets will hope to make big savings, due to the large number of people employed by the chains. For instance, Tesco has 250,000 staff in the UK, Sainsbury's 155,000 and Morrisons - where most of the recent trouble has occurred - 150,000. "The biggest single cost is labour," says Mr Hawkins.

When the minimum wage is increased next month by 4 per cent, that will mean it has gone up by 20 per cent since October 2003. "That creates a lot of pressure," adds Mr Hawkins. "Those sources of inflation [labour, fuel, property and rent] come at a time when retail prices are falling, when competition is ferocious and consumers are spending less."

Among the big chains, only market leader Tesco has not recorded a fall in margins since 1995-96. At Sainsbury's, margins have shrunk from 7.3 per cent to 2.2 per cent over that period, while at Morrisons they have nearly halved to 3.1 per cent.

However, the industry is playing down concerns that attempts to carve out costs will lead to more industrial unrest. "Although there has been the odd break-out of action, generally the relationship has been a good one," says Mr Hawkins.

In this environment, he expects supermarkets to focus on trying to improve staff productivity. Other possible measures could include not filling vacancies or asking for redundancies in areas that would not affect efficiency.

But it's a balancing act for supermarkets. "At the end of the day it's about growing the sales line," says Mr Rothwell at Verdict. "I think the clear danger is that if you cut too many staff, it has an impact on effectiveness, and they will all be wary of that. The other thing is that [industrial problems are] not good for your image."

That's the problem Morrisons faces if the union action goes ahead this week. The company's reputation has already come under pressure because of the concerns raised by unions that it is set to close some of its 20 distribution depots to cut costs. And reputation is everything in such a fierce sector, with even the ever-successful Tesco being portrayed as a retail monster amid accusations that it is taking over high streets and squeezing suppliers.

A GMB spokeswoman also questions why Morrisons is opening a new depot in Kettering on 23 September - the same day as the strike is due to get under way - while it is closing others.

Separately, there are claims that Morrisons has reduced the perks of former Safeway employees and is not conducting maintenance work at the former Safeway depots.

These claims are denied by a Morrisons spokesman: "There's a review being carried out, and anything such as the depots being run down is purely speculation. We are consulting with staff and as soon as we have the results, they will be put out there." He adds that the original plans for the Kettering depot were drawn up four years ago.

However, City analysts say this sort of dispute spells trouble for the company. "Major nationwide industrial action would be very damaging to Morrisons' reputation, potentially alienating a lot of consumers," says Shore Capital analyst Clive Black.

But Morrisons is in good company. While the dispute at a Sainsbury's distribution depot in south-east London was resolved last week, tension continues to mount at Asda over allegations of a secret anti-union strategy.

The GMB last week claimed that Asda had drawn up documents containing a plan to get rid of the union, the only one at the chain. But a company spokesman, while not denying the existence of the document, denounces the GMB's allegation as "rubbish". "There is absolutely no plan to get rid of the GMB," he says.

Asda's owner, the US giant Wal-Mart, has become a focus for the labour movement in America due to its anti-union stance. In the UK, Asda employs 142,000 people, around 10 per cent of whom work in the depot. In total, just 8 to 10 per cent of its staff are union members, but the spokesman says that's nothing to do with the company.

At Tesco, which has a partnership agreement with Usdaw, the shopworkers' union, numbers are higher: around half its 250,000 UK employees are union members. Meanwhile, the John Lewis partnership, which owns Waitrose, says its co-ownership structure engenders better relations. Sainsbury's also points to its bonus scheme and open communication.

But regardless of the different stances taken by the supermarkets, they all face declining margins and a difficult outlook. "In terms of overall growth [for supermarkets], it's very low single figures, very low price inflation," says Mr Hawkins. "Over the next 10 years, with the increasing maturity of the UK market, the grocery sector might decline in real terms. That's quite serious for a business which depends on volume."

Yet a middle way has to be found - one that can keep staff happy while also protecting fragile margins. Because if it isn't, the disputes at Asda, Sainsbury's and Morrisons may simply be a foretaste of what is to come.

MORRISONS PLUNGED BACK INTO NIGHTMARE

Wm Morrison's union problems began, arguably, in January 2003 when Sir Ken Morrison made an audacious approach for his bigger rival Safeway.

As it was, most of the City decided this was an excellent idea and promptly registered their interest as well. Months of wrangling and debate followed, but canny Northerner Sir Ken hung on to win the race, picking up Safeway for £3.3bn.

But the purchase was far from being the crowning success of his long and, up until then, illustrious career. The group has struggled to integrate Safeway, revealing as late as this summer that it was still running dual costs, and has issued five profit warnings since the acquisition. Before Safeway, Morrisons had never put out a profit warning.

Slowly but surely, the company is trying to put its house back in order. Stores are being rebranded or sold off, while management has been shaken up, with Sir Ken moving away from operational duties and non-executive directors being brought on board.

But just when things appeared to have reached a nadir (they had nowhere to go but up), along came the row with the GMB and the Transport and General Workers' Union.

Morrisons is reviewing its distribution system and points out, not unreasonably, that it now has fewer shops and more depots. As a consequence, the former Safeway depots are thought to be the most likely to close.

The unions, however, feel they have been treated badly, with claims of communication breaking down and deteriorating conditions in the six depots where they represent staff.

Around 5,000 GMB and T&G members are expected to start a three-day strike on Friday, threatening supplies and sales. Morrisons is hopeful it can settle the dispute "amicably" and insists stores will be "well serviced".

Either way, however, it seems Sir Ken is still a way off from putting his Safeway nightmare behind him.