The Breakdown | Explaining Southern California's economy

Southern California grocery strikes and disruptive innovation

Here’s a story we’re following closely at SCPR/KPCC: the possibility of a strike by grocery workers in Southern California: 62,000 of them, who work at Ralphs, Vons, and Albertsons stores. Over the weekend, the United Food and Commercial Workers union voted to authorize a strike -- which isn’t the same thing as going on strike. But it does set the stage.

The last time there was a strike, in 2003-04, it didn’t go well for the the major unionized chains. This from the LA Times:

The drawn-out negotiations has area grocery workers nervously recalling the bitter debate over wages and healthcare benefits that led them to the picket lines seven years ago. In fall 2003, the labor dispute led to a contentious 141-day strike and worker lockout that affected hundreds of California grocery stores.

The work stoppage ultimately hurt the retailers and the labor unions. Profits and the stock prices of all three retailers subsequently dropped. It also resulted in some consumers in Southern California shifting their shopping patterns, grocery analysts have said. Smaller chains and non-union shops — including Trader Joe's and Gelson's — enjoyed a boost in business.

Trader Joe’s and Gelson's took slightly different approaches to attacking the traditional grocery store business. Trader Joe’s focused on keeping costs low while, in a manner of speaking, keeping customers slightly off-balance and stimulated with an ever-changing line-up of all-Trader-Joe’s-branded products. Customer service was also stressed. The idea was to emulate the neighborhood market on, eventually, a national scale. (Two professors, one at the Gradiazio School of Business and Management and the other at CSU, Northridge, explored Trader Joe's success in some detail in 2007.) 

Gelson’s did something similar, but in the context of of a more traditional large grocery store setup. The 60-year-old operation delivered a higher-quality shopping experience -- better producer, premium meats, a fancier overall product mix on the shelves, a staff dietician -- in upscale neighborhoods that laid the groundwork for the arrival of Whole Foods.

That was then. Now, the space is even more competitive. What’s going on here is an example of what Harvard Business School professor Clayton Christensen calls “disruptive innovation.” It doesn’t fit exactly with Christensen’s now famous idea -- he argued that companies are typically disrupted by competitors who bring a simpler product to market, giving customers an appealing alternative at the bottom that’s less complex than the established version.

The major SoCal grocery chains have instead been disrupted at the level of the shopping experience. Fresh & Easy has streamlined everything -- checkout is automated -- while mixing fresh produce, meat, and prepared foods in with its own and national brands. Costco is competing on price, but more important, allows people to buy in volume. So does Wal-Mart. Target combines food shopping with shopping for other necessary items, such as clothing, and discretionary stuff, such as toys and electronics.

More Christensen-esque disruption has occurred on the price front among non-union stores that cater to an ethnic clientele. KPCC’s Shereen Marisol Meraji reported in this trend in July, as part of a series on grocery labor negotiations.

So the “Big 3” SoCal union grocery stores are getting disrupted in several directions at once. Given what happened to their market share after the last strike -- it fell from 59 percent to 33 percent -- both sides might want to think about the economics of their shared business before they pull the trigger on another prolonged stoppage.

Chart: Wikimedia Commons