Photo: Kroger
Do Kroger’s chains have more to gain or lose from closing stores over ‘hero’ pay increases?
It’s safe to say that no retailer feeling forced to pay its workers $4 or $5 an hour more as a result of a local ordinance is happy with the situation. All have groused, but most have chosen to pay the temporary increases knowing that they can either bite the bullet in the short term or make adjustments, such as raising prices.
Trader Joe’s took a different approach with an announcement last month that it would temporarily raise the pay of workers nationally. The chain, which operates more than 500 stores across the U.S., bumped up its hazard pay for associates by $4 an hour. To pay for the increase in wages, Trader Joe’s chose to cancel the midyear bonus it pays its roughly 10,000 workers.
Kroger’s approach has been notably different. In a number of cases, management decided to close underperforming stores in markets where the grocery giant is faced with having to extend hazard pay to its frontline hourly associates.
The supermarket giant said yesterday that it would close three stores in Los Angeles after the city passed an ordinance requiring grocery and pharmacy retailers to extend workers “hero pay” of an additional $5 for the next 120 days. The law applies to grocery and pharmacy retailers with more than 10 employees on site and more than 300 nationwide.
Kroger’s move to close the two Ralphs and one Food 4 Less location in Los Angeles follow its decision to close two others in Long Beach — a Ralphs and a Food 4 Less — after the municipality passed an ordinance requiring Kroger and other retailers to pay $4 an hour to frontline associates for 120 days.
Kroger has criticized hero ordinances as being imbalanced because some retailers are forced to pay workers more money while other employers are exempt. The retailer pointed out that, while it is being required to pay more to its workers, Long Beach was not doing the same for its municipal employees who are in public facing positions.
The Long Beach law applies to stores with 15 or more employees run by companies that employ more than 300 nationwide.
Kroger recently reported that its 2020 same-store sales (excluding fuel) were up 14.1 percent with digital revenues jumping 116 percent. The grocery retailer announced an operating profit of $2.8 billion.
- Kroger To Close 3 Stores In Los Angeles In Response To Approval Of ‘Hero Pay’ Mandate – CBSLA
- LA City Council Approves $5 Hero Pay; Emergency Order Goes To Garcetti For Signature – CBSLA
- Trader Joe’s hikes hazard pay for its U.S. workers, but there’s a catch – CBS News
- Is Kroger justified in closing stores over a hero pay ordinance? – RetailWire
- Kroger Delivers Strong Fourth Quarter and Fiscal Year 2020 Results – The Kroger Co.
Discussion Questions
DISCUSSION QUESTIONS: Should chain retailers look at temporary pay mandates as more of a branding challenge vs. as a financial issue? How do retailers that frequently publicize the investments they make in communities not see similar opportunities when it comes to underperforming stores?
Poll
BrainTrust
Jeff Weidauer
President, SSR Retail LLC
James Tenser
Retail Tech Marketing Strategist | B2B Expert Storytelling™ Guru | President, VSN Media LLC
Given that the stores were already underperforming it sounds like the hero pay ordinance may have brought forward a decision to close them rather than initiated it – especially if hero pay pushed them into the red. Shutting a store has consequences and it is not always a good look, however Kroger needs to stay on top of its store fleet and ensure that it is constantly trimming unproductive locations. Over time, the failure to do this creates a sclerotic and flabby company. As for the hero pay, I am sure it is well intended but it is wrong for local councils to intervene in the market in such an arbitrary and haphazard way: and now people have lost their jobs because of it, which is far from a great outcome.
Underperforming or not, I can’t think of a worse time to close a store with regard to customer perception. Here is Kroger’s message, loud and clear, “Our workers don’t deserve more money for 120 days for their service to you.”
If the stores are underperforming, suck it up and wait until the 120 days have passed then make the business decision.
I quite agree that it looks bad. However much of the blame needs to be assigned to local councils, which should not be setting wages. Especially so when the mandate is discriminatory and doesn’t apply to other stores like Walmart or Target. Interference has consequences and this is one of them. Kroger is not a charity there to clean up or mask a government created mess so, as bad as it looks, I can’t blame them for shutting stores that no longer work for them.
I agree with you Neil, but I also see brick-and-mortar stores as a form of marketing that needs to be managed like any other channel. They should have figured out their PR play before closing to better manage the optics, even though you are right that they are a business, not a charity.
Absolutely, Neil, I too think it is totally inappropriate for local councils to be cherry picking who pays more and who does not.
I agree that retailers need to close underperforming stores or they risk their financial futures. The question is, what pushes a retailer over the edge to close an underperforming store? If a local ordinance makes an already underperforming store even more unprofitable, then it seems to qualify as a logical tipping point. Kroger will take a bad PR hit in this particular local market, however so will the local government among local businesses. Retailers open and close all the time. In a few months it will likely be forgotten.
I’m all for rewarding front-line workers for their heroic work, but this needs to be at the discretion of the company, not government. And while there may be some positive publicity as a consequence of providing additional pay, it shouldn’t be the primary motivation – it should be about the workers. The government mandated pay proposed in California is a very slippery and dangerous slope.
It just creates bad optics for Kroger – it makes them appear unsympathetic and uncaring to the situation of their front-line workers. They should have looked at other options rather than closing one million+ facilities and causing customers to look elsewhere to shop.
This may well be an example of “the straw that broke the camel’s back” for already underperforming stores. Retailers do not have a moral commitment to operate stores that are losing money because customer are not buying enough to keep the stores open. If there is no way to balance a temporary increase in hourly rates (such as canceling bonuses), retailers may have no choice but to close those stores.
This is way worse than bad optics or bad timing. It’s deeply flawed management thinking and behavior. I have read so many positive things about Kroger’s business practices. This leaves me scratching my head.
Sorry, this is a naked attempt by the grocery union to embarrass the chains. I quote union president John Grant, “Faced with sharing their windfall with their employees, [Kroger] chose instead to destroy 250 families’ lives in the middle of a pandemic.” I have family members who have been part of unions for years but this is just wrong; it is wrong to use the front-line workers as pawns. Kroger either gives into this and fights it forever, or they hold the line with their business model and battle the press. In the end the customer and employee loses.
Kroger is going to face some big blow-back on this over time. They can say whatever they want and try to point figures at local governments, but at the end of the day when Kroger posts huge sales and earnings gains there will be questions and bad public relations. I get these stores may be in “soft markets” for Kroger, but since when does Kroger just give up, pack up and go home? Someone should ask Kroger their position on raising the national minimum wage.
This is a slippery slope that’s only going to get deeper and faster. With additional municipalities introducing “hazardous duty” bonuses, the pressure on all retailers will increase. However if perception is reality, the timing is not good.
How perplexing and aggravating. Clearly, Kroger leaders didn’t think to talk to customers before doing this. Customers see up close and personal how hard these associates are working, and they are talking with them at each visit. Does Kroger really want to take a reputation hit like this?
Why aren’t Target, Walmart or Amazon targeted? It is perplexing and aggravating to cherry pick who the union decided to make the enemy in a battle for eyeballs.
Kroger shot itself in the foot with this move. The general public empathizes with the front-line folks, and also knows that supermarkets have all seen record sales in 2020, due in part to those frontline workers. Kroger may have a valid business reason for the closings, but the negative optics outweigh the financial upside.
Record sales have not been driven by frontline workers. According to an extensive survey of UK shoppers, of those who said they were spending more, 39 percent said it was because they were having to buy more expensive brands or types of products due to the lack of choice.
Some 32 percent said they had to splash out more on groceries due to not eating out anymore whilst 29 percent said it was due to a lack of multi-buy promotions, which were stopped by many supermarkets at the start of the outbreak to help manage stock levels.
Another 31 percent said they were consuming more in general after finding themselves comfort eating whilst 13 percent admitted treating themselves to pricier brands or product types which is likely due to some households having more disposable income.
Another 26 percent said their increased bills were due to shopping in pricier convenience or independent stores since the lockdown began, perhaps as they were looking to travel to nearby shops instead of large supermarkets.
Others have been stockpiling with 19 percent admitting they had been stocking up on food in case of future shortages.
We can all agree that a survey done in the States would show like results.
I am with Trader Joe’s on this one. The message is clear, “We care about our workers who service you and therefore we care about you.”
Too often companies look at labor as a cost. It must be approached as an investment and it generates ROI just like any other asset.
The NGA says that labor, including store management is about 14 percent of store revenue. If the pay increase takes it to 20 percent, the grocer can raise prices a mere 1 percent and cover the increase without hurting the bottom line. If they use price increase as an excuse for helping workers and raise prices 2 percent, they can take half of that straight to the bottom line.
That the specific actions Kroger is reacting to were discriminatory in their treatment of large/national versus small/local retailers is well established. So the current question is “who gets to decide what workers will be paid?” At the geographic level (i.e. blanket minimum wage laws for all workers and industries) that right has been granted to government. That leaves companies with simple decisions — do business there or don’t. Kroger doesn’t deserve criticism for exercising the only choice they are still able to make under any circumstances. But it is particularly odorous to do so in such a clear case of blatant discrimination. The issue for all retailers here is not public opinion, it is legal precedent.
Oh boy! Legislating what the big boys pay to their employees at the local level scares the heck out of me. And it apparently is an action that has instigated large changes to Kroger’s market presence. Did the cities up their staff’s income where staff must interact with the public? What other retailers will the cities go after? Surely there have to be more.
Bad move, bad statement. If Neil is right and the stores were underperforming anyway, this was the wrong excuse.
Walmart is drooling.
I’m sure Walmart is laughing because they didn’t have this foisted on them.
No retailer wants to operate stores that are unprofitable. Kroger had identified these locations as underperforming. That term covers a wide range of results. It may be that the locations’ profitability was marginal and on a downward trend. Are the optics good? No, but the issue with this type of proclamation is that this one for 120 days may be followed by another.
I think this strategy is much more about the broader notion that local municipalities can dictate your labor costs and therefore your ability to operate. I also believe that it is not a coincidence that this is happening in California where the governor is being recalled, ostensibly because of onerous and in the opinion of many of his constituents, nonsensical diktats. Point being, that in California, Kroger and other retailers have good reason to believe these new rules and regulations may not be as temporary as being postured. Time will tell if Kroger is the hero or the goat with this decision but, given the current mindset in California, it is just as likely the shoppers will blame the rule makers as they do Kroger for this decision.
I find it a bit curious why Kroger would choose to draw a line in the sand in this instance over ordinances that are supposed to be temporary, at a time when their corporate profits are at an all-time high.
This three-way dynamic between municipalities, labor unions and retailers over so-called “hero pay” simmers with political, economic, and public relations consequences.
Closing a money-losing store when expenses rise beyond the retailers’ control would seem like a simple business decision. Making the move to resist a local ordinance has political resonance, and the PR fallout can be easily predicted.
It’s well worth asking why the stores that Kroger wants to close in Long Beach and L.A. were performing poorly in the first place — especially at a time when the grocery business at large is enjoying some of its best financial results in many years.
So I cannot help wondering whether Kroger’s decisions were made to cement a precedent for future negotiations or if they were merely opportunistic. Either way, in an era when most localities can offer numerous options for grocery shopping, Kroger is electing to lose some shoppers and sacrifice a bit of its reputation. I wonder if it has calculated the impact on its Likelihood to Recommend score.
It is clearly a branding challenge, one frankly large enough that it could easily become a financial issue. The optics are awful, refusing to pay people a little more for potentially risking their lives and the lives of their loved ones. The same argument could possibly be made about underperforming stores, but I think it is a lot easier to shutter a store than it is to be seen as exploiting your entire workforce.
The poll question is a little misleading: closing a store makes a huge impression … in the perceptions of the (soon to be) former shoppers at the store closed, but probably little on shoppers elsewhere. Someone in Denver or LA isn’t going to stop shopping at XXX because they closed stores in Cleveland … they’re unlikely to even know about it. (A good question would be what those former shoppers do: do they seek out the same chain at another location, or do they actively avoid it?)
I’ve long argued on these pages that keeping open unprofitable stores is a worthwhile form of corporate “giving” — up to a point — but how to publicize this? The consumers are likely to feel disparaged, however valid the claims may be, while shareholders may (and SOME shareholders certainly will) object to giving up income. Years ago both of these groups could probably be sidestepped, but in our wonderful age of facebook and twitter and cheap publicity, no good deed goes unpunished.
If there is one single way to build a reputation as a thug, it’s to close stores in response to local ordnance for combat pay during a pandemic.
I’m sympathetic to Kroger’s. Theirs is a tough business and I’m sure a bunch of people inside Kroger’s have ironclad logic showing this to be a good move. Unfortunately, these things have consequences.
Once did research in a suburb of Chicago where a Lowe’s store had closed 8 years earlier. Participants still ranted about it in frustration.
Certainly there are other ways for Kroger to absorb temporary wage hikes for their lowest paid group of associates who are the face and connection with customers. Especially given shoppers are increasingly making purchase decisions based on companies’ social responsibility.
The optics are just awful. Shoppers won’t forget. Just provide the “hero pay” to heroic employees. It’s that simple.
If the stores were underperforming, they should have closed them sooner. They have a fiduciary duty to their shareholders to shed underperforming assets.
The argument that the “temporary” wage increase justifies closing them for good just comes off as rash, at the very least.
I already have my opinions on this. It is not really right for the city councils to mandate this on a grocery store and not on a Walmart or a Target, but they are. That ship sailed when cities started to arbitrarily set their own minimum wages and it isn’t coming back. But it is really poor form for the grocers to close stores over this when they can cut services, increase prices, etc. to make up for the “temporary” increased cost.
Most consumers are sympathetic of the employees and think the employees should have a pay increase. The consumers may not know the whole story or all of the facts, but perception is reality and this sort of move makes the store chain look REALLY bad in the eyes of the customer. Even in my eyes, this is terrible form.
Kroger will just continue to bleed market share out west. They build few new stores. Kroger seems to just want to cede the west to Albertsons/Safeway and Amazon. It is a real shame.
No. Pay is still one of the retailers highest costs and having local governments throw a wrench into their pay structure amplifies the incentive to move from certain locations. Sure, some negative PR locally — but the average New York, or LA or (insert location here) consumer is by and large not thinking about whether the store in Long Beach closed. For retailers trying to build community and gain local advantages, it is a marketing investment decision. For everyone else it’s typically a financial decision. Sure it’s nice to be magnanimous, but for many retailers, the PR costs will be negligible and is expected to pass quickly.
As a grocery store worker, I would love the addtional pay increase, especially after I tested positive for COVID due to my work environment. However, I do not think the government should have control over the grocery stores and demand that they increase employee wages. If Kroger feels that they need to close some of their stores, good for them. It is their business, not the business of the government.
Kroger is getting a black eye — perhaps not deserved! I worked for Kroger in the past. They are extremely disciplined and work hard to make their stores work and also make sense. They are not the number 2 grocer because they are sloppy. They are not. They work hard to eek out success in the extremely difficult marketplace of groceries. They also are STRICT with loss. They tolerate poorly performing stores if they see a service to a community and if they can at least break even and the store can carry itself. But I believe they will not allow a store to become a detriment to the whole — they will protect the greater business.
What the city council likely did with this ordinance in a naive and unknowing consequence of its actions, was upset a delicate balance that Kroger plays with many stores to maintain a small profit or simply break even. If that delicate balance is broken, or when that delicate balance breaks down, the store is done — period. You have to protect the overall business. That’s business, and I fear this may have been what happened here.