L.A. report on grocery ‘hero pay’ warns of potential layoffs

A new city report on the Los Angeles City Council’s proposal to require grocery store owners to temporarily boost the pay of their workers raises questions about how grocery chains will shoulder the additional cost.

City leaders are considering an ordinance that would force larger grocery and drug stores to temporarily pay workers an extra $5 an hour for 120 days. Council members are expected to discuss the so-called hero pay proposal at a City Hall committee hearing Tuesday afternoon and vote on the ordinance at a full council hearing Wednesday.

The proposal is opposed by the grocery store industry, which has responded by shutting down stores and suing cities that have passed similar ordinances. The giant Kroger chain announced plans to shutter two stores in Long Beach after that city moved to require stores to pay workers an extra $4 an hour.

The L.A. City Council asked city analysts to report on the economic effects of temporarily raising grocery workers’ pay.

In a Feb. 19 report, Chief Legislative Analyst Sharon Tso wrote that the grocery industry is a low profit margin industry and that the net profit margins of Kroger (which owns Ralphs and Food 4 Less) and Albertsons Cos. (owner of Vons, Pavilions and others) were near or below the industry average of 2.2% in 2019.

Net profit margin is a measure of earnings as a percentage of revenue, according to the report.

The city’s analysis suggests that a spike in sales from people stockpiling groceries in the early months of the COVID-19 pandemic was temporary and didn’t translate into a profitability trend for stores.

Kroger and Albertsons saw big boosts in early 2020, the report found. Still, the “companies did not earn above-average profits until the first quarter of 2020 during the COVID-19 shopping spike and by the third quarter had dropped below the average,” the report found.

Grocery store chains’ big gains during the pandemic has been cited by some L.A. city leaders as a reason to force them to hike pay for their workers. A widely cited report by the Brookings Institution studied the profits of the three largest grocery providers, Walmart, Kroger and Albertsons, and found that together they earned an additional $6.8 billion in profit in the first three quarters of 2020 compared with 2019 — an average increase of 98%.

Tso’s report also looked at private grocery store chains, finding the average net profit before taxes was 1.85% for independent grocers for the five years before the pandemic. “After the March 2020 surge, the number of trips to stores fell well below 2019 levels as shoppers quarantined at home,” the report states.

The ordinance under consideration by Los Angles would apply to grocery, drug and retail stores in Los Angeles with 300 or more employees nationally and 10 or more employees on-site. The Los Angeles County Board of Supervisors is expected to vote on a similar proposal at its Tuesday meeting.

United Food and Commercial Workers International, which represents 1.3 million workers in grocery, meatpacking and other front-line industries, is spearheading the pay increase push. California cities including Oakland, West Hollywood and Santa Monica have passed similar laws.

If Los Angeles moves ahead with the proposal, a $5-per-hour boost would increase the average pay of workers to $22.51 per hour, an increase of 29% from the base wage, according to the city report.

“Employees would have a temporary earnings boost and more spending power, which could trigger a temporary increase in the demand for goods,” the report notes.

At the same time, grocery stores could raise food prices in response and a “typical family of four could see grocery prices increase by $33 per month, for a total of $132 in extra costs over the 120 days the ordinance would be in effect,” the report states.

The chains could also close stores, cut employees’ pay or lay them off, the report says.

The city report states that more profitable grocery stores often subsidize unprofitable stores within the same chain and “smaller chains with fewer stores will have less capacity to rely on their profitable stores to make up the increase in labor costs.”

Los Angeles lawmakers had sought to include larger chains including Target in the ordinance. But there are several Target stores smaller than 85,000 square feet in Los Angeles that wouldn’t be subject to the proposed law, according to the report. L.A.’s ordinance applies to retail stores that are over 85,000 square feet and dedicate 10% or more of their sales floor to groceries.

The city report included information about the “estimated excess mortality of Californians” by their job category during the pandemic, stating that food and agricultural workers saw the highest rates of death. The report characterized Latino and Black workers as having high rates of mortality.

The California Grocers Assn. highlighted Tso’s report in a statement Tuesday and warned of “negative repercussions.”

“Extra pay mandates will have severe unintended consequences on not only grocers, but on their workers and their customers,” said Ron Fong, the group’s chief executive. “A $5/hour extra pay mandate amounts to a 28% increase in labor costs. That’s huge. Grocers will not be able to absorb those costs.”