A BUYOUT'S BITTER FALLOUT // Safeway deal brought riches to executives, pink slips and broken lives to many workers

On the eve of the 1986 leveraged buyout of Safeway Stores Inc., the board of directors sat down to a last supper. Peter Magowan, the boyish-looking chairman and chief executive of the world's largest supermarket chain, rose to offer a toast to the deal that had fended off a hostile takeover by the corporate raiders Herbert and Robert Haft. "Through your efforts, a true disaster was averted," the 44-year-old Magowan told the other directors. By selling the publicly held company to a group headed by buyout specialists Kohlberg Kravis Roberts & Co. (KKR) and members of Safeway management, "you have saved literally thousands of jobs in our work force," Magowan said. "All of us _ employees, customers, shareholders _ have a great deal to be thankful for."

Nearly four years later, Magowan and the KKR group can indeed count their blessings. While they borrowed heavily to buy Safeway from the shareholders, last month they sold 10 percent of the company (but none of their own shares) back to the public _ at a price that values their own collective stake at more than $800-million, more than four times their cash investment.

Employees, on the other hand, have considerably less reason to celebrate. Magowan's toast notwithstanding, 63,000 managers and workers were cut loose from Safeway, through store sales or layoffs. While the majority were re-employed by their new store owners, this was largely at lower wages, and many thousands of Safeway people wound up either unemployed or forced into the part-time work force. A survey of former Safeway employees in Dallas found that nearly 60 percent still hadn't found full-time employment more than a year after the layoff.

James White, a Safeway trucker for nearly 30 years in Dallas, was among the 60 percent. In 1988, he marked the one-year anniversary of his last shift at Safeway this way: First he told his wife he loved her. Then he locked the bathroom door, loaded his .22-caliber hunting rifle and blew his brains out.

"Safeway was James' whole life," said his widow, Helen. "He'd near stand up and salute whenever one of those trucks went by." When Safeway dismissed him, she said, "it was like he turned into a piece of stone."

Few financial maneuvers have drawn more controversy than the leveraged buyout, or LBO, a relatively old money-making tactic that was dusted off and put to extensive use in the 1980s, thanks largely to the rise of junk-bond financing.

In a leveraged buyout, a small group of investors

that generally includes senior management borrows heavily to buy a company from public shareholders and takes it private. The debt is to be rapidly repaid from the company's own cash flow or from sales of its assets.

The returns on some such highly leveraged investments have been astronomical, enriching such financiers as Henry Kravis, Ronald Perelman and Nelson Peltz to a degree unheard of since the days of the Robber Barons. Proponents of LBOs argue they are good for business and good for America, triggering long-overdue crash weight-loss programs for flabby corporations. By placing ownership in the hands of a small group of investors and managers with a powerful debt-driven incentive to improve productivity, the argument goes, companies can't help but shape up.

The Safeway LBO is often cited as one of the most successful in this regard. It brought shareholders a substantial premium at the outset, and since then the company has raised productivity and operating profits and produced riches for the new investors and top management. "We could not have done what we did do without going through the incredible trauma and pressure of the LBO," Magowan said in late 1988.

But while much has been written about the putative benefits of LBOs, little has been said about the hundreds of thousands of people directly affected by the past decade's buyout binge: employees of the bought-out corporations. In the case of Safeway, a two-month investigation of the buyout reveals enormous human costs and unintended side effects. The company dropped tens of thousands of employees from its payroll, suppliers and other dependent industries laid off hundreds more, and communities lost the civic contributions of a firm whose first store had been opened by a clergyman who wanted to help his parishioners save money.

When Safeway itself selected a group of its employees to speak to the Wall Street Journal on behalf of the company, not one of those interviewed praised the buyout. "I think LBOs are very ugly," said Carl Adkins, an inventory control clerk who described himself as happy with his job. "I think they are harmful to individual working people. I think they honestly stink."

Moreover, the evidence doesn't entirely support the argument that the LBO made Safeway a healthier institution.

The supermarket chain cut plenty of muscle with the fat, both from its holdings and from its labor force, and deferred capital improvements in favor of the all-consuming debt. Many employees find the post-LBO working environment more difficult, as a company legendary for job security and fairness resorts to hardball labor policies and high-pressure quota systems.

Will anyone get hurt? No, Mom Just before the Safeway deal was struck in 1986, Magowan's mother grew worried about the employees. The supermarket dowager wanted to be sure the LBO wouldn't damage Safeway's longstanding reputation as a benevolent employer.

Will anyone get hurt? Mrs. Magowan pressed her son at the time, according to company staff members. Will anyone lose his job?

No Mom, Magowan promised, according to the staffers' account. No one will get hurt.

"Yes, I was greatly concerned about the people," Mrs. Magowan recalls today, in her mansion overlooking the San Francisco Bay. She declined to comment further.

Magowan's recollection: "Well, I don't ever remember such a conversation ever occurred . . . I might have said things like, "We're going to do the best we can for our employees and I'm hopeful that we are going to be able to keep the vast majority with the new owners.' "

In any event, before that summer was out, Mrs. Magowan's son had begun firing Safeway employees. Not long after, Safeway replaced its longtime motto, "Safeway Offers Security." The new corporate statement, displayed on a plaque in the lobby at corporate headquarters, reads in part:

"Targeted Returns on Current Investment."

A father and son play for Safeway

Before the buyout, Safeway was hardly a prime example of the sluggish, out-of-shape sort of company that LBO proponents like to target. Founded in 1926, it had grown under Magowan family leadership to encompass more than 2,000 stores in 29 states and in England, Australia, Canada and Mexico. Magowan's father, Robert, had largely built Safeway, and his mother, Doris Merrill Magowan, is the daughter of a founder of Merrill Lynch & Co., which helped finance Safeway's growth.

Many companies, including Safeway, had allowed their payrolls to become bloated in certain underperforming divisions, and layoffs were common throughout large American companies during the last decade.

But Safeway was already doing _ albeit at a slower pace _ many of the things LBO experts advocate. It was remodeling its stores and creating the upscale "superstores" that have now proved such a big success. It was experimenting with employee productivity teams, phasing out money-losing divisions, and thinning its work force with a program that included some layoffs but generally relied on less painful methods like attrition.

All these changes produced earnings that more than doubled in the first four years of the 1980s, to a record $231-million in 1985. The stock price tripled in three years, and dividends climbed four years in a row.

But all that wasn't enough for takeover-crazed Wall Street, where virtually no company was invulnerable to cash-rich corporate raiders. When the deep-pocketed Hafts began buying Safeway shares in the open market and then offered to buy the company for as much as $64 a share, management felt it had to take defensive action. Selling to the Hafts might have cost chairman Magowan his job and, he felt, ultimately might have brought a breakup of the company.

Safeway considered and rejected a plan to fend off the Hafts through a so-called recapitalization. This was a move that its supermarket-industry competitor, Kroger Co., would use two years later to keep the same raiders at bay while allowing shareholders to realize a big one-time gain.

The decision to sell to KKR instead brought immediate benefits to some. Shareholders got $67.50 a share _ 82 percent more than the stock was trading at three months before _ plus warrants that give them a 5.6 percent stake in the ongoing company. Employees owned roughly 10 percent of Safeway shares at the time of the buyout.

Players make a deal _ and millions

Magowan and other directors and top executives received $28-million for their shares, $5.7-million of which went to Magowan. He and about 60 other top executives also got options to buy a total of 10 percent of the new Safeway at only $2 a share; those options are now valued at more than $100-million, or $12.125 a share.

The Hafts made $100-million by selling the Safeway shares they had accumulated to KKR, and as a consolation prize, they were also given options to buy a 20 percent stake in the new Safeway. The Hafts sold that option back to KKR two-and-a-half months later for an additional $59-million.

The three investment banks that worked on the deal made a total of $65-million. Law and accounting firms shared another $25-million.

And then there are Henry Kravis, George Roberts, about a dozen other KKR employees and the 70 investors KKR brought into the buyout. KKR itself charged Safeway $60-million in fees just to put the deal together. The five KKR partners then put up a small fraction of the equity funding _ 1.1 percent, or roughly $2-million _ and received a 20 percent share of the eventual profits from any sale of Safeway.

KKR's investor group, half of which consists of state pension funds and which also includes banks, insurance companies and even Harvard University, got most of the rest.

Roberts rebuts the notion that too few people really benefit in an LBO. He says that some of "our 70 limited partners represent retired teachers, sanitation workers and firemen, and 80 percent of our profits go to them."

But at the largest of those investors, Oregon's public-employee pension fund, LBO investments make up only a tiny portion of investments and thus haven't had "a significant impact" on retirees' benefits to date, according to Bob Andrews, fund manager.

17 years and a severance check

The immediate gains for some triggered immediate costs for others. The first employees to be fired shortly after the buyout's completion were more than 300 staffers from Oakland corporate headquarters and a nearby division in Walnut Creek, Calif. The following spring, the entire Dallas-area division was shut down, and nearly 9,000 more employees were dismissed _ employees with an average length of service of 17 years.

"This is going to kill people," transportation manager Richard Quigley said he told his boss when he learned that layoffs would take place.

On the Friday afternoon before the dismissals went into effect, Patricia Vasquez, a 14-year systems analyst, heard that her name was on the list. That evening, Mrs. Vasquez, a Safeway devotee famous for her refusal to take lunch hours, packed her service citations in a cardboard box and left looking pale and drawn. The next morning her two young children found their single mother on the bathroom floor, dead of a heart attack.

That Monday, Quigley came home with the news that he, himself, would be fired. His worried wife's blood pressure began to rise. A diabetic who had been in good health for years, she was hospitalized by Labor Day weekend _ and dead by Sept. 5. Rightly or wrongly, Quigley blames his wife's death on his Safeway layoff: "She was very traumatized by it."

Told of these deaths and several suicides that family members and friends attribute to the Safeway layoffs, Magowan said: "I never heard of this before. If it's true, I'm obviously sorry about such a tragic thing, but any attempt to associate this directly with the LBO shows a disposition to want to believe the worst of LBOs."

For many at Safeway, firing day was only the first in a long series of financial and emotional body blows.

"The dominoes began to tumble and they crashed for a long time to come," says Ron Morrison, a former corporate systems manager. When Morrison lost his 14-year job, his fiance announced she couldn't marry an unemployed man.

He found work as a transportation analyst at Del Monte, but then KKR bought that company, too _ and he was laid off again, just before Thanksgiving. By the time 1990 rolled around, Morrison had not only gone through two KKR-led LBOs, he had lost his second home and was unemployed again.

"Right now I pretty much live in a cocoon," Morrison said. "You begin to pull in your tentacles because you can't afford to have any more cut off."

Sorry, no written references

While at Safeway, Morrison said, he helped conduct a transportation study that trimmed millions from the company transit budget. And he wasn't the only fired employee at headquarters whose work had brought the company big savings. Refrigeration engineer Mikhail Vaynberg, a Soviet emigre, said he invented a new cooling system for the stores that cut energy costs 35 percent, saved $1.6-million a year, and was copied by many suppliers. (A Safeway spokesman said the company doesn't contest these cost-saving claims.)

After he was fired, Vaynberg couldn't find work in his field and, like many other employees fired at headquarters, said he couldn't get a current letter of recommendation from Safeway. He said his boss told him he wasn't allowed to supply a written reference because "you might use it to sue the company." (A Safeway spokesman said it is company policy not to grant reference letters for "good, sound legal reasons," but maintained that managers were allowed to make exceptions for employees laid off in the 1986 firings at headquarters.)

Vaynberg said his greatest blow came a few weeks after the layoff, when his only son dropped out of engineering school weeks shy of graduation: "The country doesn't want engineers: Look what happened to you," he told his father. Now Vaynberg, still unemployed, spends his days in a painfully clean living room, prowls the halls at night and avoids old friends and neighbors. "I am ashamed," he said, staring at his big empty hands. "I am like an old thrown-out mop."

Safeway fired its corporate employees with no notice, cut off their medical insurance in as little as two weeks and provided severance pay of one week's salary for every year of service, to a maximum of just eight weeks. And to get the pay, many employees say they were told to sign a letter waiving their right to contest the severance package later. (A company spokesman said the letter wasn't a waiver but simply an "acknowledgment" that they understood the terms.)

Magowan concedes that many of the people fired at headquarters in the summer of 1986 were "very good" employees. The cuts were made in a hurry, as he said later in a court deposition, so as "to put this whole unpleasant matter behind us as soon as possible." For such haste, Safeway would wind up paying $8.2-million to settle a wrongful termination class-action suit and $750,000 to settle a separate suit for age discrimination.

One executive who left headquarters voluntarily was accorded much better treatment. Safeway President James Rowland was granted a $1-million bonus when he retired a few months after the buyout.

Rowland advised Magowan in a memo to approve the bonus privately and divide the amount into smaller portions with labels like "paid consultant." The reason, as Rowland wrote: "Peter, I do not want to put you in an embarrassing situation."

(Rowland, reached at his Arkansas home, said he never got a "million-dollar bonus. I got my regular bonus. I just don't recall what it was. I'm not going to go back and rehash all that." He then hung up. Magowan said Rowland wasn't paid a lump sum of $1-million. He was paid his previous year's bonus, which he had earned, plus an advance on consulting work he would do for Safeway, Magowan said. "It wouldn't have been some side deal under the table between Jim Rowland and me that nobody knew about. That's not my style.")

Unemployment lines, suicide attempts

"I wouldn't be surprised if 11,000 jobs were created out of" the roughly 9,000 jobs lost, Magowan announced to the press after he closed the Dallas division. He says he assumed that other grocery chains would expand to fill the Safeway vacuum. "What I'm talking about here is a theory of mine," he said later. "I will get right up front and say I don't have facts to support it." Magowan said he has not been back to Dallas since the closure.

When the Dallas division shut down, the state unemployment office had to open on the weekend _ for the first time ever _ just to accommodate the Safeway crowds. The Dallas employees had a thin financial pallet to cushion the blow. Their severance pay was half a week's pay for each year of service, up to a maximum of eight weeks.

And their severance checks didn't start arriving until July 1987, three months after the shutdown. Russell Webb, a 12-year produce clerk and single father with three children, didn't get his severance check for eight months. Vacation pay arrived even more slowly: First the union had to go to arbitration to get it; then, the company didn't start mailing the checks until February 1989. Safeway says the severance and other checks arrived late because they weren't part of the union contract and thus "had to be negotiated."

In addition to White's suicide, at least two others tried to kill themselves. One was Bill Mayfield Jr., a mechanic in the Safeway dairy since it opened in 1973, who slashed his wrists, then shot himself in the stomach. The bullet just missed his vital organs, and he survived.

"I would say (the layoff) devastated about 80 percent of the people in the division," said Gary Jones, president of Safeway's credit union in Dallas, which eventually had to write off $4-million in loans.

"Overnight we turned from a lending institution into a collection agency." At one point, more than 250

repossessed cars were sitting in his parking lot.

KKR and Safeway blame organized labor for the fall of the Dallas division. Once the leading grocer in the area, Safeway had seen its market share fall by nearly half in the '80s. KKR and Safeway officials say the company was paying too much in wages, some 30 percent more than rivals, thus preventing it from cutting prices, remodeling stores and the like.

But rival Kroger was also a union shop, and it found a way to prosper and expand in Dallas by renovating stores and negotiating lower wages with the union. Its market share was on the rise. The Kroger case suggests that the Safeway layoffs might have been necessitated as much by mismanagement as by labor costs. Some company officials concede that Safeway had other problems besides wages in Dallas: Its stores were too small, too old and poorly designed.

While grocery competitors in Dallas eventually bought more than half the 141 Safeway stores, they were less eager to pick up the unionized workers. According to a state-funded survey of the displaced workers, stores under new management typically recalled no more than a half dozen of the 40 to 60 former Safeway employees who staffed each outlet.

And wages fell sharply, no matter where the workers landed: In 1988, according to the survey, ex-Safeway employees reported that their average pay had dropped to $6.50 from $12.09 an hour.

Cindy Hale, an 11-year Safeway employee, saw her wages fall to $4 an hour when she took an identical grocery clerk's job with AppleTree Markets, at an old Safeway store. Her new employer would only hire part-time, so Hale, a single mother, lost her medical benefits. She eventually lost her house, too, and had to send her son to live with her parents. "But it really wasn't as bad for me as the others," she said.

In the parking lot, a worker prays

For Dallas employees, working for Safeway had often been a total family experience, and many households lost more than one income after the buyout. The Seabolts lost three: Husband, wife and daughter all got their pink slips the same day. Ron Seabolt, who worked in the company's distribution center for 17 years, searched for months before taking a job as a janitor. Now he works at the post office.

Kay Seabolt, a human resources supervisor at Safeway and a 17-year company veteran, counseled ex-employees for a year under a state job-placement retraining program. The program's counselors sometimes fished into their own pockets to buy groceries for those who streamed through the counseling center, an abandoned Safeway office. When Safeway sold it, the new owners evicted them.

Seared into Mrs. Seabolt's memory is the day one tattered man arrived at the office. A long-timer in the Safeway bread plant, the middle-aged baker made his way to her desk with a slow, wincing limp. He apologized for his appearance, explaining that he had just walked six miles from the temporary labor pools: His car had been repossessed. He was living in a homeless shelter. "I gave him a few job leads," she recalled, "but he was pretty shabby and I didn't hold out much hope." Before he left, she slipped him some money for bus fare. "I never saw him again," she said.

When the layoff rumors first began circulating, Clara Sanchez took to praying in the parking lot of Store No. 677. Her silent pleas went unanswered. On April 24, 1987, she and her husband, Jesse, lost their jobs. She had been a checker for 12 years; he had been an order filler in the warehouse for 18 years.

Clara could find no work, and is still unemployed. Jesse searched for eight months before the city hired him to cut grass for $3.55 an hour. Then he washed cars for $4.50 an hour. Two months later, he was laid off. Finally, with $14,000 in unpaid bills, the Sanchezes filed for bankruptcy.

The church sent canned goods, and Mr. and Mrs. Sanchez skipped supper some evenings so their children could eat better. After a while, Mr. Sanchez was too depressed to eat anyway. "I wasn't a man; I wasn't worth anything as far as I was concerned," he said. "Why live if I can't support my kids?" One Friday night, Sanchez told his wife he was going to watch a wrestling match, but went to a friend's house instead with a business proposition: "I told him I would pay him $100 to take my life. I didn't own a gun or I would've done it myself." The friend put his gun out of reach and sent Sanchez home.

When Safeway pulled out of Dallas, the shock waves didn't stop at the supermarket doors. The shutdown led to secondary layoffs at almost all the big food and beverage vendors in town, and some construction businesses suffered. For Harry W. Parks Co., a general contractor, Safeway represented 85 percent of annual revenues. Parks had dropped most of his other clients to assist Safeway in its big remodeling program in the early '80s. After the pullout, his company nearly folded, all but three employees were laid off, and Parks had a heart attack and died.

"Safeway was his whole world," said his son, Harry Jr. "That's all he cared about for 30 years. When they pulled out, it was like his whole family died."

The North Texas Food Bank suffered, too. It lost a founding member and its leading contributor; Safeway used to donate 600,000 pounds of food a year.

"The bottom line," food-bank director Lori Palmer said, "is fewer people ate."

Selling the stores to save the company

The layoffs in Oakland, Dallas and elsewhere were just one part of KKR's broad-based plan to cut costs, boost profitability and meet the stiff interest and principal deadlines set by the company's lenders and debt-holders. About 1,000 of the company's stores were sold, as were 45 plants and other facilities.

Safeway put whole divisions in Kansas, Oklahoma, Arkansas and Utah among others on the auction block. They were sold to a few grocery chains, many other LBO investors and, in some cases, real-estate investors.

The real-estate investors didn't rehire any Safeway workers: They converted the properties to video shops, thrift stores, and in one case a bingo parlor. Some were boarded up.

While grocery chains bought some Safeway stores just to shut them down and reduce competition, other chains bought whole Safeway divisions and kept most of the workers; the British and Oklahoma divisions are examples of this. In other cases, new owners retained only selected workers. In virtually all cases, though, new ownership meant pay cuts.

In what seemed at first the best deal for employees, the grocery chain Borman's Inc. bought the entire Safeway Utah division and hired virtually all the workers. But nine months later, these 3,000 employees lost their jobs when Borman sold the division, piece by piece, to local competitors and investors. Only a few of the stores in the Salt Lake City area still operate as supermarkets.

Don Schanche, a Safeway meatcutter in Salt Lake City for 25 years, spiraled downward from his $12.33 hourly pay at Safeway to a reduced wage scale at Borman's "Farmer Jack" outlet, to an unsuccessful appeal for any minimum-wage employment at the same store, which had been bought by his old manager. Now Schanche drives by a "for lease" sign in front of the store, which is empty, having gone belly-up. Schanche is making a living as a "job coach" in a state-funded displaced workers program, where he is currently counseling other ex-grocery store employees following an LBO involving their employer, Alpha-Beta.

Magowan, as Safeway's CEO but no longer the man with final decision-making authority, was at first opposed to the extent of the divestiture program, people familiar with the situation say. He liked being the head of the world's largest supermarket chain. But KKR officials gave him little choice if he wanted to stay on board, these people say.

Magowan himself said that "no one twisted my arm" over the restructuring. Still, he said he regrets selling promising divisions, mentioning in particular Los Angeles, El Paso, Tulsa and Little Rock.

Still others point with regret to the loss of the company's 132-store British division _ a top performer known in-house as the "jewel" of the Safeway collection _ and the sale of Safeway's successful discount chain of liquor stores, Liquor Barn, which under its new owners (Majestic Wine Warehouses Ltd.) filed for Chapter 11 bankruptcy protection in 1988.

The chairman sees some benefits

Despite such regrets, however, Magowan is now a self-professed believer in the LBO concept. For one thing, his own performance has been rewarded under KKR, which has increased his annual compensation by about 40 percent to $1.2-million including bonus. His bonus potential has climbed to 110 percent of base pay from 40 percent before the buyout, and he has earned the highest possible bonus every year.

Many things have gone well for the buyout group. The sale of the British division alone brought $929-million, part of the $2.4-billion that KKR got from asset sales _ or 40 percent more than KKR officials say they had projected.

Thanks to sales of some money-losing operations, Safeway's basic business could earn more without raising prices. The company's stores are now No. 1 or 2 in most of its markets. By 1989, operating profit per employee was up 62 percent from 1985, and operating margins had increased by nearly half. The company is producing nearly twice as much annual cash flow as it needs to cover yearly interest payments. As a result, Safeway has been able to pay bank lenders ahead of schedule and negotiate lower interest rates.

Finally, KKR and Safeway officials also credit a new combination of incentives and quotas that they say make workers more entrepreneurial and at the same time more accountable.

Magowan said employees are thriving in this post-LBO culture: "I am convinced that today's typical Safeway employee feels better about the company than he or she has at any point since the buyout." Store managers, he said, "genuinely enjoy this extra responsibility" of meeting new quotas.

Not every part of the new Safeway picture is as rosy as Magowan portrays it, however.

The public offering completed recently didn't quite go as planned. The offering's underwriters knocked the price down to $11.25 from the $20 a share envisioned last summer. Magowan himself conceded, "I think if we had known right at the start that this was the price that we would've gotten, we probably wouldn't have come out with our offering." He blames the much-publicized problems of other leveraged companies for unjustly tainting Safeway's offering and driving away stock shoppers.

But some potential investors say it was Safeway's own financial condition that turned them off.

The company labors under an interest bill of about $400-million a year, a negative net worth of $389-million, and a remaining $3.1-billion in debt. The company's net income was only $2.5-million last year (after accounting for nonrecurring expenses), down from $31-million the year before. Safeway lost a whopping $488-million in 1987, the first year of the LBO.

A large amount of capital improvement has been postponed, with such annual spending falling from an average $600-million to $700-million in the three years before the buyout to an average of $300-million in the years since. The company estimates it must spend $3.2-billion on store remodeling and openings over the next five years. And Safeway now has few assets left that it can justify jettisoning.

Some "happy' employees speak

When Magowan in 1988 sat down with a group of specially selected employees to tell them the story of "our growing success," the workers had a different story to tell him, as chronicled by the company's own magazine, Safeway Today.

"The morale in Richmond (Calif.) right now is down to rock bottom," Vince Macias, a 25-year trucker, told the boss. He added that drivers were forced to pull as much as 16-hour shifts and were so overworked they were "dangerous" on the highways.

"The morale is so bad in some of our stores," Christie Mills, a San Jose employee, told him, that it's driving away customers.

"There aren't many of us, and hours are cut back so much," said Cheryl Deniz, a bakery clerk. "I don't let the customer see it, but inside I'm miserable . . . I want to be happy when I wait on them . . . I try my best, but sometimes I'm so overloaded. It's unfair to the customer, and it's unfair to the employee . . . And some of you feel the same way."

Magowan looked around the room. "I see everybody nodding their heads to what you are saying," he told her. Then he added: "I've heard this before."

(A Safeway spokesman says the company immediately followed up on the workers' complaints and that Magowan personally wrote letters to those employees who voiced concerns.)

Certainly many employees have emerged unscathed from the LBO and feel comfortable working under the new regime. A good number of them even applaud the company for its rapid surfacing from the debt depths.

But among a group of workers that Safeway supplied to this newspaper as a sampler of "happy employees," no one interviewed is praising the LBO.

"We've recovered well," said Jim Ratto, a Safeway liquor merchandiser. "But personally, I think Safeway would have been better off if we had never gone through the leveraged buyout. It definitely added some problems, and the company would have been farther ahead now if it had never happened."

"Safeway's made a beautiful comeback, we're getting on our feet again, and I have no complaints," said George Voronin, an affable wine steward who always tries "to look on the positive side." But even he added, "When someone comes in and takes all your funds and sells your stores, isn't that what we in the United States call dishonest?"

The new Safeway: carrots and quotas

The new esprit de corps trumpeted in the executive suite is less apparent in the grocery aisles, where store employees say the KKR-inspired quotas _ based on complex return-on-market-value formulas _ create anxiety as well as productivity. And the pressure mounts as one goes down the chain from manager to checker.

While Safeway executives call the quota program an "incentive" plan, some store managers refer to it as "the punishment system." That's because store managers say if they don't make the week's quota, they can be penalized. In some divisions they report that they must work a seven-day week as penance. Working a month without a day off isn't unusual, managers in the Washington and California divisions say. In some stores managers who miss their quota say they have to pull 6 a.m. to 6 p.m. shifts.

Magowan said corporate headquarters sets no such penalties. "I have never heard of any such program," he said. "I simply do not believe for one second that this is any widespread activity." A company spokesman said at least 50 percent of store managers are meeting their quota.

Even among the list of satisfied employees that Safeway provides, many aren't profiting from the incentive plan. Either they are too low on the totem pole to get a bonus (with a few exceptions, only department heads and higher qualify), or their departments aren't generating enough sales volume to meet the demanding quotas. Voronin, whose wine department has been on the incentive plan for two years, has yet to get a bonus. Mary Wise is head of the floral department, but the company hasn't yet cut her into the plan. She said she doesn't mind: "I leave feeling good, knowing I did the job right, and for me, that's my bonus." She added, "But I'm one of those people you look at and say, "Oh, why is she always so happy?'

"

In Seattle, only one of more than a dozen store managers in one district expects to meet quota this year, managers say. Last year, none made more than 20 percent of their bonus potential, the store heads say. A Safeway spokesman said most managers in that region are making their quota.

On Safeway's home turf in the San Francisco area, managers are "stepping down" and becoming checkers. Some have been forced to turn in their manager badges when they didn't meet quota. Others say they are voluntarily taking lower status and pay out of exhaustion.

"A number of store managers have stepped down, this year particularly," a company spokesman acknowledged. "In recent years, the job has gotten tougher."

In the wake of the LBO, the company was able to squeeze labor concessions from the unions, using the Dallas shutdown as an object lesson of what can happen when labor costs are deemed too high. With the debt hovering overhead, you could "get the labor concessions you deserve," Mr. Magowan said.

"It was like coming to the table with a gun at our heads," recalled Ed Hardy, a United Food and Commercial Workers negotiator. While the company's average hourly wage rate has risen slightly in the last three years _ the exact amount is confidential, Safeway says _ the small increase trails the inflation rate.

The strategy of catering to the upscale at many stores has also enabled KKR to cut service workers' wages even further. To staff trendy specialty departments, Safeway has hired "general merchandise clerks," a classification that pays as little as half the wages of food clerks.

This disparity troubles even the upbeat floral manager Mary Wise. "Gosh, you can barely live on what they are paying them," she said. She broached the subject with Magowan at the 1988 meeting. These specialty clerks are performing a job that requires training and skill, she said, and "Safeway should pay them accordingly."

Magowan's response, as quoted in the company magazine: "The problem, Mary, is this. The reason we got that lower GMC (general merchandising clerk) rate was to allow our labor costs to be competitive." But he reassured her that the company was taking steps to make up for the low pay. "What I've suggested from time to time is saying, "Do you like weekends off? Do you like to work 8 to 5?' . . . We'll give you the lower rate but a better schedule.' That might make them very happy."

The view from the retail floor

In one division, Safeway has extended the incentive program beyond the department manager level in an experiment aimed at letting all workers benefit in the enhanced productivity they are generating. Employees in the Denver division took a 14 percent pay cut, but were assured that, on average, the new profit-sharing plan would more than make up the difference. The company acknowledges this hasn't happened in nearly half the cases; the union estimates that even fewer increased their earnings.

Store employees in Denver also complained about the way the incentive system was linked _ as it is throughout the company _ to grievances and work-related medical claims. "Managers have been saying to people, don't file workman's comp because it will hurt the bonus," said Charles Mercer, president of the Denver local of the United Food and Commercial Workers. Magowan conceded that the Denver bonus plan is "not very popular."

Magowan's assertion that Safeway's culture is more collegial now also doesn't always square with the view from the retail floor. In stores around the country, employees report that management is pushing out older, skilled and well-paid employees, turning to cheap part-time help (who don't get medical insurance and other benefits) and piling extra work on the remaining staff. Union officials estimate the average age of the stores' work force has dropped 10 years since the buyout; a company spokesman disputes this, but says Safeway doesn't track age.

"Safeway used to be one of the best places to work of the retail grocers," said Rowena Schoos, a middle-aged Safeway meatcutter in Oregon for five years. "But after the buyout, they started cutting hours to the nitty-gritty, the store managers went into mass panic, and Safeway just turned into a burnout company."

Schoos recently left herself, after she was cut back to 16 hours a week and lost her medical benefits. Like many of the older and well-paid meatcutters, she said, she was relegated to the "extra board," a tour of duty that can require driving more than 100 miles a day to different stores to fill in where needed.

For the older butchers, many of whom suffer physical injuries from the years of toting and carving, the assignment is the final shove out the door. Schoos, for example, has two herniated discs, which she attributes to years of lugging 100-pound carcasses.

A Safeway spokesman responded, "That's just another case of an isolated situation. She was just not performing the job adequately," and thus her hours were cut.

The company also says meatcutters' numbers have been reduced primarily because a gradual shift to pre-packaged goods in meat processing has lessened the need. Employees in the meat department argue that even with the changes, much of the work still requires a butcher's expertise and that the cutbacks have been too severe.

While on the extra-board circuit, Schoos had the opportunity to observe the LBO-fallout at many stores. "It was the same thing everywhere I went," she recalled. "The managers were desperate to meet quota and the older people always got it the worst. They'd bust them back to lower positions. One produce manager was told he had a "choice' _ go back to being a checker or get fired. One lady asked for a break, and the manager cut her from 40 to eight hours."

In response, Magowan produced a recent employee survey conducted in the Portland, Ore., division that found that more than 80 percent of employees feel Safeway offers advancement opportunity and other advantages. "These would be good scores to decertify the union should we ever wish to do so," Magowan said, adding, "which we have no intention of doing, whatsoever."

The man who didn't pay for his soup

Closer to headquarters, at the Market Street store in San Francisco, employees report a grind of tension and overwork. Some say they are shouldering as many as nine different jobs. In the meat department, the butchers' numbers have been cut back sharply and inexperienced clerks take up the slack. "Everyone is burned out," said another employee, who pointed to a counter where overripe meat was on display, the result of a hasty stocking effort. "It's a whole new ballgame and everyone's discontented."

In the Market Street store, employees complain that clipboard-toting managers patrol the floors, closely monitoring performance and filing a blizzard of disciplinary reports. A company spokesman disputes these accounts: "There is no ROMV (Return on Market Value) police."

Last month, at the Market Street store, food clerk Steve Dolinka lost his job after 25 years of service. His malfeasance: He says he forgot to pay for the cup of soup and toast he ate at the deli on his lunch hour. Dolinka apologized, shelled out the few dollars that his food cost, and explained why he was so distracted _ his mind was on a murder trial that had ended a few weeks earlier. A gas-station robber was before the court charged with slitting the throat of Dolinka's 15-year-old son in 1982 in an assault that the investigating detective called "the most brutal in my experience."

"My wife says I've been forgetting things a lot lately," Dolinka said.

"In our business, employee theft is a serious problem," a company spokesman said of Dolinka's expulsion. "And every employee is treated the same way."

Dolinka said he doesn't blame his manager for the firing. "The way it works here, I don't think any of the managers have the freedom to make these decisions. It's all coming down from company policy, and they have got to follow it like their bible."

To all such reports from the store front, Magowan says he's skeptical.

"Our productivity is up," he pointed out. Employees are donating more to Easter Seals, and worker's compensation claims are down, he said. And when the earthquake hit, "our employees stayed up all night cleaning up their stores."

"Are these acts of a disgruntled work force?" he asked. "I don't think so."

George Roberts, one of KKR's two principal partners, noted that workers at many corporations are being asked to do more, whether an LBO is involved or not. Employees "are now being held accountable," Roberts said. "They have to produce up to plan, if they are going to be competitive with the rest of the world. It's high time we did that."

- Susan C. Faludi is a staff writer for the Wall Street Journal, from which this is reprinted.

- David B. Hilder contributed to this article.

Reprinted with permission of the Wall Street Journal

1990 Dow Jones & Co. Inc.

All rights reserved.