Post-strike discounts take toll on earnings of grocery chains.

Six months after the end of Southern California's supermarket strike, the three major chains at the center of the dispute continue to take their earnings lumps, while the smaller markets looking to retain strike-related customers are struggling to hold their own.

The latest evidence came last week when Albertsons Inc. reported a 36 percent decline in second-quarter earnings from the like period a year earlier--much of it due to offers of special coupons, free movies and other incentives to lure back customers lost during the work stoppage.

Meanwhile, Arden Group, parent of the 18-unit Gelson's chain, reported a 19.3 percent increase in second-quarter net income, although the Los Angeles-based company reported that since the labor settlement in February, "sales have decreased significantly, as customers returned to their previous shopping patterns."

Many analysts and investors expect this erosion to continue, especially in the fourth quarter when the holidays typically bring increased customer traffic--and provide the majors with a chance to lure shoppers with discounted specials.

"The bitter strike in Southern California caused a great deal of customer defection among the larger grocers that saw strikes," said David Dietz, president of New Jersey-based Point View Financial, which manages $80 million in assets, including Albertson's shares. "The centerpiece of their strategy to regain those customers seems to be a bitter price war that is squeezing the smaller stores."

Besides Albertson's, Safeway Inc., which owns Vons and Pavilion stores, reported a 3.6 percent drop in second-quarter net income, citing increased advertising to win back customers. Safeway Chief Executive Steven Burd said in late July that sales appeared to have peaked after improving steadily for the first 19 weeks after the strike.

Kroger Co., parent of Ralphs, reported a 25 percent drop in first-quarter profit, also related to price-cutting. The company will report second-quarter results on Sept. 14.

While the majors struggle with their short-term earnings performance, most all the smaller chains have seen at least some erosion in customer traffic.

"The smart consumers out there are capitalizing on this (price war)," said Dietz. "It's not easy for either independent or traditional stores because consumers are aware of all the alternatives and pricing flexibility."

Wild Oats Markets Inc., which also owns the Henry's chain, concluded in a survey conducted between March and May that 30 percent of strike-related customers were still shopping at its stores.

But the Boulder, Colo.-based chain noted that its second-quarter results were impacted by the major chains' price-cutting, especially for produce and fresh meat. The company kicks off an ad campaign this month in an effort to lure customers with the slogan "farm fresh, high quality at side of the road prices," according to spokeswoman Sonja Tuitele.

Santa Monica resident Frank Gannon is one of those secondary customers. Though he has returned to shopping at Vons and Albertson's, he said he still keeps Traders Joe's, Smart and Final and Costco on his route.

"I discovered a lot of shops and different products I really liked," Gannon said. "But I'm not going out of my way to shop at these places."

Some niche grocers have managed to stay in the game despite the escalating competition by relying on gourmet products including sushi and deli meats. While declining to provide sales figures, Bristol Farms President Kevin Davis said the 11 stores in Southern California have retained most of their strike business, with sales "well ahead of last year."

The pocket of shoppers who strongly sympathized with the striking unions workers will be toughest for the big chains to woo, according to some analysts. "I think it's going to be harder than people think to win them back," said Bill Bishop, president of Bishop Consulting, which followed the supermarket strike.

Some, like Marshall High School history teacher Tom Daniel, who lives and shops in Silver Lake, say the bargains have done little to change long-term shopping habits. Since the strike, Daniel has frequented alternative grocers, though he admitted he was initially attracted by the sales.

"When I went back to Vons after the strike, there were so many ads and people kept coming on over the speaker saying 'attention shoppers, there's a dell discount, attention shoppers,'" Daniel said. "It was like this George Orwell mind control, so now I shop at Gelson's and Trader Joe's."