Raley's found itself on the defensive Thursday after the grocery chain's striking labor union agreed to a new contract with rival Safeway Inc.

Safeway, the second-largest grocer in the Sacramento market, announced a tentative agreement with the United Food and Commercial Workers. The deal protects the union's existing health insurance program – the issue that's driven a wedge between the UFCW and Raley's.

With the Raley's walkout entering its sixth day today, the union's agreement with Safeway will put pressure on the West Sacramento grocer to settle as well.

Striking workers will likely step up their efforts to persuade Raley's customers to shop instead at Safeway or the region's other unionized chain, Save Mart Supermarkets, which made its own deal with the UFCW in September.

"I think Raley's is in a very tenuous position," said Ken Jacobs, a labor relations expert at UC Berkeley. "This isolates them further."

Yet Raley's, which has kept all of its stores open, didn't sound like a company backed into a corner.

In a prepared statement Thursday, Raley's said the Safeway deal "has no impact on our ongoing contract dispute."

"We chose to negotiate on our own with the union because of our specific situation and need to reduce our operating costs," the company added.

Raley's says it is losing millions of dollars a year as it struggles against a wave of nonunion competitors.

The company disclosed Thursday that it has hired 500 replacement employees to work alongside union members who have crossed the picket lines. Although business has suffered because of the strike, Raley's says revenue has been improving in recent days.

Experts said Safeway, while facing many of the same competitive pressures as Raley's, remains profitable and can afford to be more generous with the union.

In particular, the Pleasanton-based chain was able to give the union a crucial benefit that Raley's has so far refused to offer: preservation of the current health plan, including coverage for retirees. That's a major sticking point in the Raley's dispute.

Normally, terms of a tentative contract aren't made public until workers have a chance to vote on it. This time, both Safeway and the UFCW announced the current health plan would remain intact.

"Safeway agreed to retain and fund the union's health benefit plan, the same plan Save Mart agreed to earlier this summer," said Jacques Loveall, president of Roseville's UFCW Local 8, in a memo on the union's website.

"The only company remaining to sign on to the union's plan is Raley's," he added. "We will not let up on Raley's until they come to their senses."

Safeway regional President Karl Schroeder, in a news release, said the contract "provides our employees with among the best wages, benefits and working conditions in the region, while ensuring the company can compete successfully in the future."

The statement suggests Safeway did obtain cost savings from the union, but neither side would divulge details of the contract.

All three union grocers in the region, not just Raley's, say they need concessions. The Save Mart deal includes such concessions as the elimination of bonus pay for Sunday shifts. And, for the first time, Save Mart workers are contributing to health insurance premiums for family members.

Ratification of the Safeway deal, which could take several weeks, is no sure thing. Members of three bargaining units, Local 8 plus two locals in the Bay Area, must weigh in.

It took the union two tries to implement the Save Mart contract. Local 5 in San Jose voted it down both times. But because the "no" votes fell short of the two-thirds needed to call a strike, Local 5 leaders invoked union rules and declared that the contract was approved.

Safeway has been eager to reduce its labor costs in Northern California. A national chain, it has said for years that its wage and benefits package in this region is the highest it provides anywhere in the country.

Company spokesman Brian Dowling said Safeway provides retiree health care in several of its other markets. "The cost is obviously significant," he said in an email.

Still, Safeway is considerably healthier than Raley's and more capable of shouldering the expense.

With $43 billion in annual sales, Safeway is more than 10 times Raley's size. Privately owned Raley's says it is losing money, while Safeway reported $311 million in earnings from continuing operations in the first nine months of 2012, slightly better than last year.

Perhaps most important is Safeway's geographic diversity. The chain stretches from Hawaii to New Jersey. Although it controls the second biggest market share in greater Sacramento, behind Raley's, the company isn't particularly dependent on the region.

By contrast, Sacramento is Raley's home turf and has become one of the most competitive markets in the country in recent years, said industry consultant Bob Reynolds. The Bay Area, where Safeway reigns, isn't nearly as crowded, he said.

"The competitive pressures are exceptional in Sacramento," said Reynolds, a former Safeway executive.

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