NEW YORK -- Fleming, Dallas, said it will be able to respond flexibly to decisions made by its supply customer Kmart, as the Troy, Mich.-based retailer reveals how it intends to restructure its business (see related Kmart story, page 4).
Mark Hansen, Fleming's chairman and chief executive officer, outlined some of Fleming's possible options should Kmart's efforts to emerge from Chapter 11 bankruptcy result in so many store closings that the retailer was unable to meet the volume requirements of its supply contract with Fleming.
"We have the ability to abandon the [supply] contract if we choose or renegotiate it," Hansen told the Credit Suisse First Boston Food & Drug Conference here last week.
He emphasized that he believes it is premature to take any action about the contract. "We are being patient and waiting for more news from them," he said.
Kmart and Fleming are in the first year of a 10-year supply contract that calls for Kmart to buy $4.5 billion worth of products annually from Fleming. Since the contract went into effect July 1, 2001, Kmart has been Fleming's largest customer, accounting for roughly 28% of company sales.
Replying to an audience question about how Fleming would respond should Kmart not be able to buy that much product, Hansen said, "We're not locked in. If there is a shortfall, we have the ability to address it."
Hansen also told the audience it is premature to guess at the number of Kmart store closings.
"It's pure speculation out there," he said. "Do they close one store, 100 stores, 1,000 stores?"
However, Hansen did engage in a little guesswork of his own on the fate of Kmart supercenters. "We do know that it's very rare for retailers to close their best stores," he said.
"We believe, personally, the supercenter format is a very strong format," he added. "It's a strong format for Target , and it's a potentially strong format for Kmart."
In response to another audience question, Hansen noted that Fleming has only two distribution centers completely dedicated to handling Kmart shipments, one in Fort Wayne, Ind., and the other in South Brunswick, N.J.
"Those are two of our four lowest-cost facilities," he said. "We opened both with the idea that we would broaden our usage of these facilities beyond Kmart," he said.
He added, "We do believe Kmart has a wonderful opportunity" to shed some unprofitable real estate through the bankruptcy process, including closed and underperforming stores.
"We are big fans of anything they can do to improve their business," he said.
Early in the session, in his prepared remarks, Hansen had sought to downplay the effect of any Kmart closings on Fleming.
He noted that if Kmart closes the worst-performing 10% of its roughly 2,100 stores, Kmart sales would decline 6% but Fleming sales only 2%. He added that the earnings-per-share loss for Fleming would be approximately 5 cents.
Other topics Hansen covered in his presentation included:
Hansen predicted that Fleming will increase annual sales from $14 billion in 2001 to $19 billion in 2003 through what he termed "modest increases in market share."
What makes this increase possible, he explained, was Fleming's transformation since 1998 from a "grocery-centric" wholesaler serving independent supermarkets to a consumer packaged goods supplier with "a very diverse portfolio" of customers.
He noted, "We now have the dexterity to serve alternative formats. We look at where the consumer wants to buy the merchandise we sell."
In 1998, Fleming had a $100 billion "addressable market," limited to wholesaler-supplied supermarkets, according to Hansen. Today, the company's addressable market -- which also includes self-distributing supermarkets, price-impact stores, supercenters, discounters and other formats -- totals $480 billion, "with 2% growth year over year," he observed.
Hansen said Fleming will achieve 10 basis points operating EBITDA (earnings before interest, taxes, debt and amortization) improvement annually after it integrates its new business with Kmart.
"We are a believer that you have to be a high-volume operator in the retail space," he observed, noting that Fleming has increased average volume in its full-line distribution centers from $389 million in 1998 to $640 million last year.
In the same three-year period, Fleming increased sales per full-line distribution center employee from $1.2 million to $1.6 million and saw total operating expense as a percentage of distribution sales decline from 5% to 3.9%.
"We are touching on world-class performance," Hansen said.
Retail Growth Opportunities
Hansen explained that Fleming's retail operations had shifted in the last three years from conventional supermarket operations to what he termed "value-retail" stores.
He noted that 25% of supermarket shoppers say price is the principal basis they use in selecting their primary store and that Fleming's three price-impact formats -- Rainbow Foods, Food 4 Less and Yes!Less -- are focused on that consumer.
Hansen said the total value-retail market is currently $70 billion, with a potential for 25% to 35% annual sale growth.