MINNEAPOLIS -- One of the more startling moments in the annals of the food distribution industry's recent history came earlier this year when Supervalu walked away from negotiations with Kmart to become sole supplier for its food retailing business.
t expected to have an annual sales volume of some $4.5 billion, a number likely to grow substantially in upcoming years.
In past years, Supervalu and Fleming had been the chief suppliers to Kmart's food business. Supervalu's share of that was $1.7 billion. To walk away from that business would deliver a huge -- but not crippling -- blow to Supervalu's $23.2 billion top line.
Nonetheless, that's just what Supervalu did. It effectively handed the entire Kmart pie to Fleming, which, in July, embarked on a 10-year exclusive supply arrangement with Kmart.
Does it make much sense to relinquish that much business?
One securities analyst, Gary M. Giblen, director of research and senior vice president, C L King Associates, New York, told SN that while the move was bold, it might pay off for Supervalu.
"It doesn't make much sense to suppose that Kmart is the panacea for food wholesaling in America," he said. "Kmart's sales volume is an intoxicating potion, but one which could produce quite a hangover in the morning."
Jeff Noddle, Supervalu president and chief executive officer, told SN in an interview here that Supervalu dropped out of negotiations with Kmart because of the nature of the strategic alliance Kmart was seeking with a supplier, an alliance that might have choked off other growth possibilities for Supervalu.
"The prime reason we decided not to pursue the negotiations with the Kmart deal is that we had started the strategic-planning work that's leading to new directions.
"I thought that if we accepted the kind of alliance they have succeeded in achieving with Fleming, it would potentially preclude growth in the areas we're looking at, and would be an impediment to marketing ourselves more broadly.
"Kmart is a fine company and it has fine leadership. The departure of that business will make for a hard year -- and no one likes giving up that amount of volume -- but sometimes a decision for today must be made to set up the future. I'm convinced our growth opportunities will be bigger in the future because of that."
Fleming's top executive, Mark S. Hansen, has described Fleming's new alliance with Kmart as one that's somewhat akin to a merger. The two companies are working together to remove duplicate functions, uniting supply-chain activities. The two will also share private labels, marketing and numerous other functions.
Noddle also asserted that the new alliance between Fleming and Kmart could drive into the arms of Supervalu some independents now supplied by Fleming that don't like the looks of the Fleming-Kmart arrangement.
Asked if he thought that because Supervalu had lost business in the past when it supplied Kmart -- and because of its current supply arrangement with Target -- Noddle said that wasn't the case since that was a different deal.
"We haven't lost business because of supplying discount stores or supercenters. The reason is that what we did for them was to simply supply product. Kmart and Fleming are in a very integrated agreement concerning marketing and procurement. I'm only introducing the thought that some independent operators may be uncomfortable with that kind of relationship, and might wonder if [Fleming] is focused on the growth of the independent operator."