HOUSTON -- Representatives of Randalls Food Markets here and Fleming Cos., Oklahoma City, were meeting last week to discuss a transition plan as Randalls moves toward self-distribution.
The talks between the two companies follow a binding decision by an arbitration panel, which ruled that Fleming had breached its longterm supply agreement with Randalls and therefore that agreement should be terminated immediately.
With the Randalls agreement terminated, effective July 9, Randalls said Fleming refused to supply it with merchandise unless the retailer signed a new three-year supply agreement -- prompting the retailer to go to court July 10 seeking a temporary restraining order that would require Fleming to continue shipping products to its warehouses for another 10 days. That TRO was granted and expires today. Talks were proceeding last week to ensure Randalls has a source of supply until its move to self-distribution is completed next year.
The arbitration panel ruling on Randalls, combined with the early release of Furr's Supermarkets, Albuquerque, N.M., from its Fleming supply contract, will reduce Fleming's annual revenues by about $1 billion.
According to Ted Bernstein, a high-yield securities analyst with Grantchester Securities, New York, "That's a significant chunk of business to lose, even if Fleming could see it coming for a while, but it means Fleming will have to work hard to grow its top line."
That isn't going to be easy, Bernstein added, "because its traditional customer base is eroding, as the small chains and independents that comprise about 70% of its business are getting hurt by the consolidation wave and the competitive nature of the business. "And Fleming has had difficulty prospecting for new business because of lawsuits by David's, Furr's and Randalls that have prompted a lot of customers to go back to look at their supply agreements."
The dispute between Fleming and Randalls came to a head last July when the retailer filed a legal action charging Fleming with violating the terms of its supply agreement by allegedly manipulating costing procedures, which resulted in overcharges; it also said Fleming had failed to provide supporting documentation for purchases, as required under the contract.
The legal action was filed with the American Arbitration Association, Dallas, whose opinion, both sides agreed, would be binding.
The panel rejected Randalls' claim of $50 million in damages and waived a $10 million cancellation fee for terminating the supply agreement.
The panel directed Randalls to pay Fleming $23,663.79 for fees and expenses associated with a special hearing that Randalls called.
In order for the TRO to take effect, the judge ordered Randalls to pay Fleming $850,000 it owed to the distributor -- money Fleming said was for previous underpayments related to improper deductions at store level.
Randall Onstead, chairman and chief executive officer of Randalls, said his company had three goals in the arbitration: to terminate the supply agreement with Fleming -- which was scheduled to expire in 2001 -- "so we would have freedom to pursue self-distribution"; to collect damages; and to try to work out short-term supply arrangements as the retailer expands its self-distribution capabilities.
"We won on the first point, but the arbitration panel didn't award us any monetary damages, although it waived a very significant cancellation fee. And now we're pursuing our third objective, to work with Fleming while we transition away from them."
A Fleming spokesman said representatives for both parties were scheduled to meet last week to determine whether the distributor would continue to sell products to the retailer. The spokesman said Fleming submitted a transition plan to the retailer the day after the arbitration panel's ruling, outlining a short-term supply agreement that would provide stability to the flow of products to Randalls stores.
Randalls said it hopes to continue purchasing groceries from Fleming while seeking to develop "an orderly and mutually beneficial transition plan as Randalls moves forward toward self-distribution."
In a similar dispute, Fleming's largest customer, Furr's Supermarkets -- with annual purchases of approximately $550 million -- won the right in an out-of-court settlement last October to end its supply contract with Fleming. Furr's disclosed plans late last month to acquire a distribution center in El Paso, Texas, from Fleming and convert to self-distribution, although Fleming will continue to supply it in the interim.
Randalls has been Fleming's second largest customer, with $450 million in annual purchases. It has been buying 30% of its needs from Fleming, the retailer said.
Onstead said his company was pleased "with this successful outcome of the arbitration process. Our customers and employees will benefit from the lower cost structure that will result from the expansion of our self-distribution system."
He said the 215-store chain already self-distributes all perishables except frozen foods to its stores. He said Randalls is expanding a 200,000-square-foot distribution center in Houston by adding 350,000 square feet to accommodate dry groceries. That footage is expected to open early next year.
The chain also has a 300,000-square-foot facility in Dallas. "But we still have some options and issues to work through as we make the transition to self-distribution," Onstead told SN.
"However, we're not sure how long that process will take. After Jan. 1, we will begin to move product into our expanded facility in Houston, and we're looking at our options in Dallas about expanding the capacity there."