Supplier Strikes Kroger With Sanitizer Suit

Does anyone want 40 million bottles of hand sanitizer?

A manufacturer of hand sanitizer that said it made a $100 million deal to provide the product to shopped-down Kroger stores this spring is now suing the retailer, alleging that Kroger accepted only a portion of what it has agreed to buy, sticking the manufacturer with millions of unsold bottles in an oversaturated market.

According to a complaint filed late last week in the U.S. District Court in the Southern District of Ohio, K7 Design Group is seeking $85.6 million to address what it called a “enormous miscalculation” by the Cincinnati-based retailer, which K7 said over-ordered in the midst of the pandemic before finding demand did not keep pace—and it had nowhere to store the supply.

A Kroger spokesperson in an email told WGB, “We are disappointed by this vendor’s claims and intend to vigorously defend against their accusations.”

The dispute provides a peek into the repercussions of a grocery supply chain thrown into chaos by the pandemic. Hand sanitizer virtually vanished from store shelves amid panic buying in early March, only to ramp up production and wind up in costly oversupply months later.

K7 Design Group said it is a family-run, New York-based manufacturer of consumer products sold under the Ultra Defense brand name and an approved Kroger vendor. Its suit says it agreed to sell “several million” units of hand sanitizer to Kroger in March for $5 million; and then made a second deal with the grocer in May calling for an additional 42 million units (10 million bottles each of 3-, 6-, 16- and 30-ounce bottles of hand sanitizer; and 2 million bottles of antibacterial soap) for an aggregate price of $102.6 million.

K7 said it contracted with overseas vendors on the May order but in what it called “a harbinger of the problems to come,” a lack of space in Kroger warehouses and stores forced the manufacturer to sell a portion of the first Kroger production run to other retailers in June with Kroger’s encouragement and permission.

By summer 2020, the backlog had only gotten worse, K7 alleged, saying it was forced to stock the May production run in its own facilities while it waited for Kroger to clear space for it. According to the complaint, Kroger officials repeatedly confirmed to K7 it would accept the product but “needed more time to take delivery because Kroger needed to open a new warehouse and arrange for sufficient storage capacity to accommodate what it had purchased.”

K7 said the agreement called for Kroger to purchase the units over a period spanning from July 2020 through January 2021. By August, K7 said it had had manufactured the entire quantity of product necessary to fill the commitment, “including the millions of bottles, bottle caps and labels necessary to unitize the product for the consumer market, as Kroger had ordered.”

By late September, however, the retailer accepted just $16.9 million of the $102 million run. K7’s suit seeks $85.6 million to cover costs it has incurred, plus its costs for storing the product in a Los Angeles warehouse, where they now sit facing a saturated market with few options to sell. K7 alleges the retailer at this point engaged in a series of actions effort to “avoid its contractual obligation to accept and pay for the unaccepted product.”