FLEMING, AG PLAN MARKETING JOINT VENTURE

ELLIOT ZWIEBACH

OKLAHOMA CITY -- Fleming Cos. here said last week it plans to create a joint-venture marketing company with Associated Grocers of Seattle, effective in mid-October.

Fleming said the company, which is to be called AG/Fleming Northwest , would provide food-marketing and full-line distribution services to the 74 supermarkets in Oregon and Washington currently served by Fleming's Portland, Ore., division.

AG would be the majority partner in the joint venture, while Fleming would have "a small minority position," a Fleming spokeswoman told SN, although neither she nor an AG spokesman was willing to discuss the financial arrangements.

According to Fleming, the formation of the joint venture would result in the following series of events:

Fleming would sell to AG its Portland division business, all current inventory, loans, receivables and leases (except technology leases), plus two of five corporate-owned stores in Oregon -- for an estimated $10 million, industry observers told SN.

AG/Fleming Northwest would contract for purchasing and transportation services from AG and would lease warehouse space in AG's Seattle distribution center.

Once all inventory had been transferred to the AG facility, Fleming would sell its 265,000-square-foot Portland distribution center -- probably early in 1999 -- and redeploy those funds.

AG/Fleming Northwest would offer Fleming's existing IGA, Food 4 Less and Shop-n Kart marketing formats to additional independent retailers in the Pacific Northwest.

Fleming expects to record a charge in the third quarter of 1998 for closure of its Portland operations.

Andrew Wolf, a securities analyst with Merrill Lynch, New York, said the joint venture enables Fleming "to sell a small division that is making hardly any money, so this gives it a way to exit a division that isn't contributing much while getting an adequate return on capital and improving profitability.

"At the same time it also signals the financial community that the company is willing to come up with innovative solutions to its problems."

Wolf estimated that Fleming's Portland division averages sales of about $150 million a year.

For AG, the joint venture helps make up some of the volume -- "perhaps 75%," Wolf said -- that was lost when Quality Food Centers, Bellevue, Wash., was acquired by Fred Meyer Inc., Portland, Ore.

According to Don Benson, president and chief executive officer of AG, "We believe the creation of this joint venture leverages the strengths of both AG and Fleming to benefit all our independent retail customers.

"The Pacific Northwest is a very competitive retail market, and this new consumer marketing and distribution enterprise brings independent retailers even more purchasing clout, marketing advantages and potential growth opportunities."

Bill Dowd, president and chief operating officer of Fleming, said, "Through this strategic alliance, we will create the largest food marketing and distribution operation in this rapidly growing market.

"We're excited about AG/Fleming Northwest because it will give area independent retailers a real competitive edge against the chains in the battle for consumers' shopping dollars. This joint venture provides new opportunities for all concerned -- Associated Grocers, Fleming and independent retailers -- in the Pacific Northwest."

Charles E. Carlbom, UG's chief executive officer, said last week it is "too early" to comment on the effect of AG's joint venture with Fleming on plans for UG/AG joint ventures. Interviewed two weeks ago, AG's Benson told SN he was hoping AG and UG could have their first joint-venture project operating by Nov. 1.

According to the Fleming spokeswoman, Fleming and AG would share in the proceeds from joint-venture sales; however, she declined to say whether each company's share would be commensurate with its ownership stake.

The 74 Northwest stores served by Fleming operate under the names IGA or Shop-n Kart, which Fleming licenses, or Food 4 Less, which Fleming franchises.

The goal of the joint venture, Fleming said, "will be to expand participation [in the marketing formats] by other independent retailers in the marketplace, which will generate more buying and marketing power for all customers within these groups.

"The combined volumes of AG and AG/Fleming Northwest will increase economies of scale and influence with vendors and suppliers for customers of both entities," Fleming said.

Fleming said it would sell two of five corporate-owned stores in Oregon to AG -- a Shop-n Kart in Lebanon, Ore., and a Food 4 Less in Bend, Ore.; Fleming would retain ownership of three other Shop-n Kart locations in The Dalles, Albany and La Grande, Ore.