ANCILLARY DAMAGE IS WIDESPREAD IN COMPANY FAILURES 2004-05-24 (2)

David Merrefield

When a major company in this industry, or any other, fails, there's a lot of obvious damage that occurs. Chief among it is that capital creation ceases and the employment of many people comes to an end.

In addition to that proximate effect there's a lot of ancillary damage, and that damage may be just as serious, in the aggregate, as that experienced by those who ran and worked for the failed company. That's especially true if the failed company is a wholesale grocery distributor, a style of business that fans out to countless product and service vendors, as well as to the stores supplied.

All this becomes vivid because of an interview conducted by SN reporter Elliot Zwiebach with Tom Haggai, chairman and chief executive officer, IGA, Chicago. You'll see a news feature based on the interview referenced on the front page of this week's SN.

The feature is about new directions for IGA, but, to a great extent, it's also about how IGA is finding its way anew in the wake of the failure of Fleming Cos. Wholesaler Fleming filed for bankruptcy 13 months ago, and subsequently left the business of supplying independent supermarkets, such as IGAs. It now appears as though Fleming may emerge from Chapter 11 by July 31 as a convenience-store distribution business. Be that as it may, let's take a look at the pounding IGA took as a result of Fleming's bankruptcy. Tom told SN that when Fleming collapsed, IGA lost a principal distributor and 300 stores, or 20% of the stores operating under its banner in this country. IGA's sales dropped by $1 billion, to about $23 billion, or by about 4.2%, during 2003.

As is now known, many of Fleming's troubles started when it forged an exclusive distribution pact with Kmart Corp. in 2001 to be its consumables supplier. That arrangement sopped up prodigious amounts of Fleming's capacity and taxed its margin production, to the detriment of its ability to supply independent supermarkets. Less than a year after the deal was made, it came to naught as Kmart filed for bankruptcy. The supply arrangement ended. In April 2003 -- and despite fervent denials that such an outcome was possible -- Fleming went into bankruptcy, too.

IGA's Tom Haggai said there were warning signs, over a period of time, that all wasn't well at Fleming. "Historically, Fleming was at the top of the industry in terms of efficiency, operating at a 95% service level. But it dropped down to an 85% level in 2001, and continued to decline." Service eventually fell to 40% or so, well below the level at which an independent can do business. Tom acknowledged that because Fleming had long been the strongest of IGA's distributors, "I probably gave Fleming more latitude than I should have and didn't see the warning signs."

The main points to consider here have less to do with IGA and Fleming than they do with larger observations. One is that no company is TBTF, as some posit hopefully: too big to fail. Another is that if warning signals appear, they should be read. Finally, other large-scale companies in this industry will fail, projecting damage in all directions.