FLEMING BUYING FLAP EXPOSES INEFFICIENCIES

MARK HAMSTRA / Additional reporting: David Ghitelman and Christina Veiders

DALLAS -- The recent flap over Fleming's buying practices illustrates once again the systemic trade-relations problems in the food-distribution industry.

Jonathan Ziegler, managing director in the San Francisco office of Deutsche Banc Alex. Brown, New York, described the buying process as "extremely inefficient," adding that it impairs traditional food retailers' ability to compete with low-price rivals.

He said part of the reason for the success of Wal-Mart Stores and Costco is that those companies tend to work out "dead-net" prices for the goods they buy, and don't rely on the complex discounts achieved through case allowances, slotting allowances and other programs that serve to reduce the cost of goods.

"If you go into the practice of dead-net pricing, you're not going to get into all these things," he said.

Fleming was reported in a recent Wall Street Journal article and in the Sept. 9 issue of SN to be employing a variety of unusually aggressive tactics to deduct payments from its suppliers' invoices, including some that irritated vendors to the point that they stopped delivering to the company.

Fleming said the measures were necessary and that placing tough terms on vendors was simply part of the negotiating process.

One industry source, however, who asked not to be identified, said an increasing number of suppliers have expressed concern that Fleming has been too aggressive with its deductions.

Fleming countered the allegations by issuing several press releases in which its suppliers -- including Agrilink, Solo Cup Co. and Unilever -- said they had resolved their disputes with Fleming.

For suppliers, the deductions are a logistical headache.

"It's not new, but there have been a number of reports of this nature from manufacturers," said Gene Grabowski, vice president, Grocery Manufacturers of America, Washington. He declined to cite specific companies that vendors have complained about.

Barry Kotek, managing partner, Retail Systems Consulting, Naples, Fla., said it is not unusual for suppliers to be concerned about such activity. Citing research from Cannondale Associates, Wilton, Conn., he said more than 60% of manufacturers rated off-invoice deductions as the No. 1 problem they face in working with retailers. That compares with about 24% of retailers who consider deductions to be a concern.

"For the retailer, the easiest thing is to just take an off-invoice deduction," Kotek said. "They just subtract the money and use it for whatever they want."

Robert E. Stauth, former president and chief executive officer at Fleming, told SN that "the deduction thing has gone on forever. What happens is there are over-charges [by vendors] from time to time, and they are just errors. So rather than argue about it, the customers deduct right from the invoice for the amount of the error. That's common practice, and it's not an insignificant amount of dollars."

One packaged-goods analyst, who asked not to be identified, agreed that taking off-invoice deductions is "a fairly common industry practice, and it seems to be directly related to how much pressure the wholesaler may be under to make some earnings targets and generate profitability."

He said the examples cited in Fleming's case, however, "seem to be pretty egregious, so to a degree, it is more than what we've seen elsewhere."

Some in the industry report that Fleming pressures its associates to be highly aggressive in seeking off-invoice deductions to meet earnings goals.

Fleming could not be reached for comment on the issue.

Bruce Ferrin, assistant professor, marketing and logistics, Western Michigan University, Kalamazoo, said he thinks the general trend in logistics management is "toward much more collaborative relationships."

He said that based on what he read about Fleming's practices, "the approach they're taking is behind the curve."