FLEMING SETS FEES ON PROMOTION BILLBACKS

JAMES TENSER

OKLAHOMA CITY -- Fleming Cos. here has issued new policies at several of its divisions that impose "administrative fees" of between 2% and 10% on promotion billbacks for grocery products.

Observers noted the move extends Fleming's activity-based costing analysis to a new trade relations area and that it is being monitored closely by manufacturers and brokers. A spot check of a few other U.S. wholesalers found fees on billbacks were not in place, although at least one company said it held vendors accountable for errors on billbacks.

According to several industry sources, new Fleming policies regarding such performance-based promotion payments have been issued by several of Fleming's 41 divisions.

The wholesaler says such programs are more costly to administer than off-invoice allowances, since they may involve reconciliation after the fact.

The actions came to light in a copy of a memo to vendors and brokers from Rick Strawbridge, a merchandising manager at Fleming's York, Pa., division, which was obtained by SN.

"In the not so distant past, most allowances and performance monies presented to us were off-invoice. They are now becoming count and recounts," the memo read in part.

It continued, "This trend has been costly to us in the form of tracking, billing and accounting for this activity. We have deemed it necessary to implement a charge to cover our costs for these activities, which did not exist with an off-invoice procedure."

The York division memo went on to assess an administrative fee of 10% to cover the costs. It did not specify how that fee would be calculated.

Andy Oden, communications manager at Fleming, said the company has made presentations about this issue over the past year to its suppliers, through its local product supply centers.

"We have communicated through the [Association of Sales and Marketing Cos.] and the Grocery Manufacturers of America, establishing dialogue on a national level. We have also met with our strategic-alliance partners and our other large suppliers over the last year to assure dialogue on the issue," he said.

"The performance-fund requirements have increased significantly, which is good for the manufacturer and retailer. But this has added additional expense such as administration, accounting and other functions. So, we seek to recover our costs for these activities. This is exactly like what a retail chain does today to manage the same process."

Billbacks generally apply to performance-based promotional programs. Because payment depends on evidence of compliance, the reconciliations may be complex, adding hours and cost to the process.

"Historically, wholesalers have not charged such fees on billbacks," said Burt Flickinger 3rd, managing director of Retail Reach, based in Westport, Conn. "Certainly, if competing wholesalers decided that handling billbacks is a service they choose to provide without a fee, it could put Fleming at a disadvantage."

Reactions from the vendor community were guarded, in part due to the importance of Fleming as a customer, but also reflecting the general consciousness-raising that has pervaded the post-Efficient Consumer Response era.

"Fleming corporate had a meeting recently with its divisions and identified this as a problem," said one source from the broker community. "At that time they said, 'billbacks for us as a wholesaler are very inefficient; we'd prefer to get off-invoice payments.' Several divisions took that and produced written directives."

A sales executive at a manufacturer also avowed awareness of the corporate decision, which may have taken place several months prior to the recent memo. "The letter from corporate said divisions should charge anywhere from 2% to 10%. A few divisions, like northern California, chose to ask the minimum. Others went to the maximum. I do not know if that applies toward all manufacturers or all funds."

The executive continued, "I choose to view this positively, that Fleming is aware of these issues. I am supportive of them calling out the fact that they spend money on administrative tasks."

Fleming is a semi-decentralized company, with some divisions fully "re-engineered" and others not as advanced in their supply-chain initiatives. But the company overall has made strides in ECR. Its Fleming Flexible Marketing Plan, part of the re-engineering process, opens the books and shows costs to the divisions. Like competitor Supervalu's Advantage program, the FFMP is designed to encourage lower-cost practices in ordering.

Brokers and manufacturers contacted said they agreed activities that result in unnecessary administrative costs should be discouraged. But several said they regretted learning about this particular charge from a form letter.

One industry consultant observed that budgets would not expand to cover these added fees. "Manufacturers will take the money right out of the trade promotions budget. So Fleming will have no additional money to work with."

He suggested Fleming might be missing an opportunity to solicit help from its vendor partners in attacking the added cost inherent in performance-based promotion payments.