THE NEW OUTLOOK

DAVID MERREFIELD

OKLAHOMA CITY -- A penny saved is a penny earned, but two pennies earned promise better cash flow. That might be the outlook of Mark S. Hansen, Fleming's chairman and chief executive officer. Hansen has been in the topside position at Fleming for less than four months, but he has already turned much of his attention from cutting costs to growing the top line.

"We're focused on the top line because I'm concerned that any business that loses sales, sometimes year after year, will be compromised in the future," Hansen told SN during an interview here.

Hansen said the way to top-line growth is to turn the traditional outlook that has long pertained at Fleming on its head: "There's a fundamental change in philosophy at Fleming now, and it is simply to give the customers what they want. I think that's an important change. In the past, Fleming asked its customers to change to a vision we had of the future.

"We will grow very successfully at Fleming if our customers are successful. Helping our customers by being a good partner means we'll be successful."

The challenges that face Hansen in his efforts to refocus Fleming to ensure its future success were made manifest when Fleming issued its year-end numbers last month. Fleming's numbers swooned to a year-end loss on declining sales. Specifically, Fleming chalked up a loss of $510.6 million for its year ended Dec. 26, or $13.48 per share, on sales of $15.1 billion against $15.4 billion the previous year. Fleming's loss included a pretax charge of $668 million attributed largely to charges connected to the new strategic plan Hansen is now implementing. Without special charges, Fleming's earnings would have been $32.3 million, or 85 cents per share. Comparable earnings for the previous year were $49.9 million, or $1.32 per share (also excluding an extraordinary charge).

Jonathan Ziegler, a securities analyst with Salomon Smith Barney, San Francisco, said that based on everything he's heard about Fleming, the statesmanship role Hansen has adopted is the right prescription for the company.

"A lot of statesmanship is needed for Fleming. There needs to be someone like [Secretary of State] Madeleine Albright who can get out and see everyone and get everyone properly inspired. He may be able to pull that off, but, at the same time, he must be able to deliver."

And that's just what Hansen seems to have in mind. Not one to mill around the office for weeks at a time, Hansen travels about 40% of the time, by his own estimate, and spends that time in stores and figuring out what store operators need: "Store operators know we will live in their stores with them. I spend time personally in stores. I'm on the front line, not in the back with a pair of binoculars. I'm up there seeing what it's really like to face the battle. That helps me understand what their needs are and to help me marshal resources of the organization to help make Fleming a better business partner for those retailers."

Despite Hansen's brief tenure at Fleming, he's certainly no stranger to retailing. His evolved resume includes stints at Sam's Club as president and CEO, and at PetSmart, with the same titles, in addition to posts at Federated Foods, Jewel Cos., A&P and National Supermarkets. Hansen is 44.

Indeed, Hansen's familiarity with both retailing and wholesaling made it easier to consider the posts at Fleming he now occupies when Fleming's board approached him. The board had been busy seeking a successor to Robert E. Stauth, whom the board asked to leave the company last July.

"Last fall, when the board approached me about whether I would be interested in the opportunity here, I hadn't been thinking too much about Fleming. It just wasn't on the radar screen. The one thing that piqued my interest is that I had a relationship with Fleming that went back many years. I had always found the company to be highly regarded and with extraordinarily loyal associates."

He recalled that as far back as the time he spent at A&P (1976 to 1980) Fleming was a secondary product supplier to the chain. "That makes for a 20-plus-year tangential relationship with Fleming," he observed.

"I met with select members of management and also with the nominating committee of the board and walked through their assessments of where the business was, then we spent a ton of time with Bain & Co."

Bain is a consulting firm Fleming's board hired last year to take a look at what the wholesaler needed to do to better position itself to grow. It was implementing Bain's findings that became Hansen's first task at Fleming -- he started that process about a week into the job.

"What we found in the Bain study was a classic asset-rationalization process. They were able to take a look at our business with a very fresh view. That view came on the back of the Food Distributors International study [about wholesaling in the future]." That study, Strategies 2005, was undertaken for the trade association FDI by A.T. Kearney and issued at FDI's Midyear Executive Conference last September.

Said Hansen: "The study said, 'given the changes in the industry and given the existing complement of businesses Fleming has in its stable, what's the optimum way to go ahead?'

"One of its conclusions was the same conclusion that Kroger, Safeway, Albertson's, Ahold and many others have come to; that is, in a maturing industry, growth to the top line is very difficult and so you have to do things to address the underlying cost structures to be able to improve the performance of the business. So we announced a major restructuring early last December."

The balance sheet moves of late last year were intended to position the company to earn a return on capital in excess of the cost of capital, to produce net earnings approaching 1% of sales and to achieve more than $3 in earnings per share by 2003.

To that end, seven product-supply centers are to be sold or closed, leaving a still-substantial 34 in operation from which remaining customers of the closed centers are to be supplied.

Asked about customers lost owing to the closing of product-supply centers, Hansen said that it's happening, but not as at great a rate as had been expected: "We are running 50% ahead of plan on customer retention, which is extraordinary. It is evidence of the good relationship we have with our retailers. That's a big sales number right there." He declined to specify the attrition rate that had been anticipated.

Other moves inspired by the Bain study include the closure of the 11-unit Hyde Park Market chain in Florida and the writedown of goodwill and other assets. More recently, Fleming made known its intention to sell or close all 21 units of its Consumers Food & Drug chain in Missouri.

"The plan addressed two things that the business needed: one is that the goodwill on the balance sheet was causing us not to be able to do the right thing for our customers; secondly, we had assets that we were using that were no longer strategically well positioned and the best thing to do is to take them off the field and redeploy them in ways that are more meaningful," he said.

Charges expected to be taken because of the plan amount to $802 million, pretax, from the fourth quarter of 1998 through 2002, of which the bulk was charged in the final quarter of fiscal 1998.

"The good news is that most of it is noncash. It's more of a balance sheet event," Hansen declared.

However, those actions represent no more than the "starting flag in the race in terms of what has to happen; that was the first step. The challenge I had was that [study recommendations] stopped. They didn't necessarily help make a better mousetrap on a go-a-head basis."

Indeed, one securities analyst told SN it doesn't look as though Fleming has cut enough to really make a big difference in the bottom line.

"There's a question if Fleming has cut deep enough, and even if they have it will take another year to execute against the strategy and start to turn around profitability," said Ed Comeau, with Donaldson Lufkin & Jenrette, New York.

In any case, Hansen's next focus will be on the top line: "There are three ways to grow top line in our business," he said. "One is same-store sales growth, whether our corporate stores or our customers' stores. Secondly, there's square-footage growth, whether it's company-owned stores or Fleming-supplied stores. And then there's customer acquisition. I'm very encouraged by people who are looking at the business, as we're presenting it now, and saying 'yeah, I think Fleming might be the best place for me to buy my product.' Last year was the single best year in terms of business acquisition and hopefully that will be the low-water mark for years ahead."

Hansen also acknowledged that there has been a parallel loss of sales volume too, including the business of Randall's Food Markets, United Supermarkets, Furr's Supermarkets and many others. "There has been attrition," he allowed, "but basically it has been very high profile, very large pieces of business that we expected to lose, and that were centered around issues other than whether Fleming is a good business partner. There was a lot of big money behind those decisions."

He said that positioning Fleming to be a valued business partner in the future is another key to business retention and acquisition. "We're making Fleming smarter, and making Fleming faster. Speed to market, intelligence and value are the critical success factors for any business, and we aren't exempted from that."

So, in a bid to position Fleming with those attributes in mind, Hansen moved in January to trim 220 positions from its office here and in 20 field locations. The cuts represented about 12% of Fleming's corporate staff and are expected to reduce expense by some $10 million on an annualized basis. Those savings are expected to be devoted to ensuring that Fleming is first to market with delivery, new product, loyalty cards and so on. "A speed mentality is required."

Then, a few days later, Hansen reorganized the management decision units -- meaning administrative offices and buying centers -- from 57 to 14 companywide. That move, expected to take a year or two, should produce another $20 million in annualized savings.

Also the reduction in the number of decision-making points and product-supply centers should reduce product costs, he said.

"The challenge is, we were a very expensive business to do business with. For a national manufacturer, it caused a lot of transactions with all those business units out there. Simplifying that reduces their cost, which long term will help our value proposition."

Moreover, he said, the opportunity to leverage Fleming's size to drive down product costs is substantial, and better than the opportunity facing many of the newly conglomerated retail chains.

"We have a better opportunity than they do," he said. "Our business at wholesale is $15 billion and change. That translates into about a $27 billion retail-volume base. We are often the No. 1 or No. 2 buyer of a particular vendor's line in the country. So we do have critical mass in terms of procurement."

The vast number of decision-making points developed over the years as Fleming grew by acquisition, Hansen said.

"People think [growth by acquisition] is a recent phenomenon, but you can go back to 1948 and see this basic process lay in. It all goes back to [founding-family member] Ned Fleming, and how he grew the business."

As a result, he acknowledged, Fleming became as much of a holding company as an operating company.

"Some very dispersed decision-making grew up. We had all these little pods out there, but now we'll concentrate those decisions. We'll eliminate redundant activity and better align the organization. From the leadership standpoint, that means the organization can move faster because less mass needs to be moved. The business will become nimbler as a result," he said. "But there's danger that there will be a misunderstanding that we're going to 14 distribution centers [34 remain]. It just means there will be 14 decision centers. We're not asking our customers to change. We're changing to better serve them."

Fleming by the Numbers

1998 1997 1996 1995 1994 *

Net Sales in Billions 15.0 15.4 16.51 7.51 5.7

Net Earnings (loss) in Millions (510.6) 25.4 26.74 2.05 6.7

Cash Flow From Operations

in Millions 141.11 13.03 27.5 399.0 332.9

Net Earnings (loss)

per Share (13.48) 0.67 0.71 1.12 1.51

Source: Fleming Cos.

Results include the Scrivner acquisition, effective the third quarter.