WHAT HAPPENED AT FLEMING

David Merrefield

There are two ways to play baseball. One is to step up to the plate, take a huge swing and hope for the best. The other is the legendary, and probably apocryphal, Babe Ruth approach: Point to the outfield wall and slam the ball over that very spot on the wall.

Bob Stauth was more in Babe Ruth's league, as readers of SN and attendees of trade-association meetings well know. Bob was more than willing to assume a leadership role, to say publicly and for the record what had to be done, and then make every effort to achieve the goals specified. More than that, he was willing to give direction to the grocery-wholesaling industry by assuming leadership roles at trade associations, most recently the chairmanship of Food Distributors International, an appointment made just last March.

The willingness to articulate company and industry goals so publicly is a much-needed, but an all-too-rare, quality in the food-distribution industry.

Bob, as anyone who has glanced at the front page of this week's SN knows, was until recent days the chairman, chief executive officer and a director of Fleming. That's all over now.

And it was sudden: Bob went to a board meeting a few days ago, the purpose of which was to discuss recommendations of a consultant who had been retained to suggest new long-range strategic directions Fleming might take. But before the meeting started, Bob was told that he was out and shorn of his titles. He also resigned from the board. There was no permanent successor to announce. He resigned as FDI chairman shortly thereafter.

Was Bob surprised? "I was a bit surprised at the quickness with which it all happened," he told me last week. "I would have preferred a plan that would have let me say goodbye to retailers and everyone, maybe over the course of a quarter. But that's just personal. The board had a decision to make and I told the board earlier that if they had to make such a decision, there would be no fight from me."

There is no doubt that Bob had a rough five years at the helm of Fleming, a period characterized by sinking results and lackluster equity values. And, during that same period, rival wholesaler Supervalu was on the upswing. None of these factors did Fleming, or Bob, much good.

What happened during the period since 1993 when Bob succeeded E. Dean Werries? (Actually, Dean remained chairman for a time before relinquishing that title.)

The tumult started quickly with the July 1994 announcement that Fleming intended to acquire its crosstown rival Scrivner for more than $1 billion. The buyout came at a particularly inauspicious time since Fleming had just embarked on a re-engineering program, which, as is the case with any fundamental organizational change, had already sown a bit of chaos.

But, at the same time, Fleming could ill afford to let Scrivner fall into rival hands. Moreover, it gave Fleming a way to achieve another needed objective: to greatly increase the percentage of the top line produced by corporately owned retailing.

As for the re-engineering, a key element of it was Fleming's move to a cost-plus system. That entails a move away from submerging product costs into the murky waters of "inside margin," and moving toward the rational approach of making money by selling product, instead of by buying product.

The salient feature of cost-plus is the disclosure of product-acquisition costs to retailers, since the idea is to charge a retailers a certain add-on percentage above that cost. This disclosure probably contained the seeds of one of the more remarkable lawsuits ever filed in the food-distribution industry, the lawsuit brought by David's Supermarkets of Texas against Fleming. That operator claimed Fleming kited its acquisition costs and so was overcharging.

In February 1996 a Texas jury found Fleming liable to the tune of more than $211 million, a sum that was five times Fleming's earnings at the time. Subsequently, a new trail was called, but before it commenced, an out-of-court settlement of less than $20 million finally put the matter to rest.

That whole event was seminal. In retrospect, Fleming should have paid more attention to the potential harm a local jury could inflict, and should have done far more to keep the matter from going to a jury trial in the first place. That fact became clearer with time: After the Texas verdict, the floodgates opened and other Fleming-supplied retailers decided to file suit too.

Another such blow came just this month when an arbitration panel permitted Randall's Food Markets, also in Texas, to terminate its supply contract with Fleming.

It's probably because of negative publicity generated by the suits, and Wall Street's lack of understanding of the wholesale sector, that kept Fleming's equity values stagnant and depressed. No doubt the bad news also hobbled Fleming's efforts to attract new business. Incidentally, allegations broached in the outpouring of suits occurred during time periods prior to Bob's incumbency at the top of the company.

Fleming's board is now searching for a permanent successor to Bob. What can that successor do that Bob couldn't accomplish? Perhaps the biggest advantage the new executive will have is that he won't be Bob.

"My departure allows the stigma of the lawsuits and everything else to be attached to me and buried. So be it. The important thing is that Fleming has to win in the long term, and so do the independent stores Fleming supports and so do the company-owned stores," Bob told me.

The industry will miss Bob's vision and forthright nature.