COST PRESSURES DRIVE THE INDUSTRY'S BIG 3 EVENTS OF 2003

David Merrefield

This is a year that many will be happy to see consigned to the history books.

Not only did scary developments play across the international scene, but the food-distribution industry was rocked by several events that were not just astonishing in their own right, but which vividly signified change. This special issue of SN chronicles many of those events. Relevant articles are marked by the logo inset just to the right. From the broad perspective, the year's events that seemed most telling -- and most surprising -- include the accounting fiasco at Ahold, the collapse of Fleming Cos. as a traditional grocery distributor, and protracted labor strife in Southern California and elsewhere. Let's take a quick look at those big three events, starting with the last. That's the one with the greatest potential to cause permanent change in the way business is done.

The facts of the matter are well known, and are further reviewed on Page 16. In sum, this epic is little less than an opening fusillade fired by supermarket management in a battle to reset labor costs so they are in line with those experienced by non-organized insurgents, notably Wal-Mart Stores. On the front line are employee health care costs, traditionally paid in full by many food retailers. Management is seeking to spread those costs to employees. Labor has put up quite a fight. The logic supporting each side is equally compelling.

Details of the outcome of this zero-sum game are likely to set the tone for compensation in the food-distribution business, and others, for some time to come. And that underscores the fundamental shift low-cost retailers have wrought in American business, a shift that's not all good. The current direction is pressing retailing to be little more than vending machines set atop efficient logistics. That form of retailing admits to few nuances such as livable wage rates and attractive benefits, never mind arts such as marketing, merchandising and new-product development. Society will be poorer on account of this. The saga of the collapse of Fleming is related to the same dynamics driving the labor situation, as the review of the situation on Page 10 implies. Here's the short version of why: Cost pressures drove Fleming from the refuge it had in corporately owned retailing, then into the arms of an ill-fated supply arrangement with Kmart Corp. Through it all, Fleming had likely become far too dependent on vendor funds, and had lost the ability to make money on the sell side. That, too, bodes poorly for many retailers.

Finally, it's probable that similar cost pressures engendered the accounting scandal at Ahold, described on Page 11. At the root of it may be that Ahold couldn't drive enough cash flow from food retailing so it acquired a food-service asset, which itself was a vendor-allowance machine fueled by reckless accounting.

Let's hope that 2004 somehow shapes up as the year retailing breaks free of cost fetters, and sheds allowance dependency.