FLEMING COLLAPSES, REEMERGES WITH CORE-MARK

ELLIOT ZWIEBACH

DALLAS -- For Fleming, 2003 proved to be the end of the line for the 86-year-old wholesale giant.

The company filed for Chapter 11 bankruptcy protection on April 1, and by early summer it was out of the grocery wholesale business altogether.

Fleming's rapid downfall actually began in mid-2001, when it agreed, amid much hoopla, to become the sole grocery supplier for Kmart Corp., Troy, Mich. -- a 10-year agreement that made Kmart its largest customer, with annual sales expected to be around $4.5 billion annually, or approximately 20% of Fleming's volume. However, Kmart filed for Chapter 11 bankruptcy protection early in 2002, sending Fleming into a tailspin from which it never recovered.

In January, Kmart said it would close more than 300 stores, including half of its 120 Super Kmart Centers -- a move that led Fleming to reconsider its arrangement.

According to Mark S. Hansen, Fleming chairman and chief executive officer, "The contract was designed to have two big components: a big step-up in volume year over year, and substantial bias toward supercenter expansion. In the absence of both of those, the contract itself must be modified at a minimum to allow Kmart to remain in compliance with it."

Within weeks, however, Fleming decided to terminate the supply agreement altogether. "It may be beneficial to have zero relationship with the [Kmart] business," Hansen explained.

However, there was speculation at the time that Kmart may have initiated the termination because of its displeasure with Fleming's service levels and inconsistent private-label products.

While it struggled on the wholesale side, Fleming was also struggling on the retail side of its business as aggressive pricing by many large operators exerted pressure on the grocery business, particularly on the kind of corporate price-impact stores Fleming was operating.

As the company looked for buyers for its 100-plus retail stores, industry observers and Fleming's own retail customers began questioning the wholesaler's long-term survival as it began shutting down distribution centers -- beginning with dedicated facilities for the Kmart business in Fort Wayne, Ind., and South Brunswick, N.J., and followed by facilities in Lubbock, Texas, and Kansas City, Kan. Further doubts about the company's long-term viability were raised in early March, when the Securities and Exchange Commission launched a formal probe into Fleming's accounting practices.

During the first week of March, the ax fell on Hansen, who was asked to resign by Fleming's board of directors after just over four years at the helm because of the board's lack of satisfaction with the company's performance.

Fleming installed Archie Dykes, a longtime Fleming director, as its non-executive board chairman and Peter S. Willmott, a board member for less than three months, as interim president and CEO.

Yet, Fleming's options were already limited as retail service levels began dropping to the 55% to 65% range for some customers, prompting them and others to begin considering changes in their source of supply.

On April Fools' Day, after failing to reach a restructuring agreement with its bank lenders, Fleming filed for Chapter 11 protection.

While many companies trying to restructure have a variety of options for emerging, Fleming, as a more one-dimensional company, didn't have a lot of alternatives, a restructuring expert told SN at the time. "It's clear Fleming has had sufficient difficulties with basic logistics, and it doesn't have other avenues of the business to resort to. Logistics is what it has to do well -- there are no other performance options."

In May, Fleming condensed its operations further with the closings of four more grocery distribution centers and a nonfood facility. "The loss of business at these divisions and their limited growth opportunities has made it impossible for us to continue in these markets as a core part of Fleming operations," Bill May, president and CEO of Fleming's wholesale division, said.

At the same time, Target Corp., Minneapolis, said it would begin buying groceries from other sources for its SuperTarget stores.

In mid-June, Fleming disclosed three more warehouse closings and said, for the first time publicly, it was considering the sale of the company. By the end of the month, C&S Wholesale Grocers, Brattleboro, Vt., emerged as the buyer for most of Fleming's wholesale grocery business and assets.

Mark Gross, executive vice president of C&S, said the purchase of Fleming's wholesale grocery operations "would allow us to expand our business into parts of the country where we do not presently operate."

C&S also made arrangements to supply the wholesaler with selected products for distribution to its retail customers to help Fleming boost its service levels and hold onto sales that were rapidly slipping away.

C&S said it would pay approximately $400 million to acquire most of Fleming's assets, including all product supply centers, inventory and equipment, plus corporate offices and other real-estate and licensing rights to the Piggly Wiggly and Sentry Foods brand names. However, the agreement excluded all assets related to Core-Mark International, the convenience store business Fleming had acquired in June 2002.

The U.S. Bankruptcy Court approved the C&S bid in August, after which C&S opted to hold onto Fleming facilities in Hawaii and Northern California. However, it sold most other properties to other wholesalers, including five distribution centers to Associated Wholesale Grocers, Kansas City, Kan.; three to Supervalu, Minneapolis; and single facilities to Grocers Supply Co., Houston; Associated Grocers of Florida, Miami; and Associated Grocers, Baton Rouge, La.

In September, C&S swapped three additional Midwest facilities with Supervalu in exchange for four Supervalu facilities in New England.

Fleming retained the Core-Mark convenience store division, although it put that division up for sale. Earlier this month, Fleming said it had filed a plan of reorganization with the U.S. Bankruptcy Court that would enable it to emerge from Chapter 11 as a wholesale C-store distributor if Core-Mark is not sold.