THE SAGA OF FALLING ASSET VALUES AND SLIPPING COMPENSATION

David Merrefield

As might be expected, while many of us were tromping around the exhibit hall at the Food Marketing Institute's annual convention in Chicago last week, events in the food-distribution industry proceeded right along; there were big happenings at Fleming, Kmart, Safeway and Ahold.

Probably the biggest jolt was Fleming's disclosure that it intends to shutter five distribution centers almost immediately. The depots represent about $1 billion in annual revenue to Fleming. That hands a huge problem to many independents that now will have to scramble for supply alternatives. Fleming filed for Chapter 11 April 1. See Page 1 for more.

Also last week, Kmart completed its rapid transit through bankruptcy court, emerging from Chapter 11 in just 15 months. In that process, Kmart shuttered hundreds of stores and showed the door to tens of thousands of employees. There's not much good in that and, worse yet, it remains unclear how Kmart will achieve the profitability it has predicted for next year. Regardless of how that goal is to be pursued, it seems Kmart will no longer aspire to be a big player in food retailing. As was reported in last week's SN, Kmart previously drove an estimated $1.7 billion in food sales from its 117 supercenter locations. About half those stores are closed now, and many predict that food retailing will continue to wind down at Kmart.

Apart from the damage Kmart's bankruptcy inflicted on Kmart itself, damage was widely disseminated to many others in the food-distribution industry. Coming under shelling from the Kmart debacle were manufacturers with unpaid bills and, to bring us full circle, Fleming, previously Kmart's food supplier. Here's more on Fleming: It received an infusion of financing and won an agreement from the bankruptcy court to offer a vendor program that could revive product shipments. Fleming also moved closer to selling 31 Rainbow Foods stores in Minneapolis to Roundy's. That asset is likely to go for $42.5 million plus another $75 million for inventory and lease assumption. That's much less than had been anticipated, even under fire-sale conditions, and may presage the closure of Fleming's depot there.

So it's a buyers' market now, as Safeway also demonstrated last week. Safeway, which intends to exit the Chicago market by selling its 113-store Dominick's chain, now fixes a value of about $400 million to that asset. We'll see if it gets that much, especially since Roundy's, once considered a potential buyer for Dominick's, is occupied elsewhere. Safeway paid about $1.9 billion for Dominick's in 1998.

While we're considering declining values, let's look at executive compensation. Shareholder anger is being kindled in connection with the disconnect between company performance and executive compensation. As it happens, though, several industry companies have issued filings lately that show direct executive compensation to be dropping from the stratosphere.

Supervalu intends to eliminate top-executive performance rewards because profit goals weren't met last year. Perhaps that situation won't repeat, given the developments at Fleming. Topside compensation is also dropping at Safeway and Albertsons, to cite a couple more. It's not time to feel too sorry for these guys, but compensation attenuation might help: Shareholders will put up with a lot more if they perceive elemental fairness in the process.

Finally, just to round out the week's slate of surprising events, don't miss the report about Ahold on Page 1. It seems the scope of its accounting irregularities has widened by hundreds of millions of dollars.