Fleming Companies’ turnaround strategy

Consider the following portrayal of the turnaround strategy employed by Fleming Companies, which at the time, was the largest U.S. distributor of consumer-packaged goods to retailers of all sizes and formats.

Dozens of manufacturers that used Fleming as a channel for distributing their products to supermarkets and grocery retailers claimed that Fleming habitually deducted arbitrary sums (amounting to perhaps $100 million annually) from the billings they submitted. The practice was said to be a part of Fleming’s turnaround strategy to boost its own margins and restore profitability after five money-losing years (1996-2000). According to a food industry consultant who once worked for Fleming, the company’s practice was to “deduct and deduct until a vendor cuts them off, then they pay. Then they start deducting again.”

Former high-level Fleming employees claimed that the company played games with slotting fees, sometimes taking slotting fee deductions from manufacturer billings for products it never stocked in its warehouses or put on retailer’s shelves. Fleming’s standing as the world’s largest wholesale grocery products distributor, with some 50,000 retail customers (including Kmart), gave it powerful gatekeeper status because many grocery products manufacturers use a third-party distributor to access small independent grocery chains and because many small grocers get most of their merchandise through a grocery distributor (unlike Wal-Mart, Safeway, and many other large chains that buy directly from the manufacturers). Thus, manufacturers that sold through Fleming were hesitant to cut off deliveries to Fleming or protest its deductions too vociferously because they didn’t have effective alternatives to getting their products to Fleming’s 50,000 customers.

Relationships with some of Fleming’s retail customers, most notably Kmart (its biggest customer) and several small independent supermarkets were also said to be strained because of recurring service and billing issues.

a. Is Fleming engaging in anything unethical here? If you were a Fleming executive, on what grounds would you defend the company’s actions?

b. Is the company unfairly using its muscle of serving some 50,000 retail accounts to take advantage of its suppliers?

c. If you were a manufacturer that sold through Fleming, would you be looking for other distributors to handle your products?

d. If you were a Fleming shareholder, would you be pleased with the manner in which the company is being managed and the reputation that such practices are giving the company? Is what is going on here sufficient grounds for selling the shares you owns?

(Special note: Shortly after Fleming’s practices came to light in a front-page Wall Street Journal article on September 2, 2002, things at Fleming began to go downhill quickly. The company’s profits on sales of $15.5 billion in 2002 were marginal, despite having acquired Target, Albertson’s, and 100 other supermarkets as new customers. In April 2003, Fleming filed for Chapter 11bankruptcy protection and began a program to dispose of most all of its business assets to pay off creditors. By mid-2002, the company had sold all of its retail grocery operations and all of its wholesale grocery distribution business. Only 2 small divisions remained and they were up for sale. The company was history.)

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