Tuesday, November 11, 2003

Playing with slotting fees One of the little games that goes on between oligopolies and oligopsonies away from the public eye is that of falsifying records to time the booking of revenue, deceiving shareholders while the actual cash is only later handed over. This particular fraud, based on recent investigations, is rife in the food business. It all has to do with the proliferation of fees, rebates, and considerations (including slotting fees) that distributors and retailers charge to food manufacturers, In some cases, the manufacturer provides documentation that allows the retailer or distributor to claim income from such fees before they have been paid, a big accounting no-no, since it usually disguises serious cash flow problems. Just last week three of the biggest food companies - Kraft (Altria), Frito-Lay (Pepsico), and Dean Foods were accused by federal authorities for just such falsifying of documents, a favor given to food broker Fleming Companies (owner of Crossmark). What's in it for the manufacturers? In part, it's a cheap way to get more-favored treatment. Second, it's a way of propping up shrinking food broker Fleming. As the Wall Street Journal points out ("Special Deals For Distributors Draw Scrutiny", 11/7/2003), "in recent years, retailers and distributors have demanded more and more incentives as they faced greater price pressure from competitors like Wal-Mart Stores Inc. And suppliers have played along, partly out of concern that Wal-Mart, which demands rock-bottom prices, could one day be one of the few big customers left." In other words, here's another example of Wal-Mart's competitors imitating it, while the suppliers try escape from Wal-Mart's iron grip by propping up the competition. The Feds are already investigating other companies for similar deals. Ahold subsidiary U.S. Foodservice is being looked at for overstating revenue by $880 million in two years, using just such exaggerated manufacturer's fees and rebates. Among the manufacturers involved are ConAgra, Sara Lee, and Heritage Bags. Kmart is also been scrutinized for its claimed fees from American Greetings, which Kmart chose to be its exclusive suppliers of greeting cards. Apparently, Kmart booked revenue it legally shouldn't have. And, once again, the small guys get screwed. Fleming, like other food brokers is seeing hard times, so hard that it had to seek Chapter 11 protection in April. As the WSJ article says, Fleming turned to its suppliers more often after its results started to fall short of its estimates, according to numerous vendors. It began to take unauthorized deductions, saying that suppliers owed it for a variety of reasons. Then it stepped up its requests, telling manufacturers that it would cut payments to suppliers by 3% as part of a program it called "shared savings. "They wanted money for nothing," said Ken Farnsworth, chief executive of Rhodes International Inc., a privately held baked-goods company in Salt Lake City. Mr. Farnsworth had counted on spending promotion money to boost sales of his frozen dinner rolls. Instead, the Fleming deductions depleted the funds he had earmarked for advertising and special displays at grocers. In the absence of those promotions, he says, his sales dropped 17%. You can bet that big companies like Dean Foods (#1 in dairy products), Kraft (#1 in food manufacturing), and Frito-Lay (#1 in snacks) did not get the same treatment. And small companies like Rhodes International have few other places to turn. They are even more at the mercy of Wal-Mart and the big supermarket chains. 6:59:04 PM

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