business news in context, analysis with attitude

One member of the MNB community writes:

“Your story that US Foodservice may have not passed along rebate income to federal government agencies as part of cost plus contracts does not come as a surprise to anyone who has worked closely with food manufacturers over the years. In fact, it is common practice among distributors to pad the profitability of such accounts through was is called "back side money" or "sheltered income". This is a common practice where a distributor is invoiced for a truckload of goods at full retail price and then there are significant reimbursements or rebates that go along with that volume but are not captured or associated with the original purchase invoice. In essence, it allows a distributor to be audited and not have a direct correlation
between specific cases sold to specific customers and the resultant sheltered income.

“To me the easiest way to see that this is going on is in looking at the gross and net margins of any publicly owned distribution company. Take Sysco for example. Their gross margin is 19.8% and yet their net margin is only 2.9% . If there are 16.9 percentage points of cost of goods sold then how can they do a cost plus 8% deal with a government agency without losing 8.9% on every case sold?

“Yes, I know that I am over simplifying the math however you can't argue with the fact that the only way that a distributor makes money on these cost + deals is via sheltered income. The school foodservice industry alone purchases billions of dollars of food each year and we as taxpayers foot much of that bill. The conundrum becomes if distributors were to take cost plus deals and pass along true bottom line cost of product then distributors would have to raise the fixed percentage that they make on contracts with these institutions. Otherwise, they would get killed on profitability. We as taxpayers would pay more to subsidize the federal school food programs.

“Either way you look at it, these are common practices that are only coming out into the open now because of a disaster at USFS. In reality, I don't think that distributors are committing fraud on these contracts because they bad people. They are just trying to make a profit on deals that in reality are priced too low.

“The foodservice distribution channel is a very broken and arcane business model where almost nobody understands their true profit per case of product because of all these complicated off-invoice deals. There is software out there to help everyone sort this out but up until now the industry has not grabbed onto such solutions because "business has always been done this way". Well, maybe it is time for a change.”

We got a lot of email about the Fleming bankruptcy story, including this one from an MNB user:

“Thanks for the detailed piece regarding Fleming. Please keep following this Fleming story with your insightful analysis and thoughtful commentary. The independent retailer community can learn a great deal from your reporting of this matter. Although I agree with your assessment of some of the important symptoms of Fleming problems, which as you stated are internal in nature - there is more! The independent retail/wholesale distribution system needs to make some very critical decisions and embrace the changes that follow -fairly soon - for it to continue to succeed in the marketplace. Issues of trust, collaboration and embracing "best practices" are essential to develop and execute an effective go to market strategy. These are external factors that have greatly impacted Fleming (and others) and will eventually determine who is capable of successfully competing in the marketplace. Independent retailers have been, continue to be and I suspect will always be the beacon of light in our industry and in the communities in which they operate and serve. If "they"/we do not learn from the miscalculations of Fleming, I fear we may make the same mistakes elsewhere - we cannot afford to do that. So keep this as a front burner issue as we can all learn a great deal from it!”


Another MNB user wrote:

“Perhaps the biggest April Fool's joke was on those companies who, even though the tea leaves foretold dark and stormy times, did not take defensive postures with respect to their credit exposures to Fleming.”

Another MNB user wrote:

“I, for one, could care less about Fleming's woes- at least the grocery side. For years, they have deducted funds from manufacturers in what I am certain the government will see to be illegal means, to support their operations. I am just sorry to see the Coremark (convenience store distributor that Fleming purchased) part of the business take this hit - they have always been financially sound, and one of the best convenience store distributors in the country. Hopefully Fleming will be able to sell them to someone who understands the business and will allow that segment to once again grow.”

MNB user Al Kober offered some thoughts about Wal-Mart:

“As much as many in the industry look at the number one retailer as the big bad guy, we need to look at what makes them so successful. They cut out all the extra junk from buying and selling and determine the cost of goods should only include the cost of goods and not everything else that most retailer buyers want, the absolute lowest costs AND all the others extra funding support. Get back to basics and deliver the highest quality at the lowest cost and scrap all the other stuff.”

Regarding yesterday’s story about the Texas legislature considering a ban on junk food in schools, one MNB user wrote:

“Before they cut out the vending machines completely -- which I don't necessarily see as a bad thing -- they need to revamp the lunch menu at the schools. I know I'm from Texas -- so Mexican food and BBQ are staples -- but serving nachos as a main course to elementary school kids is ridiculous. It is one of the main courses on our school district's three week revolving menu.”

No argument there. We’re astounded by some of the garbage that passes for lunch in our school district.

Regarding a story about boycotting of American brands overseas, MNB user Alan Binder wrote:

“We have heard much of "brand boycotting" as protest to the US involvement in the war in Iraq. We have also heard much discounting of the impact of such consumer behavior. It would appear that overseas business is far more significantly impacted by these boycotts than domestic sales.

“I can't imagine that these organizations' overseas operations haven't already gone far in creating a local connection story for their brands (otherwise, there would be nothing significant to protect). What else do these companies think they can do in light of anti-American sentiment abroad to solidify their consumer bases? Is it maybe more reasonable to simply "wait and see"? Motions to enhance brand identity may sound the death knell for many of these lines if they create the impression of trying to puppeteer consumers during these difficult times.”
KC's View: