Fleming’s fall: Vigorous turnaround plan blamed

By Paul Monies Published: August 1, 2004
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Copyright 2004, The Oklahoman

As a pared-down Fleming Cos. Inc. prepares to exit bankruptcy this month, many of the company's 15,000-plus former employees still are wondering what could have gone so wrong to cause the venerable distributor's fall from grace.

Regulators scrutinize Fleming's accounting
Former employees reflect on Fleming's demise
Fleming's fall: Vigorous turnaround plan blamed

Conventional wisdom blames the company's ties to the ailing Kmart chain and management's bid to transform the mature grocery wholesaler into a high-growth enterprise.

But according to former employees, accounting managers and industry observers, the pressure to make sales under an ambitious turnaround plan by former Chief Executive Officer Mark Hansen caused an extraordinary series of events that led to the company's implosion.

Among the events:

-- Fleming's decision to sell its conventional grocery stores and spend millions converting remaining outlets into cut-price stores, a format the company abandoned after two years.

-- The $4.5 billion a year Kmart grocery supply deal.

-- Aggressive deductions from vendor invoices for mishaps such as late deliveries.

-- A Securities and Exchange Commission investigation into the company's accounting practices.

"I think it was an aggressive strategy that proved to be a failed strategy, said Bill Bishop, president of retail consulting firm Willard Bishop Consulting in Barrington, Ill. "They were betting pretty heavily on doing some things differently, and it proved to just not be viable.

Hansen, a former executive at Sam's Club and PetsMart, joined Fleming in 1998. The company faced declining sales and lackluster earnings. Lawsuits regarding overcharging at some grocery stores had sullied its reputation. The company's stock price dropped to $9 by the end of 1998.

Fleming was searching for a niche in the hyper-competitive grocery business that was dealing with the entry of large, self-distributing discounters such as Wal-Mart.

Hansen made an immediate impact. He brought in a new management team, consolidated distribution centers, remodeled grocery stores and laid off employees.

Consultants recommended Fleming convert its retail operations to focus on "price-impact stores, bare-bones operations that offered lower prices without amenities such as delis or bakeries. That new emphasis appeared to be a shift away from the company's core business, which distributed groceries to mostly smaller, independent chains. In the space of two years, Fleming had sold or closed more than 230 of its conventional grocery stores.

In what many in Oklahoma perceived as a snub, Fleming moved its corporate headquarters to the Dallas suburb of Lewisville, Texas. It kept a shared-services center in Oklahoma City with several accounting departments, human resources and information technology.

The turnaround strategy appeared to be working, but some employees felt it had gone too far, too fast.

"I just think their eyes were too big and they had unrealistic expectations for what the company could do, said Barbara Rhoads, who worked for 20 years in the payroll department in Oklahoma City. "They realigned and redid and reconfigured things so much that I think people really didn't have a clue what their job responsibilities were.

Boosted by its annual $4.5 billion, 10-year supply deal with Kmart, Fleming's stock price soared to almost $38 by fall 2001.

Then Kmart filed for bankruptcy in January 2002. The Michigan-based chain was one of Fleming's largest customers, accounting for 20 percent of its revenue.

Despite the troubles, the company remained upbeat. Employee surveys, dubbed "Working to Win, still touted Fleming's plan to become a $35 billion company. Hansen's management team continued to ratchet up the pressure on sales, ordering associates to "make plan, the Fleming term for sales and earnings goals.

Fleming, although it had more than $2 billion in debt, spent $430 million to buy smaller distributors in spring 2002, including California-based Core-Mark International, which supplies convenience stores.

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