FLEMING SUIT FALLOUT: REVIEWS, SUSPICIONS

The fallout from the $200 million-plus verdict against Fleming Cos., Oklahoma City, is reverberating industrywide, as wholesalers consider reviewing their disclosure policies to allay potential retailer suspicions. "The Fleming situation has created a feeling of mistrust and antagonism between wholesalers and the independents they serve, which is something we don't need as we try to fight chain-store

The fallout from the $200 million-plus verdict against Fleming Cos., Oklahoma City, is reverberating industrywide, as wholesalers consider reviewing their disclosure policies to allay potential retailer suspicions. "The Fleming situation has created a feeling of mistrust and antagonism between wholesalers and the independents they serve, which is something we don't need as we try to fight chain-store competition," one wholesaler executive told SN. Another wholesaler said, "It behooves all of us to make sure that everything we say regarding the price of goods to customers is absolutely true and that we don't have double standards or different deals for different customers.

"However each of us determines cost, there has to be full disclosure so there's no doubt on the part of the retailer about the price he's paying," he explained. "But even with full disclosure, there can be some fuzziness and different interpretations of what is involved in a particular deal, so we have to work hard to eliminate misinterpretations and make sure customers understand what's included and what isn't." Another wholesaler executive told SN, "Every one of us is looking to see what his practices are in the wake of the Fleming verdict. It would be foolish not to see if our people are doing or saying things that are out of line with our policies." The industry's renewed concerns about full disclosure stem from a judgment in March against Fleming by a Texas jury in a suit filed by David's Supermarkets, Grandview, Texas. The jury found Fleming guilty of breach of contract, fraud and deceptive practices for allegedly inflating manufacturer prices. Fleming was ordered to post a $200 million bond while it appeals the verdict. Most executives interviewed by SN did not cast blame on Fleming. "The suit against Fleming is a unique situation that's not indicative of widespread fraud by wholesalers or of what's going on with other wholesalers or even with Fleming in other situations," one observer told SN. However, the publicity generated by the whopping verdict has caused some concern in the industry, observers noted. Among the possible implications of the case, they said, are the following:

Retailers might be more skeptical about wholesaler policies or see potentially big payoffs in challenging those policies, and a host of copycat lawsuits could result.

Most wholesalers are reviewing the language in their supply contracts and their deal policies to ensure they are articulating to their customers precisely what they want to.

Fleming could lose some business as it works its way out of the legal mire. Several observers interviewed by SN said they expect a spate of copycat lawsuits to be filed. "If it happens to us, we won't be surprised," one wholesaler executive said. "We feel very comfortable about our business practices. But there will always be independent retailers that are having a difficult time making it because of substandard operations or competitive pressures, which make wholesalers vulnerable to potential litigation." According to another wholesaler, "A number of retailers may decide that, rather than operating their stores, they can improve their position more quickly by suing their wholesaler." Gary Giblen, managing director of Smith Barney, New York, said, "Most of this mass of litigation will be opportunistic and not in good faith, though some will be. But the dollars involved in the David's verdict were too eye-popping not to attract attention."

Another wholesaler said he expects copycat suits to be filed, "but each will have to stand on its own merits. It would be unfair to say that most of the industry prices and defines costs the way Fleming does. There are differences in the way wholesalers execute their policies, and to say all practices are the same as Fleming's would be wrong and fallacious." Nevertheless, most executives interviewed said wholesalers are likely to begin reviewing their policies and the language in their supply contracts. "At this point, we're reasonably comfortable with the language in all our retail contracts because our pricing policy says simply that we will be competitive," one wholesaler explained. "We're not any more specific than that, and I doubt we will modify that approach. "However, we plan to re-review our contracts with regard to language, subject to some modification." Another wholesaler said, "We've looked at the pricing programs of some of our competitors and observed that everything seems to be spelled out, with no hidden agendas, and I suspect all wholesalers should be able to say that." Said another wholesaler, "The Fleming situation will force all wholesalers to re-examine the relationship they have with their customers and look at all the legal ramifications of how they deal with people -- and anytime you move toward more legal complications, it costs more." Giblen expressed a similar thought. "What will happen is that contracts will be written with more legal language to protect wholesalers and to prohibit potential lawsuits. Terms will be spelled out in more legal language and the basis on which pricing is developed might be spelled out more specifically," he said. According to the top executive at one wholesale company, problems of interpretation can occur even when companies are careful. "We like to think we've always been attentive to concerns over full disclosure. But there might be times when, attentive or not, we take certain things for granted and assume that everything is clear to our customers. "This can happen in any large organization, where the marketing and purchasing departments aren't always in sync, and we need to make sure we're all singing out of the same hymn book."

Most observers told SN they expect Fleming to ultimately survive the legal ordeal -- though it is likely to lose some business along the way. "Whenever a company restructures, as Fleming has done -- to be better at meeting the needs of its customers and to utilize Efficient Consumer Response to its fullest extent -- it disrupts the whole customer base. And that situation, added to its legal problems, could result in Fleming losing some business," said one wholesaler competitor. According to another wholesaler, "Fleming had its hands full and was already vulnerable before the judgment against it -- because of trying to swallow Scrivner and subsequent challenges from some customers due to changes in its pricing structure following its re-engineering program. And now, to have this lawsuit go against it on top of everything else is potentially devastating, especially if the fine against it holds. So it's been a tough one-two-three punch for Fleming." Fleming's stock, which hit $30 per share about six months ago, fell to $24 a share when the company disclosed soft second-half sales for 1995 earlier this year; the stock subsequently hit a low of $12 when the verdict against Fleming was announced. If the verdict is upheld by the appeals court, then it's unlikely Fleming will be able to use its stock to raise capital for acquisitions, as it did when it acquired Scrivner, Giblen said.

"As acquisition currency, the stock will be less valuable. But once people get anxious about the company's problems and decide to sell, there may be a little bit of a bounce from being oversold," Giblen added. One industry observer said the policy on which Fleming was found guilty -- cost plus an upcharge -- is standard industry practice. "David's knew what it was getting, and I'm surprised that Fleming couldn't get that across to a jury," he told SN. "When a wholesaler works out an arrangement with a retailer, he needs to have a basis on which to charge that customer, and it usually begins with a standard cost from the manufacturer -- e.g. the list price or deal price -- plus his markup. "David's alleged that Fleming was not passing on the cash discounts it got for paying for the merchandise early. But it was Fleming that was putting up the money, and it doesn't owe it to the retailer to pass on any savings because it's Fleming's money that's tied up."