MESA, Ariz. -- Megafoods Stores here has terminated its cost- and revenue-sharing supply agreement with Fleming Cos. in three Western states and signed a new supply contract with Safeway.
Under that contract, Oakland-based Safeway will supply at least 51% of the needs of Megafoods' 34 stores in Arizona, California and Nevada from its Tempe, Ariz., distribution center. That facility reportedly is capable of handling $1.5 billion of volume, though it is doing only about $500 million currently, industry observers said.
Oklahoma City-based Fleming will continue to service Megafoods' 36 San Antonio stores from its San Antonio facility.
Fleming and Megafoods had the right to unilaterally cancel their agreement with 90-days notice. These supply changes will become effective Aug. 9. Fleming has supplied Megafoods since the retailer launched its business in 1987. The two companies signed their unique supply agreement in December. That pact called for the wholesaler to sell products to Megafoods at cost, in return for which Megafoods would share in the cost of Fleming's warehouse operations. Megafoods pays a deposit
to cover Fleming's cost of buying and handling goods in return for receiving all discounts and allowances on those goods. The agreement gave Megafoods a substantial cost-of-sales benefit, based on Fleming's willingness to share manufacturer discounts, street money and special allowances with the retailer. When it signed the agreement with Fleming last December, Megafoods turned down a deal with Safeway. Megafoods had contracted with Safeway in September to replace Fleming as its primary supplier but had to give Fleming the right of first refusal to match Safeway's offer. Fleming met the offer in order to keep the Megafoods San Antonio business, Fleming said. According to Jack J. Walker, Megafoods' chief financial officer, "Since we've worked with Fleming, we've seen significant benefits, and our gross margins have improved to 18%, our highest ever.
"But the working capital requirement under the Fleming deal meant that the more we buy, the more money we have to put up. We already have $15 million on deposit with Fleming, and looking down the road, we could end up with a $20 million deposit.
"With Safeway, we've been able to work out a longterm agreement -- a minimum of five years -- and there's absolutely no question that we'll be getting the lowest cost of goods, with no corporate overhead other than management information systems."