It's becoming increasingly likely that the end of the line is in view when it comes to the food-distribution industry's traditional ways of acquiring product.
As has been set out in this space more than once, the industry is in product-acquisition territory that's indefensible. In brief, the current practice is that manufacturers may set a price of, say, $10 a case for product, but distributors see that as, say, $8 a case since they know that any number of means exist to lower the price. Those means include promotional allowances, an imaginative plethora of fees, and invoice deductions. (And let's acknowledge that vendors' trade-loading efforts sometimes abet this practice.) Meanwhile, some alternate-format players look at the complexities of buying and cut through it by simply demanding the $8 price, forgoing price-lowering machinations. What's the difference? The latter practice yields far higher margins since no bureaucracy need be maintained to shift the price from $10 to $8.
Until quite recently, it seemed that the traditional system was destined to stay in place until it collapsed of its own inefficiency, an event that could have been some time in the making. Now, though, it seems the system is destined to end soon, and for a much subtler reason: how the spread between the $10 and the $8 is booked.
The problem is that the $2 spread was seen by many food-distribution companies as a sort of slush fund that could be applied to the books as needed. If a certain quarter was coming up short, these receivables could be projected many quarters into the future and applied immediately. If a quarter was strong, these receivables could be held back for later use, or applied selectively to some lagging element. Indeed, these receivables might be so used even if they didn't exactly exist and even if there was no real expectation that they ever would.
It's evident this practice was long tolerated by accounting firms retained by various food-distribution companies. But that's no longer so. The most vivid example of that occurred when Ahold disclosed accounting irregularities and put off issuing its annual numbers, to disastrous effect on its equity. Such accounting matters are a part of Securities and Exchange Commission probes into Ahold, Fleming Cos. and Nash Finch. Investigations are going on in other industries, too.
At its base, this change is driven by the noisy collapse of Enron and Anderson. That fiasco well illustrated what could happen to a company and its accounting firm if income generation and recognition strayed too far from reality. Plus, accounting-rules changes are in the works. Closer to home, the departure of food-distribution executives such as Ahold's Cees van der Hoeven and Fleming's Mark S. Hansen focuses attention on accounting issues, even if neither of those two had any knowledge of whatever irregularities might have existed, since it will inspire top executives to be better attuned to the weight accounting problems can bring to bear on a company.
The end product of this turmoil will be to make the accounting of allowances more transparent. The best way to do that is to abandon the exceedingly cumbersome and inefficient system -- one that so cries out for abandonment -- in favor of the "clean buy" approach.