ALBUQUERQUE, N.M. -- Furr's Supermarkets here has filed a complaint against Fleming Cos., its Oklahoma City-based distributor, seeking to terminate its supply agreement.
The action also claims that Fleming has overcharged Furr's, allegedly with the knowledge and cooperation of several Fleming executives who were also named in the action -- similar to charges in a lawsuit by David's Supermarkets, Grandview, Texas, which is scheduled to be heard in May following an overturned earlier verdict against Fleming.
The same Texas-based attorneys are representing both Furr's and David's.
However, one major difference between the complaints is that the Furr's action charges several Fleming executives with breaches of their fiduciary duties.
Furr's -- a 70-unit chain, of which Fleming owns slightly less than 35% -- is Fleming's largest customer. Its 1996 purchases of $546 million represented approximately 3% of Fleming's total sales of $16.5 billion.
In a formal statement, Fleming said, "An unfavorable outcome or the loss of this customer's business -- neither of which we foresee at this time -- could have a material adverse effect on the company. We intend to vigorously defend Fleming against the lawsuit." Fleming said it believes it has complied with its obligations to Furr's "in all material respects and in good faith. As a 35% owner of Furr's, Fleming has an obvious commitment to its success."
Furr's has a 10-year supply agreement with Fleming that expires in March 2001, and Fleming is continuing to serve Furr's, despite the charges. "We believe we've complied with the contract, and we want to work this out and continue with our ongoing relationship," a Fleming spokesperson told SN last week.
Patrick Totman, executive vice president and chief financial officer of Furr's, told SN, "Our goal is to be absolutely certain we have a competitive cost of goods, fees and charges, and we don't think that's the case right now."
He said Furr's has obtained an offer from another wholesaler "that provides us with a very substantial opportunity in the cost of goods -- a savings in excess of 1%."
Although Totman declined to name the other wholesaler, trade observers told SN the distributor is C&S Wholesale Grocers, Brattleboro, Vt. C&S officials declined to confirm or deny those reports last week when contacted by SN.
For C&S to supply Furr's, observers pointed out, it would probably have to acquire a distribution center somewhere closer to Furr's base of operations.
According to Totman, Furr's submitted the other wholesaler's competing bid to Fleming on March 5. Under the terms of its supply agreement, Fleming has 30 days to respond by either matching the lower price or allowing Furr's to accept the competing officer, Totman said. According to Fleming, "With Fleming's cooperation, Furr's has been examining the pricing under our supply agreement. Furr's has submitted to Fleming what it asserts is a qualified competitive bid by a potential competitor to supply Furr's approximately 70 stores in New Mexico and west Texas.
"Fleming is examining the submission but has not yet determined whether it is qualified or competitive."
Five days before Furr's submitted the competing offer to Fleming, the retailer filed its complaint against the supplier, claiming overcharges, breach of contract, misrepresentation, fraud and violation of certain New Mexico trade practice statutes.
The action, filed in Second Judicial District Court in the County of Bernalillo here, also seeks unspecified damages plus a declaratory judgment terminating the agreement.
Named as defendants in the complaint, besides Fleming, are James E. Stuard, retired executive vice president of Fleming's southern region; William M.Lawson, senior vice president of corporate development and international operations; Thomas L. Zaricki, senior vice president of retail operations; and Art Hahn, director of chain marketing. Both Lawson and Zaricki are members of Furr's board.
According to the Fleming spokesperson, all of its executives "are there to provide focus, service and leadership to Furr's and to help it perform in the marketplace."
The distributor declined further comment on behalf of Lawson, Zaricki and Hahn. Stuard could not be reached for comment.
According to the Furr's complaint, Fleming's supply agreement with Furr's obligates Fleming to sell products to Furr's at cost plus an agreed-upon markup: cost plus 2.75% on groceries, dairy products, dry bakery goods and store supplies; cost plus 5% on frozen food and frozen meat; and cost plus 10% on produce.
"Fleming has systematically and intentionally overcharged Furr's . . . in many ways," the complaint says. "For example, Fleming regularly buys goods at a discount from . . . diverters but charges Furr's for the list price of the goods, rather than the discounted price Fleming paid.
"Fleming also regularly buys and sells goods between its various divisions and again charges Furr's the list price . . . rather than the actual costs paid by Fleming to procure the goods in the first place.
"Fleming also fails to pass on to Furr's the benefits of deal buying and forward buying . . . "In another example, Fleming induced many manufacturers to, in Fleming's own words, 'artificially inflate' the invoices on which Fleming bases its prices to Furr's. Fleming then entered into secret arrangements requiring the manufacturers to rebate the difference back to Fleming so that Fleming could retain this unwarranted profit.
"To illustrate, if the price of foam trays was $100 per lot, Fleming would ask the manufacturer to invoice Fleming at a price of $110 per lot. Fleming would charge Furr's $110 per lot, plus the agreed-upon markup.
Fleming would then require the manufacturer to rebate the $10 per lot 'inflation' to Fleming."
The complaint alleges that Stuard, Lawson, Zaricki, Hahn and others "were and are knowing participants and accomplices in Fleming's illicit behavior."
It says Stuard negotiated the supply agreement with Furr's and directed Fleming's dealings with Furr's prior to his retirement "with full knowledge of Fleming's practices and intentions . . . and he benefited personally from Fleming's pattern and practice of overcharging Furr's. It also says Lawson and Zaricki, "instead of acting solely on Furr's behalf, as their fiduciary duties require . . . have at all times acted solely for Fleming's benefit. If [they] had not concealed Fleming's breaches from Furr's, Furr's would have discovered the breaches earlier and properly terminated the agreement.
"Lawson and Zaricki have also leaked confidential information regarding Furr's to Fleming, in violation of their fiduciary duties . . . [and their] active connivance with Fleming and breach of fiduciary duties have dealt Furr's a crippling financial blow."
In addition, the complaint says Fleming sent Hahn to work at Furr's corporate headquarters in 1995 as its "inside man," whose main duties included "keeping Furr's . . . in the dark about Fleming's overcharges as long as possible."
The action noted that in August 1995 Fleming altered the way it charged some customers for products pricing when it introduced its Fleming Flexible Marketing Plan.
