Fleming Companies, Inc. Business Information, Profile, and History

History of Fleming Companies, Inc.

Fleming Companies, Inc. is the largest food wholesaler in the United States. The company stocks the shelves of more than 3,500 supermarkets and other retail food stores in 42 states and the District of Columbia, as well as in several foreign countries. Fleming has shown exceptional innovation in meeting the changing needs of the independent grocer over the years. The company's taste for the most up-to-date technology and its knack for making healthy acquisitions has catapulted it to the forefront of the wholesale foods industry. Today the company not only supplies its customers with food products but also assists with new store planning and financing, marketing, accounting, and operations management. In the 1990s, Fleming has sought to expand its presence on the retail end of the food industry and has increased its retail revenue to more than 21 percent of total revenue.

Founding and Early Development

In 1915, O. A. Fleming, E. C. Wilson, and Samuel Lux founded the Lux Mercantile Company in Topeka, Kansas, to sell produce to local merchants. The company's name was changed to Fleming-Wilson three years later. In 1921, Ned Fleming, the son of the company's cofounder, joined the firm. He was promoted to general manager a year later and held that position until he was elected president in 1945.

Throughout the 1920s, the Fleming-Wilson Company operated locally in Kansas. In 1927, it joined the Independent Grocers Alliance (I.G.A.), a voluntary grocery store chain and one of the largest independent chains today. In such voluntary chains, affiliated stores agree to buy most or all of their merchandise from one distributor and receive collective buying power in exchange, enabling them to compete with larger corporate supermarket chains. Voluntary chains have historically made up the largest share of the wholesaler's business, and they contributed significantly to Fleming-Wilson's growth.

The Depression took a particularly heavy toll on the lower Midwest and the Southwest. Though many industries in the region were virtually paralyzed, Fleming-Wilson managed to survive. In 1935, it acquired the Hutchinson Wholesale Grocery Company, another Kansas-based distributor, the start of a period of growth that has continued virtually unbroken to the present day.

In February 1941 the company changed its name to Fleming Company, Inc. That same year it branched out of Kansas when it acquired the Carol-Braugh-Robinson Company of Oklahoma City. By the end of World War II the fate of the independent grocer was uncertain and Ned Fleming was faced with new challenges. Americans were moving out of the cities and into the suburbs. As shoppers drove their new automobiles to the new supermarkets, independent "mom and pop" corner stores fell by the wayside, and supermarket chains grew at a frantic pace. It was the voluntary chain concept that rescued the independent grocer. Voluntary chains expanded tremendously after the war, and as a result so, too, did Fleming. The company reported steadily increasing earnings throughout the late 1940s and the 1950s.

In 1956, Fleming Company bought Ray's Printing of Topeka, renamed General Printing and Paper. Fleming itself was General Printing and Paper's biggest customer, consistently accounting for more than half the company's sales.

Acquisitions and Diversifications in the 1960s and 1970s

The 1960s were a decade of exceptional growth, as Fleming expanded nationwide through the acquisition of other regional wholesalers. Throughout the early 1960s, the company acquired several companies and facilities in the Midwest and Southwest, including the Schumacher Company of Houston, Texas, in 1960.

In 1964, Ned Fleming became chairman of the board of directors and Richard D. Harrison became the company's president. Under this new leadership, Fleming began an even more ambitious campaign of expansion and acquisition. In 1965, Fleming purchased Thriftway Foods, which operated in the East with headquarters in King of Prussia, Pennsylvania. Three years later, Fleming tapped West Coast markets when it bought Kockos Brothers, Inc. in California. However, at the end of the decade profits slowed for the first time in many years.

Fleming began to diversify again in the 1970s. The company bought a semi-trailer manufacturing unit in 1970, and in 1972 it created the Fleming Foods Company, which ran the food distributing operations as a semi-autonomous unit. Later that year Fleming bought the Quality Oil Company, of Topeka, Kansas. Quality Oil operated about 50 retail gas stations in the Midwest and proved to be a wise investment. A year after the acquisition, the subsidiary was contributing more than ten percent of Fleming's pretax profits. Fleming also branched into health foods distribution when it bought Kahan and Lessin in 1972. At that time, K&L delivered to about 1,200 health food stores and 1,000 supermarkets. Fleming's venture into health foods proved to be less profitable than petroleum: K&L lost money in 1973 and showed only a slight profit in 1974.

In 1974, Fleming bought Benson Wholesale Company and the Dixieland Food Stores retail chain, both headquartered in Geneva, Alabama. In 1975, the company pushed into the New Jersey and New York markets by purchasing Royal Food Distributors. Finally, in 1979 Fleming acquired Blue Ridge Grocery Company of Waynesboro, Virginia, capping off a decade of acquisition and growth.

Renewed Focus on Wholesaling in the 1980s

In 1981, Fleming Companies reincorporated in Oklahoma and its corporate headquarters moved to Oklahoma City. In March 1981, Richard D. Harrison was elected chairman of the Fleming Companies board of directors, and E. Dean Werries, who had previously headed the Fleming Foods division, replaced him as president, while Harrison remained CEO.

This new leadership steered Fleming in a slightly different direction. Harrison and Werries stressed wholesale food distribution over diversification. Throughout the 1980s, Fleming made more and larger acquisitions of food wholesalers as part of its growth strategy. In 1981, it bought McLain Grocery in Ohio. In 1982, it bought the Waples-Platter Company for $91 million, which included the White Swan Foodservice division in Texas. A month later, in January 1983, it purchased the bankrupt American-Strevell Inc. for $14 million. Fleming also purchased Giant Wholesale of Johnson City, Tennessee, that year. In 1984, Fleming acquired United Grocers, a cooperative wholesaler in California. It further strengthened its hold on the northern California region by purchasing a huge distribution center in Milpitas, California, from the Alpha-Beta Company a year later. In 1985, Associated Grocers of Arizona, Inc. was purchased for $47 million. In 1986, Fleming purchased the Frankford-Quaker Grocery Company in Philadelphia and the Hawaiian distribution warehouse of Foodland Super Markets. In 1987, it acquired the Godfrey Company of Wisconsin, and in July 1988 Fleming became the largest wholesaler in the country when it acquired the nation's fourth-largest wholesaler, Malone & Hyde Inc.

Fleming's incredible spree of acquisitions was not completely free of complications. In particular, the acquisition of Associated Grocers of Arizona posed some new problems for Fleming. Because the wholesaler had previously operated as a cooperative, owned by those supermarkets it serviced, Fleming had difficulty implementing its own corporate style of management. Associated Grocers customers were not at first supportive of the changes that were necessary to transform the company into a profitable unit for Fleming. Despite such minor setbacks, Fleming continued to look for possible mergers to strengthen the company. Cooperative distributors who lacked the capital to reinvest in new facilities and found it increasingly difficult to compete with the streamlined corporate wholesaler were likely candidates.

At the same time Fleming concentrated on acquiring food wholesalers, it divested some of its other units. In 1982, it sold Quality Oil, and in 1983 it sold General Printing and Paper. In 1984, it sold its health foods specialty distributor, Kahan and Lessin. K&L's performance had been inconsistent ever since its acquisition in 1972. In addition, in 1982 the Justice Department charged the subsidiary, along with three other health food distributors, with fixing prices. The company was fined $75,000; Fleming reported a $862,000 expense as a result of the litigation. Also divested were M&H Drugs, the retail drug subsidiary of Malone & Hyde, and White Swan; both were sold in 1988.

Wholesale food distributors traditionally operate on profit margins of less than one percent. Increased productivity of even fractions of a penny on each dollar of volume can make a noticeable difference in earnings. For this reason, Fleming was quick to implement technological developments to increase productivity. In its newest warehouses, a computer breaks down orders by product, allowing a worker to fill several orders at once. The worker puts the total number of cases of one product ordered on a conveyor belt. A laser scanner sends each unit to the proper shipping bay to be loaded for delivery. This system increased productivity an average of 11 percent in those warehouses where it was employed. In warehouses in which it was impossible to mechanize without significantly disrupting operations, Fleming established standards of productivity as an alternative way to increase its profit margins. The procedure improvement program (PIP) measured each worker's productivity by computer. Before doing a specific task, a worker inserted a card into a computer, which calculated the standard amount of time for the task and evaluated the worker's performance. A worker who consistently fell below standard faced dismissal. Such work standards programs were, naturally, not always popular. In early 1986, workers went on strike at Fleming's warehouse in Oaks, Pennsylvania, in opposition to the work standards program and an increase in the standard number of cases moved per hour, from 125 to 150. The strike was settled when the Teamsters agreed to the new standard, and the company lengthened the five-step disciplinary review procedure to six steps.

Rapidly Changing Fortunes in the 1990s

Fleming went through a number of significant shifts in the 1990s, starting in 1990 with the loss of a major client when Albertson's became a self-distributing chain. This led to a $400 million loss in volume for Fleming and the closure of the company's Fremont, California, distribution center. Fleming quickly moved the following year to more than recover the lost revenue with a $80 million purchase of the warehousing and transportation assets of the Lubbock, Texas-based Furr's Inc. The deal garnered Fleming about $650 million in wholesale volume from the Furr's stores operating in Texas, New Mexico, and Oklahoma. Soon, however, Fleming relinquished the top spot in U.S. food distribution to Supervalu Inc.--based in Eden Prairie, Minnesota--when Supervalu, in 1992, acquired Wetterau Inc. of St. Louis in a $1.1 billion deal.

Fleming also lagged behind Supervalu in profitability, in part because Supervalu had a larger retail operation (retail marketing typically provides higher margins than wholesaling). In early 1992, Fleming derived only seven percent of its revenues from retail, compared to 20 percent for Supervalu. Over the next several years, however, Fleming would dramatically increase its retail base.

In mid-1992 Fleming spent $50 million to acquire a ten-store chain in Omaha, Nebraska--Baker's Supermarket. This was the company's first retail purchase in several years. The following year, Fleming signed a long-term (six-year) deal with Kmart to supply Super Kmart Centers with food products in those areas in which Fleming operates.

Early in 1994, Fleming began a major reengineering effort under the guidance of new company president and CEO, Robert E. Stauth. As originally envisioned, the program focused on downsizing and streamlining operations, including a nine percent (2,000-employee) workforce reduction, the closure of five regional sales offices, and a reduction in operating costs of $65 million per year. This effort had only begun to be implemented when officials at Scrivner Inc., then the number three U.S. food wholesaler, approached Fleming about a possible sale. On June 1, the two Oklahoma City-based companies announced that Fleming would pay Scrivner's owner, the German firm Franz Haniel & Cie, GmbH, $1.085 billion for all of Scrivner's stock.

The Scrivner acquisition catapulted Fleming back to the number one position with revenues of $19 billion, surpassing the $16 billion of Supervalu. The deal also brought Fleming an increased national presence by adding seven specific markets to the company's domain: Iowa, the Carolinas, western Pennsylvania, New York, Illinois, and Minnesota. Perhaps most important, however, was Scrivner's large retail operation, which increased Fleming's retail revenue to 15 percent of total revenue, derived from a combined total of 315 corporate retail stores. Fleming quickly bolstered its retail sector further when it acquired controlling interest in CMI in August 1994. CMI operated 24 stores primarily in Missouri, but with operations in Arkansas and Kansas as well. These stores garnered $225 million in annual revenue, bringing Fleming close to the $3 billion level in retail.

Following the acquisition of Scrivner, the company reengineering program was expanded into a consolidation effort as well. With 21 Scrivner distribution centers added to 31 existing ones, Fleming closed eight redundant centers for a final total of 44. Back on the reengineering side, Fleming announced early in 1995 a new approach to selling, called the Flexible Marketing Plan, whereby retail customers would be charged Fleming's net acquisition cost of goods plus the costs of storage, handling, delivery, and other services used by the customer. Another reengineering effort involved an aggressive approach to gaining new customers through a newly created New Sales Development organization.

In 1996 Fleming enhanced its retail operation again with the acquisition of ABCO Markets, a 71-supermarket chain in Arizona. This increased the company's retail sector to 21 percent of total revenues. Fleming was thus closing in on a goal it had recently set to increase retail to 25 percent of total revenue by the year 2000.

Fleming then suffered a potentially severe blow when the company was found guilty of fraud, breach of contract, and deceptive practices in a case brought by David's Supermarkets based in Grandview, Texas, a customer which accused Fleming of inflating manufacturer's prices and overcharging David's. It was estimated that damages could exceed $200 million, but Fleming received at least a temporary reprieve when the judge in the case ordered a new trial after Fleming discovered that the judge had had past financial dealings with David's and should have excused himself. Nevertheless, the judgment had an immediate impact as Fleming's stock moved down sharply, and the company reduced its dividend for the first quarter of 1996 by 93 percent. On the heels of the David's suit came a class action suit filed against Fleming charging violations of securities laws for not disclosing the existence of the David's suit; although filed in August 1993, Fleming did not disclose the suit until about the time of the jury's verdict. The company's potential difficulties were compounded by the high debt load taken on in order to purchase Scrivner's and earnings that were lagging because of the major reengineering efforts.

The late 1990s will be a critical time for Fleming Companies. The outcome of the various lawsuits and the success or failure of its reengineering efforts will go a long way toward determining whether Fleming can maintain its top position in food wholesaling.

Principal Subsidiaries: Baker's Supermarkets, Inc.; Certified Bakers; Fleming Co. of Nebraska, Inc.; Fleming Finance Corp.; Fleming Foods of Alabama, Inc.; Fleming Foods of Missouri, Inc.; Fleming Foods of Ohio, Inc.; Fleming Foods of Pennsylvania, Inc.; Fleming Foods of Tennessee, Inc.; Fleming Foods of Texas, Inc.; Fleming Foods West; General Merchandise Distributors, Inc.; Fleming Company; Clearwater Mill, Inc.; Consumers Markets Inc.; Crestwood Bakery; Hub City Foods; Sentry Drugs, Inc.; Sentry Market, Inc.; Store Equipment, Inc.; Malone & Hyde, Inc.; Megamarkets, Inc.; Hyde Insurance Agency, Inc.; M & H Financial Corp.; Piggly Wiggly Corp.; Royal Food Distributors, Inc.