business news in context, analysis with attitude

  • Dow Jones reports this morning that Ahold’s US Foodservice headquarters issued a directive late last year that pressured regional centers around the country to build up inventories that weren’t needed and wouldn’t be sold for months.

    Internal documents show that in some cases, the regional centers ordered so much inventory that they had to find outside storage facilities at which to keep the products, which came from companies that included Sara Lee Corp., ConAgra Foods Inc., Tyson Foods Inc., Kraft Foods Inc., and Nestle SA. These kinds of vendors were on a preferred list that the company apparently wanted to make sure had enough product being ordered from; US Foodservice headquarters said that if the regional centers didn’t make sufficient orders, the orders would be placed by HQ. Tim Lee, the US Foodservice vice president of purchasing currently on suspension, signed at least some of these memos.

    While this would appear to be the opposite of the “just in time” inventory approach that so many look upon as the promised land, this inventory build up also would have the effect of inflating the company’s sales since manufacturers were paying promotional fees and rebates to be carried by US Foodservice, often in the hundreds of thousands of dollars. The more goods in inventory, the higher the gross profit

    Eventually, however, the high inventory levels would be a house of cards that would fall apart because many of these products would have to be sold at cost or at a loss in order to clear out inventory. With fresh or frozen product, there also is the inevitable spoilage and shrink.

    And there’s another problem. The house of cards being built by US Foodservice would at some point affect the vendors, which were booking business that really wasn’t there…or, at the very least, would dry up when the bloated inventories got sold off.

  • Reuters reports that Ahold has finalized a loan for the equivalent of $3.4 billion (US), which should give the company room to maneuver as it deals with the fact that it is being investigated on two continents for accounting irregularities that led to an overstatement of earnings in the range of $500 million since 2001.

    Collateral for the loan: its Stop & Shop, Giant of Landover, and Albert Heijn supermarket chains.

    According to reports, close to a third of the loan amount is not available to the company immediately, and is dependent on certain conditions being met by the retailer. Among the conditions is the disposal of certain Ahold assets that the company already had decided to sell as it focused on “core businesses.” In addition, the money also is accessible when the company issues audited accounts for its US and Dutch operations by the end of June.

  • The Washington Post reports this morning that federal prosecutors plan to interview US Foodservice executives next week, and are working their way through documents provided to them by the Ahold subsidiary.

  • A securities fraud class action lawsuit was filed in the United States District Court on behalf of investors who purchased stock in Royal Ahold between May 15, 2001, and February 21, 2003.

  • Yesterday, we reported that there was speculation that companies like Tesco, Carrefour and Kohlberg Kravis Roberts (KKR) had varying levels of interest in acquiring all or part of Ahold, if it became available. Now, there are reports that Belgian retailer Colruyt is interested in Ahold’s Dutch Schuitema supermarkets. However, Colruyt management said that they would not bid for the stores because they are convinced much bigger players will try to carve up Ahold.

  • Ahold’s US Foodservice division announced that it won’t be paying millions of dollars in annual bonuses to executives and salespeople at the company until after its 2002 books Annual bonuses, a significant portion of their compensation, won't be paid to executives or sales personnel at U.S. Foodservice Inc. until the company's 2002 books are audited by investigators.

    Dow Jones reports that divisional personnel were told in a conference call that they shouldn’t “count on anything” when it comes to the bonuses, which often are a large percentage of employees’ annual compensation.

    According to industry observers, this decision could cause additional problems at US Foodservice if the suspension of bonuses causes executives and salespeople to jump ship…which could cause it to lose customers.

KC's View:
It may not be fair to salespeople who haven’t done anything wrong, but we would have hollered loudly if US Foodservice kept paying out bonuses under the circumstances. After all, it appears that many of the bonuses would have been based on artificially inflated sales figures.

(Not that hollering would have had any impact, but we would have felt better…)

While we realize that the foodservice is not analogous to the supermarket business, this certainly illustrates one of the problems that can occur when companies make money on the buy and not on the sell. The first casualty of such an approach is accuracy.

The one thing that can make Ahold feel better about the US Foodservice situation is the fact that in the current economy, executives won’t be able to easily find new jobs to jump to. Small comfort, but you have to take what you can get.