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  • From: "Tradingpost" <tradingpost@gilanet.com>
  • To: livingontheland@lists.ibiblio.org
  • Subject: [Livingontheland] Food Industry Corruption - bribing stores to promote junk
  • Date: Mon, 26 Apr 2004 21:23:24 -0600


Food Companies Quietly Give $100 Bn Cash To US Retailers
By Thomas Lee Minneapolis Star Tribune 4-26-4
http://www.startribune.com/stories/1557/4740333.html

In 2003, food companies such as General Mills Inc., Nestle SA, International
Multifoods Corp. and Kraft Inc. quietly funneled an estimated $100 billion to
the biggest U.S. retailers and food distributors.

Most shoppers are unaware of the practice, known as trade promotion spending,
but they benefit from it by way of coupons, special promotions, or
two-for-one deals on cereal or crackers.

But the dirty little secret in the food industry is that more than half of
that $100 billion does not go to consumer promotions.

Securities and Exchange Commission regulators are investigating whether food
companies are using the money instead to pay their customers -- retailers and
distributors -- to order more items than they need, a possible violation of
both federal law and accounting standards.

Executives at General Mills, Coca-Cola and a host of other food companies
under investigation say they have nothing to hide. But food company
executives admit that the industry and its salesmen are hooked trade on
promotional spending as a way to goose sales and compete in a low-cost world.

And in confidential industry surveys they acknowledge that they can't account
for how all that money is used, even as they spend an increasing amount of
their budgets on such promotions.

Promotional spending now consumes 54 percent of food company marketing
budgets and represents an average of 17.3 percent of gross sales, compared
with 14.9 percent in 1999, according to a survey of food company executives
by Cannondale Associates, a Connecticut consulting firm.

In 2002 alone, General Mills spent about $500 million on advertising, but it
gave retailers $2.25 billion, an amount equal to 26 percent of its total
sales. In that same year, Hormel Foods Corp. in Austin spent about $270
million on trade promotion.

Safeway Inc., one of the country's biggest supermarket chains, got $2.2
billion in promotional payments in 2003, a year when it lost $170 million.

How it works

The billions of dollars swapping hands each year that are part of the complex
web of relationships between manufacturers, distributors and retailers are
supposed to come with strings attached. When Target runs a two-for-one
special on Cheerios, it's not doing so out of kindness; General Mills has
paid for the promotion. A breadmaker might pay a supermarket to run a
promotion designed to sell a certain number of packages of hot-dog rolls in a
week.

The federal Robinson-Patman Act says retailers "should expend the allowance
solely for the purpose for which it was given."

If the store fails to sell as many rolls as promised or expected, the
breadmaker is supposed to suspend the payments and the retailer is supposed
to return unused money or roll it into another promotion.

Industry executives, few of whom are willing to speak publicly, say that
almost never happens, but it is difficult to track whether every dollar spent
on promotion is used properly. Companies are not required to disclose how
much they give to retailers, and trade promotion deals can vary from week to
week and retailer to retailer. One store can run dozens of promotions a week.
According to some estimates, 30 percent of a grocer's products are "on deal"
each week.

"We track as closely as we can, but this isn't an exact science," said Craig
Schnuck, chairman and CEO of Schnuck Markets Inc., a regional grocery chain
based in St. Louis. Often, he said, the use of the money depends on trust
between the vendor and the retailer.

At General Mills, SEC investigators are looking into whether the company
artifically inflated sales by shipping excess inventory to retailers, a
tactic known as "loading." In February, the SEC informed General Mills that
it and its two top executives, CEO Stephen Sanger and Chief Financial Officer
Jim Lawerence will probably face civil charges.

In a recent interview, General Mills Vice Chairman Stephen Demeritt declined
to speak specifically about the SEC investigation but said the company
closely monitors its trade promotion programs.

The company sets annual budgets and tracks promotion money by customer,
region and brand, he said. Demeritt noted that the Cannondale study
consistently ranks General Mills as one of the industry leaders in trade
promotion in terms of strategy and execution.

"Trade promotion is one of a number of different marketing tools that we
use," Demeritt said. "We try to eliminate the least efficient [programs] and
invest on the ones that are efficient. We have a constant desire to get
better. But we got a pretty good handle on the situation."

The Federal Trade Commission, which is charged with enforcing
Robinson-Patman, lacks the resources to monitor trade spending. "The
accounting is just so complicated," said Patricia Schultheiss, a lawyer with
FTC's bureau of competition.

For companies under pressure to meet sales and profit promises made to Wall
Street, the loose rules and lax oversight of trade spending can prove a
temptation too great to resist.

Executives at St. Louis-based Aurora Foods, maker of Lenders bagels and
Duncan Hines cake mix, pleaded guilty in 2000 to inflating profits by hiding
$43 million worth of trade promotion costs. Last year, Dutch grocery giant
Royal Ahold NV lowered previous reported profits by about $3.1 billion after
conceding that it had inflated the amount of trade spending it received from
foodmakers in its U.S. Foodservice unit. Sara Lee Corp. and ConAgra Foods
Inc. acknowledged last year that their salespeople signed off on inaccurate
documents that showed the foodmakers owed more in promotional allowances to
U.S. Foodservice than the companies actually did.

"The SEC is battening down the hatches," said Eric Larson, an industry
analyst with Piper Jaffray in Minneapolis. The agency is "making sure people
know that they are watching."

Paying for shelf space

Any explanation for the spike in trade spending isn't complete without a
visit to the nearest Wal-Mart Supercenter.

Wal-Mart, the world's largest company, accounts for about 19 percent of all
U.S. grocery sales. It has become the largest customer for the world's
biggest consumer brands. General Mills, for example, gets 13 percent of its
sales through Wal-Mart.

Supermarket chains have scrambled to compete with Wal-Mart by snapping up
regional companies. In 2003, the six largest grocery store operators gobbled
up 50 percent of all U.S. food spending. Profit margins on food are
notoriously slim but, with an increasing amount of shelf space in the hands
of a few large companies, retailers have more power than ever to demand
promotion spending from food companies.

"The only time retailers can make money is from trade promotion," said Mark
Hostetler, an attorney who represents food companies. "Their profit margins
are just so narrow that they need other sources of income."

Food companies will usually comply with retailers' demands. They don't want
to lose shelf space to a rival, they don't want Wal-Mart to become too big,
and they don't want to risk disappointing investors, said Bob Hilarides, a
Chicago-based consultant for Cannondale

Sometimes, the foodmaker's biggest competitor is its retail customers, which
rely increasingly on private label brands. Consumers long ago abandoned their
squeamishness about buying such products. Wal-Mart's Old Roy dog food, for
example, is the nation's top selling dog food.

To stay competitive, manufacturers of brand name products say they must lower
their prices through sales and other promotions. And retailers aren't above
playing one food company promotion off against another's, creating a "price
war situation," among company salespeople, said Mike Campana, a former
controller at a regional food company who is now a partner with the
accounting firm McGladrey & Pullen in Bloomington.

"We had to rein in a lot of salespeople," Campana said. "They were always
trying to one-up the competition."

According to Cannondale, trade spending has jumped 33 percent in the past
five years. Hilarides, who likens it to a drug addiction, isn't surprised.
Companies "report earnings quarterly and need to support sales volume," he
said. "They are not sure shareholder patience will be there. But by
increasing trade spending, they only raise the bar for next year. It becomes
a never-ending cycle."

Like most food companies, General Mills doesn't disclose quarterly or annual
trade spending. But company documents contained in a lawsuit by Jeffrey
Millard, a former manager in Phoenix, show sizeable spikes in shipments every
three months, when the company had to report earnings to investors.

In October 2002, General Mills shipped 46 million cases to retailers.
Shipments in November, the last month of its first quarter, rose 28 percent,
to 59.2 million cases. Shipments dropped the next two months, but rose 19
percent, to 50.8 million cases, in February 2003, the last month of its third
quarter.

Executives have attributed the increase in shipments to product
introductions, such as Berry Burst Cheerios. But Greg Downey, a General Mills
employee on a disability leave, and Millard, who was fired in February 2003,
have told SEC investigators that the General Mills salespeople, under
pressure to meet quarterly volume targets, dangled large rebates and payments
before retailers to get them to take more merchandise than they needed. The
incentives were usually tied to shipments of cereal and other nonperishables.

Why would retailers take inventory they don't need? "That's an easy one," one
analyst said. "They got it for dirt cheap."

Sanger, speaking before analysts in Arizona in February, dismissed the
allegations.

"We ship what our customers order," Sanger said at the time.

Thomas Lee is at tlee@startribune.com.

© Copyright 2004 Star Tribune. All rights reserved.

http://www.startribune.com/stories/1557/4740333.html




  • [Livingontheland] Food Industry Corruption - bribing stores to promote junk, Tradingpost, 04/26/2004

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