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Consumers could benefit from food-business scandals

Posted: Friday, March 07, 2003

NEW YORK (AP) Could accounting scandals actually save you money? Maybe not in the stock market, but at your local supermarket.

Far-fetched as it seems, the recent rash of troubles in the food business could well result in better deals for shoppers on everything from chips to cereal to cookies.

A crackdown is under way on how the industry operates and how it accounts for its work following a flurry of new probes over inflated earnings and bad business practices.

This will spur change in the business that will hopefully lower costs for manufacturers and make it tougher for rogue retailers, and that should help consumers,'' said Burt Flickinger III, managing partner at the consulting firm Strategic Resource Group.

The food industry has been rocked recently by scandals over promotional deals that have long been a standard practice among food makers, distributors and retailers.

They typically work like this: Manufacturers offer discounts or bonuses on the goods they sell to distributors or retailers, who get the money either upfront for promoting certain products or once they hit certain sales targets.

These allowances, which also are used when selling to restaurants, hotels and hospitals, can save a distributor or store owner as much as 20 percent.

You can see these deals at work when you stroll around most grocery stores.

What brand of pasta hits you at eye level? How much does one jar of jelly cost compared with the next? What pretzels are featured on the displays at the end of the aisle?

While giving incentives are perfectly legal, there are growing concerns over how these deals work and whether, amid intense competition, the practice has gotten too aggressive.

Those worries only increased last week when Dutch supermarket and distributor Ahold said it was reducing earnings for the last two years by at least $500 million. The restatement was largely to correct accounting irregularities at its U.S. Foodservice division related to its transactions with suppliers.

Then there was the news that Dallas-based Fleming, the nation's largest food distributor, was under formal investigation from the Securities and Exchange Commission for its business practices.

And earlier in February, Minneapolis-based distributor and retailer Nash Finch said it was under SEC investigation for its handling of promotional allowances.

Part of the problem is that the rules are vague on how to account for these deals.

Retailers aren't required to use the money they receive just toward the promotions, so they often include it with other unspecified income on their financial statements. Distributors, too, don't have to break down their allowances.

In both cases, this allows them to pad earnings and makes it tougher to sniff out what is getting spent where.

A truck load of money is given to retailers and half of that money is being wasted. It is funding other things in the business that the consumer never sees,'' said Rob Culin, principal at the retail and consumer products consulting firm Kurt Salmon Associates.

Ethical lapses add to the mess.

Analysts say it is not unusual for some retailers and distributors to shortchange manufacturers. For instance, if they are given money upfront for a promising to achieve a certain level of sales, they refuse to return the money when they fail to hit their targets.

Manufacturers, often eager to keep up their relationships at certain stores, end up having to eat the costs.

Now that so much attention has been put on these deals, regulators will likely consider requiring more detailed accounting, and auditors are sure to be more focused when analyzing these practices.

For the consumer, this can only be good news.

Retailers and distributors will have to be more transparent about where and how this promotional money is spent, which could shift a greater portion back to programs that directly benefit the consumer. And manufacturers might be able to offer better prices because they won't be as stretched covering their buyers' unpaid costs.

We've seen too much phantom profitability ... too much dishonesty,'' Flickinger said. It has to change.''

While it is still too early to see any change, all the scandals are certainly a wake-up call that business can't continue as usual.

Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org



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