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A Financial Scandal That Hits Closer To Home

Editor’s Letter

A Financial Scandal That
Hits Closer To Home

You were probably just an interested spectator while the Enron and WorldCom corporate fiascos played out on the national media stage. But the latest financial scandal hits a lot closer to home for many RH readers.

For auditors and SEC regulators, the accounting irregularities discovered at U.S. Foodservice (USF) are going to demand in-depth investigations. One indicator of how off-center things were is that the company’s corporate parent, Dutch food giant Ahold, is bringing in "forensic accountants" to straighten out the books. If you need to hire numerical detectives to explain how you ran your company, the outcome isn’t likely to be good.

So this flap is bad. But what if you are, or were, a customer? At nearly $20 billion in annual sales, USF ranks as the No. 2 foodservice distributor in the country. Short-term, the advantage may be yours. The salespeople and delivery drivers who service your restaurant are definitely now on their best behavior.

They have to be. The company was overly aggressive in its pursuit of rebates, growth incentives and other "sheltered" income from foodservice manufacturers. It booked these monies as profits as soon as the deals were cut, worrying later about selling to you all the product they had agreed to buy.

"Later"came at the end of 2002, when this tidal wave of product was delivered. The company told managers to rent extra warehouse space and line up spare refrigerated trailers to hold the excess. If your distributor sales rep has cut you some exceptionally sweet deals on certain products lately, it’s because the company had a mountain of inventory.

The issue here is that hefty rebate payments distort the true cost foodservice distributors pay for goods. As the Wall Street Journal puts it, "These payments...may drive up prices paid by consumers."

How? If you run a chain and have a cost-plus contract with a distributor, the invoice price you see may not reflect the true cost of the item to the distributor. Off-invoice incentives that flow to the distributor can cause you to pay too much.

It may be worse if you’re what distributors call "street business" (i.e., you have no contract and your pricing is quoted week-by-week via your salesman).

For numerous reasons, not everyone gets quoted the same price by a foodservice distributor. But there’s still a distortion on the true cost of many items due to back-end funny money you’ll never see. A big problem is that artificial pricing levels make branded manufacturer products seem more costly than the distributor’s private label products.

There’s nothing wrong with distributor private label products, which many RH readers serve every day. But switching to them because you’ve been kept in the dark about what the branded versions of those products really cost is just not fair.

The upshot: The equity that manufacturer brands lend to your operation is therefore being unfairly undermined. Artificial pricing disparities mean your customers might not be receiving the quality they expect and deserve. We’ll see what the investigators bring to light.


EDITOR-IN-CHIEF [email protected]

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