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    Fleming Looks to Core-Mark for Help

    Bankrupt c-store wholesaler's 2002 acquisition could be its salvation.

    By Mitch Morrison

    Like a sinking vessel, the nation's largest food distributor sought to plug a gaping hole — not through repairs, but by enlarging the boat.

    When Lewisville, Texas-based Fleming Cos. acquired Core-Mark International Inc. last year, it hoped expansion would offset the potential loss of its largest retail client, the foundering Kmart.

    "Quite candidly, the Kmart problems were already there when they bought Core-Mark," said Jonathan Ziegler, principal of PUPS Investment Management, which invests in past underperforming stocks. Ziegler covered the merger as an analyst at Deutsch Banc Alex Brown.

    "They needed Core-Mark to pump up growth for Wall Street. They were trying to bring in a life preserver because a leak was already there," he added.

    Fleming's bankruptcy filing last month follows a year of aggressively expanding its convenience store business. Since mid-2002, Fleming, anchored by Core-Mark and Head Distributing — the two assets it picked up for $330 million in 2002 — entered into deals with Shipley Stores of York, Pa., and Gas N Shop of Lincoln, Neb., and expanded its accord with ConocoPhillips to cover 114 Conoco-branded locations in five states.

    Indeed, upon consummation of the ConocoPhillips deal this past February, a top Fleming official extolled, "This agreement is another example of the additional growth opportunities for Fleming in the convenience sector."

    With the addition of Core-Mark and Head Distributing, Fleming ranks only behind McLane Co. Inc. as the convenience channel's largest distributor, serving more than 30,000 outlets, or about 20 percent of the U.S. convenience store market.

    According to industry observers, Fleming was already preparing for the shock of losing the 10-year, $4.5-billion supply deal it signed with Kmart in 2001. Interestingly, should Fleming, in fact, survive the Kmart demise and longstanding accusations of padding its bottom line by not passing down vendor discounts to retail clients, it could be its c-store distributorship — the Core-Mark and Head acquisitions — that bails it out.

    The company already has promoted two of Core-Mark's highest-ranking officials to executive-level roles within Fleming. Robert Allen and Michael Walsh were elevated respectively to acting chief operating officer and executive vice president/president of convenience distribution.

    Retailer Reaction

    "When the whole Kmart thing was happening we were having dialogue with our Core-Mark/Fleming people, going over 'what if' scenarios," said Dave Cap, chief operating officer of the 71-store Gas N Shop chain, which last summer replaced McLane with Fleming. "From the very beginning we've been impressed with their communications. We're very pleased with our relationship with them."

    Cap said Fleming's bankruptcy has yielded few changes concerning weekly deliveries of supplies, dry goods and snacks. What particularly impressed Cap was Fleming's response after last December's arson fire that destroyed Core-Mark's Denver warehouse.

    "The way they responded then was amazing," he said. "They essentially put together a crisis team. We were getting distribution from two different warehouses. And any time there was a product they might not be able to get, they notified us."

    Julie Igo, spokeswoman for CononoPhillips' vast retail network that also includes Circle K, said the oil giant has not experienced any problems or delays in deliveries in spite of Fleming's financial uncertainty.

    "As far as disruptions and what's going on with them, we're concerned but we don't expect any major disruptions to supply," she said, adding that the company is monitoring the situation, but had no plans to abandon its Core-Mark distributor, which supplies candy, tobacco, general merchandise, health and beauty care products and groceries to 700 ConocoPhillips locations.

    On April 7, Fleming's interim CEO Pete Willmott said that the wholesaler had been forced to delay shipments to some of its retail customers, primarily supermarkets, and would likely have to delay additional shipments as manufacturers postpone deliveries.

    But c-stores are another matter.

    "We've been working with our retailer partners and with our trade vendors," Fleming spokesman Shane Boyd told CSNews, adding that the convenience channel last year represented roughly one-third of the distributor's portfolio. "We've had very good success in that area, [and we'll] continue securing services to our convenience store customer."

    Whether the delays ultimately carry to the c-store channel remains the big question. Investment analyst Ziegler doesn't think they will. "I think it's going to be pretty invisible to the c-store industry," he said.

    By Mitch Morrison
    • About Mitch Morrison

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