The Wall Street Journal this morning reports on the vendor rebates that are so much a part of the day-to-day business and year-to-year profitability of the supermarket industry – and yet are largely invisible looking to understand how they impact the sales and earnings of publicly owned chains.
This situation has persisted despite the fact that the manipulation of such rebates and allowances contributed to the billion-dollar accounting scandal that has plagued Ahold, resulting in a criminal investigation and the indictment of four former executives at the company’s US Foodservice division…and despite the fact that wholesalers such as Fleming and Nash Finch have been investigated by the US Securities and Exchange Commission (SEC) for their accounting practices…and despite the fact that the Financial Accounting Standards Board has tried to clarify its rules about rebates and allowances.
The WSJ notes that Safeway has been one of the few companies to disclose vendor allowances in detail, “breaking them out by promotional, slotting and contract allowances on a quarterly basis.” But most other chains have, in their annual and quarterly reports, done very little to expose the impact that allowances and rebates have on their profitability.
This situation has persisted despite the fact that the manipulation of such rebates and allowances contributed to the billion-dollar accounting scandal that has plagued Ahold, resulting in a criminal investigation and the indictment of four former executives at the company’s US Foodservice division…and despite the fact that wholesalers such as Fleming and Nash Finch have been investigated by the US Securities and Exchange Commission (SEC) for their accounting practices…and despite the fact that the Financial Accounting Standards Board has tried to clarify its rules about rebates and allowances.
The WSJ notes that Safeway has been one of the few companies to disclose vendor allowances in detail, “breaking them out by promotional, slotting and contract allowances on a quarterly basis.” But most other chains have, in their annual and quarterly reports, done very little to expose the impact that allowances and rebates have on their profitability.
- KC's View:
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The implication, from an investor perspective, is that in a culture where unhappy investors often sue public companies when they feel there has not been complete disclosure of even the most mundane and obvious information, public supermarket companies that don’t explain their rebates and allowances in detail could be vulnerable.
We don’t think that is a bad thing. The fact is that this industry has for far too long subsisted on the heroin of allowances and rebates, allowing their decision-making and profitability to be driven by how they buy rather than how they sell. And until that changes, many of these companies will never be able to successfully compete with Wal-Mart…which, of course, doesn’t take such allowances.
There are major and minor retailers out there that are attempting to change the way they deal with allowances, attempting to wean themselves off the heroin of rebate money. And it’s tough, no doubt about it.
(There are, of course, other chains where the senior executives keep one eye on their retirement date, hoping they can get out before they’re forced to deal with these kinds of issues.)
But in our view, responsible executives have no choice. Not if they really want to survive and be competitive.
