Taking Stock – Memo To Wal-Mart: When Bribes Are Real, You Must Not Conceal

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In the great 1958 Orson Welles movie, “Touch of Evil,” that deals with corruption on the U.S.-Mexican border, Police Captain Hank Quinlan (played by Welles) says to his loyal cohort, Sgt. Pete Menzies (Joseph Calleia), when questioned about their police procedures: “I don’t call it dirty. Look at the record, our record, partner.”

“Touch of Evil” is arguably the best film-noir of that decade and three of its most prominent actors – Welles, the legendary Marlene Dietrich, and the larger than life Russian actor, Akim Tamiroff – play three of oiliest characters ever to appear together in one movie.

A great movie, indeed, but a screenplay that was total fiction.

After reading the New York Times’ non-fiction expose on the bribery and corruption scandal at Wal-Mart concerning its powerful Mexican operation (Wal-Mart de Mexico), my first thought is that you could say that some of the executives involved in the wrongdoing resemble the villains in Welles’ classic, dark film.

Additionally (and unfortunately), my feelings have reverted back to the bleaker days of Wal-Mart. You know the so-called “Old Behemoth,” replete with gender discrimination lawsuits, “off the clock” violations and a general perception that the world’s largest retailer was a bad place to work.

Until reading the Times’ report, I had actually believed that over the past five years the Behemoth had become a kinder and gentler corporation – one that is providing better compensation and health care benefits, offering improved working conditions to its associates and actually developing a conscience when dealing with environmental and foreign supplier issues.

However, after reading the story, even though much of the alleged $24 million in bribes occurred more than seven years ago, the consciousness of its some of its current top executives apparently hasn’t significantly improved.

After digesting the 7,600 word page one story (and a monumental piece of journalism to boot), maybe  I shouldn’t have been surprised that payola is thought by some to be a justifiable means to an end inMexico. And perhaps it wasn’t all that shocking that much of the actual alleged bribery was conducted by Wal-Mart officials based in Mexico (not senior managers in the U.S.) in an attempt to accelerate Wal-Mart’s growth.

But what was most eye-opening was that its leadership team based at headquarters inBentonville,ARknew of its “Mexican Problem” back in 2005, investigated it thoroughly and then deliberately chose to ignore it.

The old adage goes, “it’s not the crime, it’s the cover up.” And although, bribery, baksheesh, payoffs, kickbacks (or any other related term) may be an accepted method of doing business in other countries, we still have to live by the laws of our country.

And it seems pretty clear that Wal-Mart’s efforts were not merely a gratuity, because the bribes allowedMexico’s largest private employer (209,00 associates) to gain a clear competitive advantage in accelerating and approving construction permits more easily than its rivals.

So, while laws may have been broken (the U.S. Justice Department is currently investigating), the fact that when about 12 senior level executives were presented with clear cut evidence of widespread bribery in 2005 they elected to sweep the findings under the rug, hoping it would go away.

Among those executives the Times said knew of its “Mexican Problem” were: then CEO Lee Scott; current chief executive Mike Duke (then head of Wal-Mart International); Eduardo Castro-Wright, who oversaw Mexican operations at the time (Castro-Wright would later ascend to become president of Wal-Mart’s U.S. business ad become vice-chairman of the corporation; he is scheduled to retire in July); and Craig Herkert, who at the time supervised Wal-Mart’s Latin American operations (more on “Wonderboy” in the next subhead of this column).

In the end, this was not business as usual, even for a company like Wal-Mart, which has paid hundreds of millions of dollars in fines over the past 15 years for dozens of violations clearly outside the margins.

Unlike past offenses though, the Mexican bribery conspiracy can’t be sloughed off to a “disgruntled employee” or “overzealous store manager;” this scandal goes right to the core of the company’s leadership.

Solely because of that, all involved need to resign or be dismissed. And that starts with chief executive Duke and Castro-Wright (he certainly shouldn’t be allowed to retire with dignity). That purge list should also include Lee Scott, currently a member of the board of directors.

To be fair, this stuff did happen seven years ago and Wal-Mart has certainly become a better citizen in the ensuring years.

However, because of its notorious past record, there is a certain level of untrustworthiness that has always lingered. And the Mexican bribery scheme, along with the subsequent deliberate cover-up, is going to cost Wal-Mart dearly.

For its own credibility, it needs to clean the slate of all its executives who were part of the conspiracy to bury the facts of its own investigation.

Adios!

Herkert Celebrates 3rd Anniversary With Another Billion Dollar Loss, Additional ‘Plays To Lose’

It’s time for a time for a celebration – yes, it’s hard to believe that Craig Herkert, Supervalu’s chief executive, has been at the helm of his deteriorating company for three years. Check that, did I say “deteriorating?” I must be reading from the wrong script, because according to the industry’s best spinmeister, Supervalu is actually realizing it objectives.

And to give the man credit, Supervalu’s loss this year was a mere $1.04 billion, a solid improvement from FY 2011’s $1.5 billion worth of red ink. That’s progress that should be highlighted.

“I am pleased with the launch of our business transformation this year…,” Herkert stated in the company’s fourth quarter and FY 2011 release. Later that morning, in his conference call to financial analysts, the 52 year old CEO noted, “Our business transformation strategy and the ‘8 Plays to Win’ framework are helping us redefine our value proposition. In the 12 months since we unveiled this strategy, we developed and rolled out new tools and capabilities to improve the ways we run our business.”

Those statements alone beg two follow-up inquiries: 1) if you believe this new strategy has been so beneficial over the past 12 months, what was Herkert and his ever-changing management team doing during the first two years as his tenure as CEO; 2) does his definition of “value proposition” differ that much from what Supervalu’s customers, vendors and many of his associates think?

So, after 36 months in the saddle for Herkert, those who follow Supervalu know a few things to be consistent. In Herkert’s world, the glass is always more than half full (so don’t count on hearing much real insight into solving the company’s vast problems); in his view it’s always better to concentrate on “feel good” stories such as the new analytics tools, private label revampment and the improvement in shrink control. For other retailers whose balance sheet and overall performances are better (and that includes an overwhelming majority of all food retailers), those might seem like notable achievements. With Supervalu’s ongoing challenges (with sales and earnings declines and plummeting shareholder value), prioritizing an issue like shrink control progress is truly “majoring in the minors.” But if you haven’t figured it out by now, “fake left, go right” is a tack that Herkert has perfected.

I don’t want to diminish all of the man’s skills. After all, there is nobody more gifted when it comes to creating slogans and acronyms to describe some of Supervalu’s initiatives. Beginning in October 2009 when he humbly introduced Supervalu as “American’s Neighborhood Grocer,” the (mis)hits just keep on comin’.

Remember “SHE” (Simplify Her Experience), which was unveiled in early 2010? We won’t fault you if can’t recall this acronym, because its shelf life was short and it was buried like a slice of Russian history under Herkert’s tenure. And if you like games, you probably got a big kick out of “Plenty for Twenty,” “Wish Big, Win Big,” and “Sizzlin’ Summer Giveaway.”

But seriously, those cutesy wordplays are a mere bagatelle when compared to the true Herkertian genius of “8 Plays To Win.” This is the big one – the ultimate turnaround strategy slogan delivered by the ultimate talking head.

In case you’ve forgotten already, those “8 Plays” are: provide competitive value; deliver high quality “fresh”; match stores to their neighborhoods; hassle-free shopping; simplify and improve capabilities; funding in advance of investment; expand Save-A-Lot; and grow independent business.

OK, now back to reality. Thirty-six months on the job has yielded Herkert more than $13 million in compensation. SVU’s staffing – at its headquarters in Eden Prairie, MN, at its divisional bases and in its stores – continues to be significantly reduced (at this point, these job riffs are not about efficiency, the company is understaffed) and, despite Herkert’s rose-colored view of his company, the grocery trade and the company’s consumers are signaling a dire message of concern about the viability of what was once a great company.

So, in the interest of “balance,” (after all, if Herkert can deliver his “The Company According to Me” doctrine, so can I), here’s my counterpoint perspective – “8 Plays For Why You’re Losing:”

1. Declining overall sales – When Herkert was named CEO on May 6, 2009. Supervalu’s total sales were $44.6 billion. Today that number is $36.1 billion

2. Continuing negative identical store sales – Under Herkert’s reign his record is perfect. Twelve quarters as CEO, 12 consecutive quarters of negative identicals. The total SVU number is actually 16 quarters in a row (but under the company’s “history in the closet” rule, who’s counting?)

3. Higher than average retails – Despite Herkert’s rants about the improvements and fairness of SVU’s retails, the company’s banners in a significant majority of its markets still offer among the highest retails in their given marketing area. Yes, there has been some pencil sharpening, but not enough to convince price checkers or the ultimate judges, Supervalu’s consumers, that “fair prices” are a reason to visit one of the company’s banners.

4. Market share declines – See #3. After three years of Herkert rule, is it unreasonable to expect at least some market share improvement, someplace? Instead, we continue to hear that the company’s share in its top 20 markets declined again – this quarter by 40 basis points.

5. Culture and morale – Obviously, tougher to measure as a tangible metric, so I’ll offer you my perspective after talking to several hundred associates at store level, division level and in Eden Prairie over the past year. It sucks.

6. Real estate/cap-ex – In a word, woeful. Last year, one new supermarket opened. That’s one in a network of more than 1,200 conventional grocery stores. This year three new traditional stores are slated to open (two are replacements including the Acme in Bryn Mawr, PA which will open next month). To contrast that number, Redner’s Markets, one of SVU’s independent customers with 39 supermarkets, will have opened about the same number of new units during that same period. No real estate growth is akin to standing still, which is akin to roadkill.

7. Declining wholesale volume – Very competently run, at least in the Eastern region. But for a company that used to be the biggest and arguably the best pure play wholesaler in the industry, independent sales accounted for only 22.9 percent of total revenue, making it virtually impossible for “wholesale” to significantly contribute to solving the company’s deeper and more long-term problems. Even after subtracting the volume of Total Logistic Control (which was sold in 2011), overall wholesale revenue has declined since Herkert became CEO (the addition of Western Beef or C&K Markets on the West Coast can’t begin to compare with the loss of the Target distribution business).

8. Hyperlocal/hyperjoke – As one Acme store manager told me: “Hyperlocal really means that we’ll order an item for you that we typically don’t stock because we reduced our variety so much.” Ouch. His comments may have been a bit over the top, but his point is accurate: as a full-service supermarket, compare the inventory and individual product selection at Acme, Shoppers or Shaw’s and tell me they’re competitive with ShopRite, Safeway, Market Basket, any of the Ahold USA banners, or even Wal-Mart SuperCenters. And to this reporter, “hyperlocal” also means having a strong presence with “locally-grown” produce items and increasing the use of overall local products and vendors.. Things may be better than three years ago, but there’s a lot less traction with this new program/slogan that Herkert implies.

So, let’s not “rope-a-dope” anymore. Here are a couple of more facts to consider when assessing Supervalu’s current and long-term health: debt is still above $6 billion and the company’s stock price on April 20 was at a ridiculously low $6.45 per share (it was $16.75 per share when Herkert took over).

Happy anniversary.

Kreider Farms Vindicated On“Inhumane Conditions” Allegations

It’s been a difficult few weeks for Ron Kreider, his family and the associates of Kreider Farms, the third generation egg producer based in Manheim, PA. On April 12, company officials were startled to learn that they were being accused of raising their hens in filthy, cramped conditions, creating a potential public health issue. The first 24 hours were particularly anxious for Kreider and VP-sales Dave Andrews because of the typical consumer media overreaction (“guilty” – before objective review of both sides). Not surprisingly, there’s more to this story than just the accusations. Reportedly, someone connected with the Humane Society of the United States (HSUS) had an insider at Kreider Farms (allegedly) filming these “inhumane conditions.”

But here’s the back story. The HSUS is trying to build support for federal legislation that would improve conditions for hens. Aligned with the HSUS is the United Egg Producers (UEP), a large trade association that Kreider Farms is not a member of. There’s belief that UEP is working with the HSUS to target farms not aligned with the trade group.

While it is not a UEP member, Kreider Farms does support the new proposed legislation.  In the ensuing days after the story broke, Kreider Farms worked feverishly and proactively to defend its name and provide evidence that was contrary to the charges made by the HSUS.

George Greig, Secretary of the Pennsylvania Department of Agriculture, released the following statement: “The state veterinarian visited and inspected the entire Kreider Farms Manheim facility on two occasions over the past three days (April 12-14). All practices, procedures and conditions that our veterinarian observed were consistent with industry best practices. Kreider Farms has passed every state inspection over the past five years, showing high and consistent standards of flock health management, above PEQAP (Pennsylvania Egg Quality Assurance Program) standards.”

Ron Kreider added: “Inspections from state and third-party experts returned glowing reports of our current facilities. Additionally, these comprehensive audits recognized our excellent ratings over the past five years. There is zero evidence of any type of animal abuse or food safety concern at Kreider Farms.

“These results confirm what we’ve maintained since the beginning: The allegations by HSUS are unfounded – completely untrue. Our chicken houses are and have been professionally managed at the highest levels, and our birds are well-cared for, healthy and active.

“HSUS’s video demonstrates no connection to Kreider Farms – it could have been taped at any chicken house. The day these allegations broke, we welcomed television cameras immediately inside our chicken houses. Viewers observed that conditions in our facilities bear no resemblance to the HSUS video. Consumers should question how these videos were shot, edited and assembled.

“It is not a coincidence that this video release coincides with the political debate over egg production standards. We believe HSUS is targeting farms not affiliated with UEP, its partner in petitioning for new standards. Kreider Farms is not a member of UEP, but we are in good standing with the U.S. Poultry & Egg Association. We fully support such legislation, contrary to HSUS claims. More than 80 percent of our birds are already housed in state-of-the-art facilities – we would have the least to do to comply.

“Kreider Farms is one of the most highly respected, progressive egg companies in the U.S. My grandparents founded Kreider Farms in 1935. Today our family continues the mission of delivering high-quality products; to be good stewards of the land; and to operate clean, efficient, modern facilities.”

Furthermore, Kreider officials reached out to three other independent auditors who visited multiple Kreider facilities in Central PA – Dr. Greg Martin of Penn State; Dr. Donna Kelly of the University of Pittsburgh and Dr. Eric Gingrich of the American College of Poultry Veterinarians. All inspections again validated Kreider’s claims that their facilities were operating at or above industry standards. The company has passed every state inspection in all categories dating back to before 2007.

Moreover, Andrews noted that SQF (Safe Quality Food) food safety audits reveal mostly “excellent” ratings and Kreider Farms was the first egg producing farm east of the Mississippi to achieve SQF food safety certification.

“We were the second egg farm to achieve SQF certification in the United States,” Andrews asserted. “Kreider Farms is also a founding member of the Pennsylvania Egg Quality Assurance Program known as PEQAP. PEQAP was the model for the new National FDA egg program enacted in 2010. And despite the saber-rattling from another “do-gooder” organization with an agenda (it’s a small, but increasing list), Kreider Farms maintained every retail and foodservice customer on its roster.

“In fact,” Andrews noted, “we’re getting inquiries from potential new customers who recognized how unfairly we were treated and want to learn more about us.”

Local Notes

Robert Edwards, Safeway’s  former CFO,  last month was elevated to the post of president of the large chain last month. So, does this mark the beginning of a succession plan at the chain, whose CEO, Steve Burd has been at the helm since 1993? I don’t think that’s going to happen anytime soon because the fire still burns in Burd and at age 63 is in great shape. There are those who’ve said the Burd’s passion about improving national health care could find  him in a Cabinet-level post one day, but my belief is that Burd will carry on as Safeway’s leader as long as his personal health is good and his interest in his current job remains at a high level. Of course, for a publicly-held company like Safeway, having a “next in command” is always a prudent idea. On a somewhat similar note, I  remember back nearly 30 years ago when analysts and reporters would ask the great Izzy Cohen, then chief executive of Giant/Landover, what his succession plan for the company was. He responded that his father (N.M. Cohen) lived until he was 94 and was ultimately killed in an auto accident. A decade later, as Izzy was approaching 75, the same question was asked. This time Cohen retorted: “Don’t worry about me, I plan to rule from the grave.” Ultimately Cohen did name Pete Manos as president in 1992 and when Izzy passed away in 1995, Manos succeeded him…and the company which Manos ultimately sold Giant to, Royal Ahold, held its annual meeting (AGM) in Amsterdam last month. Dick Boer, the international retailer’s CEO, reiterated to shareholders that he is bullish about the company’s future. He singled out all the chain’s four U.S. divisions noting that Giant/Carlisle “delivered another outstanding performance.” Boer also noted G/C’s debut in the city of Philadelphia, its pending acquisition of 16 Genuardi’s stores (which should be announced very soon, but most likely will be a few stores short of the original 16 sought), the unveiling of a more compact supermarket model and the expansion of Peapod’s online and delivery service in the Delaware Valley. At Giant/Landover, Boer praised that banner’s performance noting that success was achieved from its “Project Refresh” remodeling effort and the division’s focus on its fresh assortment and customer loyalty. At Stop & Shop/New York Metro, progress was achieved through in-market acquisitions in New Jersey and Staten Island and the continued success of Stop & Shop’s loyalty card program. And at its bellwether Stop & Shop division inNew England, Boer noted the opening of a new concept store featuring new services and a pick-up point enabling customers to order groceries on line and pick them up at the store. Stop & Shop also launched a mobile application that allows customers to scan their groceries, tally their orders, receive personalized orders and pay using their Smartphones. A couple of more important points made by Boer when discussing Ahold USA: Peapod, now the leading online grocery service in the country, achieved a double digit sales increase last year and the company’s merchandising headquarters in Carlisle, PA is making “good progress” toward its goal of 40 percent “own-brand” penetration… sadly, more notable deaths than usual to report this month. From the grocery industry, we lost one of the true gentlemen in the business when we learned of the death of Lee Javitch, retired chairman and CEO of Giant/Carlisle. Lee’s dad David founded the company as The Carlisle Meat Market in 1923. During Lee Javitch’s tenure as chairman and CEO, beginning in 1967, the company grew to become a leader in Central Pennsylvania. He sold the company to Royal Ahold in 1981. Lee was one of the nicest and smartest people you could ever meet, a man of character and humility and a great ambassador for the food industry. I was also very sad to learn of the passing of James S. Herr, founder of Herr Foods and a great inspirational leader, not only to his family and the company’s associates, but also to many, many people he helped in 86 fruitful years of life. He was truly a servant leader. Also leaving terra firma was Dick Clark, 82, who was the granddaddy of all video jocks with his seminal “American Bandstand (AB)” show. AB ran for an unbelievable (by TV standards) 30 years (1957-1987) and beginning from his Philadelphia base, introduced us to hundreds of rock and roll singers and musicians over the years. “He was true pioneer who revolutionized the way we listened to and consumed music. For me, he ranks right up there with the giants of our business,” said record executive Clive Davis, who like Clark is a member of the Rock and Roll Hall of Fame. I’m also particularly sad to report the death of one of my all-time personal favorites, Levon Helm, 71, the great singer and drummer from “The Band” (and Rock and Roll Hall of Fame member, too). In recent years, Helm hosted and played with an all-star group of musicians at his home in Woodstock, NY. Those gigs, which came to be known as Midnight Rambles, grew from Helm’s experiences as a child when he went to see musical tent shows near his native Turkey Scratch, AR. I’ve been to many Midnight Rambles over the past six years and I’ve never witnessed better musicianship, a warmer ambience or a kinder, gentler soul than Levon. May you rest in peace.