Court battle between Dunnes and Whelans puts spotlight on retail giant, writes Colm Keena
A peep over the wall into the highly private and hugely rich world of the Dunnes Stores group is promised by the pending High Court spat between it and Whelan Frozen Foods Ltd.
Both sides are seeking discovery and the material being sought by Whelans is understood to include board minutes from Dunnes.
The retailer and the Dunne family are famous not only for their low profile but also for their tough business approach and concern with costs. The last two points are key features of the row with Whelans.
The issues in the fight were in fact aired in a related court hearing earlier this year, which has gone all but unreported up to now.
The evidence in that case and subsequent developments indicate that what began as a strong push by Dunnes to drive down costs within Whelans is now leading to the sundering of a 25-year trading relationship between the two, and the possible closure of Whelans with the loss of 477 jobs (300 of whom Whelans says are non-English speaking non-Irish nationals who work as drivers and general operatives).
At issue in the High Court hearing, scheduled for July, is how much notice Dunnes must give Whelans. It gave 12 months' notice in February in relation to part of the business, but only six in relation to the rest. Whelans is seeking 12 months for all elements of the relationship.
In the case in February, Whelans successfully sought an injunction forcing Dunnes to reimpose larger margins for the sourcing, storage and delivery service Whelans was supplying.
Whelans has a 25-year relationship with Dunnes - its sole customer - buying, storing and delivering a range of stock to the retailer, including frozen foods, ambient foods, groceries and textiles. The arrangement means Dunnes has to deal with only one supplier rather than a multiplicity.
The injunction hearing was told by Whelans that, in 2003, it made a pretax profit of €1.4 million on turnover of €168 million. The comparative figures for 2004 were €800,000 and €169 million. In 2005 it made a pretax profit of €1.5 million on turnover of €189 million. Dunnes's directors alleged that the directors of Whelans were getting excessive fees and that the Whelans balance sheet indicated the company had made "excessive profits" in past years.
Whelans was incorporated in 1981 with a view to supplying Dunnes Stores, Paddy Whelan snr told the court in an affidavit.
"Whelans always agreed margins and terms with the Dunnes buyer at all times and these were adhered to. I say and believe that it has always been the policy of Dunnes never to enter into written agreements. I have been advised on more than one occasion over the years by Dunnes that 'Dunnes don't do contracts'."
The Dunnes/Whelans business developed through the 1980s and 1990s, with Whelans borrowing money first to develop a premises in Inchicore and later for a purpose-built property at Park West.
In his affidavit, Whelan snr claimed that, in 1992, the managing director of Dunnes "insisted on a £200,000 cash payment. This money was paid by Whelans but never repaid by Dunnes. To this date I do not know the purpose of this cash payment."
The claim by Whelan snr was not responded to by the Dunnes executives who gave evidence to the hearing. The judge who ruled in the case said it was not relevant to the hearing. In 1992 Ben Dunne and Frank Dunne were joint managing directors of Dunnes, though Ben Dunne was more active in running the business.
It seems that, around 2003/04, Dunnes Stores became concerned about the level of profit being made by Whelans. In March 2003 a payment cheque from Dunnes was withheld, which had the effect of lengthening the Whelan's credit terms.
In January 2004, Dunnes told Whelans it was cutting the margin payable for milk distribution. The reduction represented a loss of £600,000 over a year, according to Whelan snr.
In February 2005, Dunnes issued a tender document for warehousing and distribution of all frozen and chilled foods. Whelans responded and rates were agreed.
In August 2005 another weekly payment cheque, this one for £2.5 million, was withheld by Dunnes, according to Whelan snr. "This further lengthened the credit terms by one week. No notice or explanation was provided other than that Mr Frank Dunne was dealing with it," he said. Dunne did not make a replying affidavit to the court.
A series of meetings and contacts began around this time in which Dunnes said Whelans was making too much money at the expense of Dunnes, and Whelans responded by saying it would go out of business if Dunnes insisted on the margin reductions it was suggesting.
It also complained that requests for detailed financial information by Dunnes from Whelans would undermine the independence of Whelans if agreed to.
Whelan snr said that, at a meeting with Andrew Street, chief operating officer of Dunnes, and Eoin McGettigan, also of Dunnes, in October 2005, Street "started the meeting by stating that Dunnes was no longer going to accept certain costs incurred by Whelans as a necessary cost of its business, which would be funded by Dunnes. He further elaborated that Whelans could buy a €50,000 gold pen and effectively charge it to Dunnes."
In November, cash-flow difficulties, which Whelan snr said were due to the cheque withheld in August by Dunnes, led to Whelans having to tell milk supplier Natural Dairies that the cheque due to it from Whelans would be two days late.
Natural Dairies sent a note to Dunnes telling it its milk supply would be threatened if it did not receive its cheque.
"Vincent Hutton [ Dunnes head of food finance] called Mr [ Pádraig] Whelan jnr with a message from [ Dunnes Stores director of food] Dick Reeves that [ Whelans] was fucked if their actions led to supply issues," Whelan snr said in his affidavit.
An e-mail was then sent by Hutton to Whelan snr. "Under no circumstances are payments to Dunnes Stores grocery suppliers to be withheld or delayed. If you are experiencing cashflow difficulties which may affect payment to our suppliers, you must raise this as an issue at the highest level within Dunnes Stores. You should do this before supplier payments are affected. Dunnes Stores will not tolerate any risk to product supply."
Whelans paid Natural Dairies.
On November 18th, Whelans received an e-mail from McGettigan which outlined new reduced margins Dunnes was going to implement, following "internal board discussion".
"We believe these rates are sustainable in the longer term," McGettigan said in the e-mail to Whelan jnr.
Whelan jnr wrote to McGettigan saying that the reality was that Whelans "would be forced to cease trading within a short space of time" if the new rates were introduced.
"I think you will agree that, over the past 25 years, Whelans has rendered sterling service to Dunnes Stores and we believe we have always provided an excellent facility at a very competitive rate," Whelan jnr wrote.
"Both my father and I find it very difficult to believe that the directors and shareholders of Dunnes Stores could seek to impose such impossible conditions on us, if they were fully apprised of the facts."
McGettigan responded, saying the rates decision was made with the full knowledge and support of the directors and shareholders of Dunnes Stores.
Contacts continued between the sides, with Whelans arguing it could not afford the new rates and Dunnes saying it believed Whelans could. On Saturday December 3rd, Whelan jnr contacted Frank Dunne by telephone. He said the reductions would take €2.5 million off Whelans's bottom line and it could not afford that. Dunne said he could not comment.
In his affidavit, Whelan snr said that on the following Tuesday Dunne got back on to Whelan jnr. He said he did not want to put Whelans out of business and was "interested in fairness".
A week later Dunne again phoned Whelan jnr and said Whelans should meet Dunnes executives "and take a hard line and thrash out a deal. . . He said there was no will to put Whelans out of businessand that there was no vindictiveness. . . He said that he would arbitrate if no deal could be struck."
Whelan snr, in his affidavit, said his son said to Dunne "that it appeared from Dunnes Stores's actions that there was no future for Whelans and that we would prefer to be told and therefore allow an orderly transfer of the business. He replied that Mr Whelan jnr was talking a load of nonsense and that he was pipe dreaming."
When Whelan jnr and McGettigan spoke the next day on the phone, McGettigan said it was not in Dunnes's interest for Whelans to be unprofitable and unmotivated but its retained earnings figure struck a chord with Dunnes. Whelans "had made too much money too quickly".
A difficult meeting took place on January 10th, 2006, according to Whelan snr. He and his son met McGettigan and Street. The Whelans said their company was in "a perilous position" due to credit withheld by Dunnes and the imposed reductions in margins.
McGettigan said Whelans was generating excessive profits and Dunnes was therefore overpaying for the service provided.
Dunnes sought more financial information concerning Whelans and Whelan jnr said this would undermine his company's independence. McGettigan "replied that they did not feel Whelans was so independent given that it had only one customer", according to Whelan. The Dunnes executive suggested that Whelans could borrow money on the back of its assets. The meeting ended without agreement.
Dunne subsequently had a look at financial information supplied by Whelans. He contacted Whelan snr and said he believed Whelans was too inefficient. "He stated that he was going to halve our business," Whelan snr said in his affidavit. The two men disputed the issue of the efficiency of Whelans. Dunne said Whelans "was too big a part of Dunnes Stores for him not to take action, when there were others out there who could do the job cheaper".
Withheld cheques from Dunnes meant Whelans was having difficulty paying suppliers, including Natural Dairies, according to Whelan snr. When Reeves called to ask why Natural Dairies had not been paid, Whelan snr said Whelans was now due in excess of €7 million from Dunnes "and where would Whelans get the money? Dick Reeves suggested that I should borrow same. I reiterated to Dick Reeves that we were overdue in excess of €7 million from Dunnes Stores." Subsequently cheques were made available and suppliers paid.
However, later that month Whelans successfully sought an injunction in the High Court, forcing Dunnes to re-impose the higher margins. Notice was then given by Dunnes. A full hearing is due in July but one way or another it seems a 25-year relationship has come to an end.
