News America Exec Tells How Ahold Account Was Won; Paid Kroger $25M

Last Updated Jul 28, 2009 12:26 PM EDT

Marty Garafalo, News America Marketing's evp of trade, told a Michigan state court how his agency wrested the Ahold account from Floorgraphics, saying, "It cost a lot more than we wanted to spend." He also described how his agency paid Kroger $25 million a year for the right to run ads in its supermarkets and he denied that CEO Paul Carlucci had described employees who wanted to do the "right thing" as "bed-wetting liberals."

The testimony came in a case where News America was sued by rival agency Valassis for unfair competition. Valassis won a $300 million verdict in the trial.

Garafalo's testimony sheds light on the huge sums at stake in the in-store advertising industry. His take on the Ahold account will be of keen interest to Insignia Systems, which has pending litigation with News America over, among other things, exactly how Insignia's piece of the Safeway business was taken by News America. Insignia CEO Scott Drill previously told investors he believed News America signed an "exclusive arrangement" with Safeway to "exclude" Insignia. Back story: Floorgraphics used to have a piece of the Safeway account. But News America won Floorgraphics' business. Floorgraphics later sued for unfair competition and won a settlement from News America. Before that happened, however, two disgruntled former News America execs had a secret meeting with Floorgraphics' lawyers to describe to them exactly how News America won that business. They believed that News America had given up portions of the Ahold business in order to secure Safeway.

The court previously heard from a third disgruntled News America exec, Robert Emmel, that the agency had paid an "economically unjustified" amount to keep Ahold from either Floorgraphics and Insignia. Here's Garafalo's version of events regarding Ahold:
Q. What happened again briefly with Ahold? A. Ahold we negotiated back and forth for about a year. We had an offer on the table and they didn't think it was sufficient. We came back for a final bid. They granted us that ability and we won the business and it is a very profitable account for News America. It cost a lot more than we wanted to spend but we put a lot more products in there. We obviously have a very strong P&L with that account. Q. So even though you paid more to get into Ahold the sales have been more? A. Yes.
And Safeway:
... Q. Were the negotiations difficult? A. They were very difficult. There were certain provisions in the Floorgraphics agreement with Safeway that made it a difficult negotiation. They had a provision in their agreement, that there was an automatic renewal so unless Safeway indicated a year in advance that they wished to opt out, the contract would automatically renew that was one thing. And then they also had, we found out later, a matching provision, so we were negotiating with Safeway and no matter what offer we gave, at the end of the day Floorgraphics had a matching provision that all they had to do was match that number and they could have retained the business. Q. So Floorgraphics's agreement made it tougher for any competitor to win that business? A. Yes. Exactly. Q. And in this last round of negotiations, has the Safeway relationship been profitable? A. Yes, it's a very profitable account for News America.
Here's what Garafalo said about Kroger:
Q. Can you give us an example? A. We are paying Kroger about $25 million a year for the opportunity to place signs in their store. Q. Was it always 25 million a year? A. The last major negotiation we went from five million to 25 million. Q. Was that something you folks wanted to do? A. No. ... Q. Did you consider refusing Kroger? A. No, as long as it's profitable for News America at the end of the day, Kroger is a big store, they are about 11 percent of the ACV, a lot of our clients want them to be part of our network. So we didn't really consider saying no.
Finally, Garafalo testified that he had been on the conference call where Carlucci was alleged to have threatened to fire any "bed-wetting liberals" in his company, and said that Carlucci said no such thing.

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