450 Jobs at Stake in Valassis Trial; Is This All CEO Schultz's Fault?

Last Updated Jun 24, 2009 10:52 AM EDT

Valassis CFO Robert Recchia testified that 450 jobs are on the line if his company does not win its anti-competition trial against News America Marketing. Since 2001, Valassis has lost so much newspaper coupon business that if News America is allowed to continue to use its alleged monopoly pricing power in supermarket ads to subsidize its newspaper coupon operation then Valassis would have to shut down operations in Wichita, Kan., Durham, N.C., and Livonia, Mich., Recchia told a Michagian state court:
There are probably 200 people in the sales and operational and administrative areas that work on the free-standing inserts. So obviously if we were not in this business, we would not have the work for those people to do. All up in the printing side of the operation, you are probably looking at close to 450 people and a couple hundred people in the salary staff.
Recchia's grim assessment of Valassis' predicament came after he testified to how much money Valassis had lost in its deathmatch with News America. Newspaper coupons ("Free-Standing Inserts," in agency jargon) went from Valassis' most-profitable to least-profitable offering between 2001 and 2008, he said:
Q. In 2001. How much profit did this co-operative FSI booklet generate for Valassis? A. In 2001, we made about $185 million that year on that product. Q. In 2008, how much profit did this book generate for Valassis? A. Just under $2 million. It was $1.8 million.
On cross-examination by News America's lawyers, however, Recchia admitted that despite the loss of profits, Valassis' overall revenues went from $1 billion to $2.4 billion in the same period and the company still gets up to a 40 percent margin on its remaining coupon business.

Further, Recchia stated that that Valassis' losses may have come about because CEO Al Schultz (pictured) made a corporate strategy error by believing that News America would settle for a moderate gain of market share and then realize that it could make more money by ending its unprofitable price war and returning to an unspoken agreement to share the market and raise prices. That didn't happen -- News America has continued to use low prices to gain share at Valassis' expense. News America lawyer Richard Stone described an internal Valassis corporate strategy memo:

Question: And it says: Timing, the second half 2001 through early 2003. It says: Goal. Allow News America to build their market share, make their point, fill their bellies and then return to profitable pricing levels prior to reaching our minimum market threshold. And that was that a goal that was decided upon prior to the second half of 2001? Answer: I don't know. Question: Well, who set this goal? Do you know? Answer: No, I mean ultimately I guess Al would set the goal. Question: And so Mr. Schultz, the CEO, set a goal of allowing News America to build its market share, correct? Is that correct? Answer: Yeah, it says allow. I think what that means is they are going to undercut us on price and build their share up. We are still bidding on the business. Question: Well, it says make their point and fill their bellies. What did you understand that to mean? Answer: That's an Al thing.
Recchia's testimony came after the jury once again heard from Sara Lee's Debra Lucidi, a former client that News America is probably wishing it had never laid eyes upon. Both Recchia and Lucidi testified that in order to win Sara Lee's newspaper coupon business, Valassis had to write Sara Lee a check for $1.8 million -- a sum that was almost directly transferred to News America to pay for in-store ads in News America's alleged supermarket monopoly. Lucidi testified in a video deposition that the supermarket offering was overpriced by that much because Sara Lee refused to also buy News America's newspaper coupons. Lucidi described Sara Lee's attempt to get around News America's monopoly pricing:
Question: ... there is an e-mail from Ms. Kramer to you that says, "Debra, as expected, News America will not commit to maintaining the in-store rates if they do not receive the FSI business" do you see that? Answer: Yes. Question: News America won't maintain the in-store prices which have already been raised, is that correct? Answer: That's correct. Question: So they raised them when they didn't get the FSI contract and now they are going to raise them another ten percent if they don't get the FSI contract in '06? Answer: That's correct.
... Question: And then in the 3rd paragraph you say, "I suggest that you do some hard research on in-store and see what else is available in the marketplace. I know that nobody else does exactly what News America does, but we have got to have other options. They are strong-arming us and in my opinion what they are doing is unacceptable." Did I read that correctly? Answer: Yes, you did.
Lucidi found there were no comparable options out there. So Valassis had to pay Sara Lee $1.8 million to get the coupon contract.