Sure Winner Foods – Maine Frozen Food Distributor Files Chapter 11 As Relationship with Nestlé USA Goes (Very) Cold

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May 7, 2019  − Sure Winner Foods (“SWF” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Maine, lead case number 19-20226. The Company, a leading direct-store-delivery ("DSD") distributor of frozen food and ice cream in the Northeast, is represented by Robert J. Keach of Bernstein Shur Sawyer & Nelson. Further board-authorized engagements include Spinglass Management Group as restructuring advisor.

The Company’s petition notes between 1 and 50 creditors; estimated assets between $10mn and $50mn; and estimated liabilities between $10mn and $50mn. Documents filed with the Court list the Company's three largest unsecured creditors as (i) Nestle DSD (“Nestle” or “NDIC” with a $5.8mn disputed trade debt), (ii) Good Humor/Breyers Ice Cream ($1.6mn trade debt) and (iii) Schwan's Consumer Brands ($549k trade debt). Also listed as creditors in this Who's Who of American ice cream brands is HP Hood LLC, Friendly's Ice Cream, East Coast Ice and Giffords Ice Cream.

Events Leading to the Chapter 11 Filing

The filing for reorganization was necessitated by unilateral acts by a major supplier to the company, which we strongly believe breaches our contract with the supplier,” said Keith Benoit, Sure Winner’s CEO.

In a declaration in support of the Chapter 11 filing (the “Benoit Declaration”), Benoit provided some insight into the identity of that supplier and the nature of the unilateral acts.

The Benoit Declaration is heavily redacted, but it nonetheless makes clear that there exists a dispute with Nestle (the Debtor’s largest unsecured creditor with a $5.8mn disputed trade claim) as to Nestle’s conduct under a pair of distribution agreements entered into between the Debtor and Nestle. In addition to the Benoit Declaration, some further information is provided by a Debtor motion [Docket No. 9, also heavily redacted, including as to document production requests] seeking to compel Nestle’s appearance in Court. Taken together, the filings indicate that Nestle has taken operational steps relating to “territory” that the Debtor believes contravenes the Agreement and poses an existential threat to its business. Those steps may relate to Nestle’s recent announcement (see below) which details its intention to change its DSD model in respect of frozen pizzas and ice cream to a warehouse model to save costs. This shift by Nestle, one of the Debtor’s largest suppliers, is likely to impact a relationship with the Debtor which runs a DSD distribution business. It appears that Nestle is freezing out the middle man and leaving the Debtor in the cold, unless, the Agreement has something else to say on the matter. Interestingly, the motion to compel Nestle’s appearance goes to lengths to note that Nestle may have taken steps since the Debtor’s Chapter 11 filing (ie within the last day) which contravene bankruptcy’s automatic stay requirements. Nestle made an announcement as to its DSD-to-warehouse distribution model shift on May 7, 2019.

Based on those portions of the Benoit Declaration and the appearance motion that are not redacted, it is clear that in September 2014, the Debtor entered into a distribution agreement with Nestle (subsequently amended) and that in January 2019, the parties entered into a second distribution agreement (the Benoit Declaration defines the two agreements together as "the Agreement"). Keith Benoit states, "I believe the 2019 Agreement to be controlling and fully enforceable, but, on information and belief, expect that NDIC may take the position that the 2014 Agreement remains in effect and controlling."

The Benoit Declaration further details that upon the receipt of [redacted] information the Debtor "immediately began an analysis of the impact that [redacted] would have on SWF's ability to operate long term as a going concern. Although SWF was profitable and fully solvent when operating under the Agreement, [redacted] I knew the ramifications of [redacted] would be dire…[redacted]- Accordingly, I, on behalf of SWF, began planning to take all action afforded to SWF under applicable law to protect SWF's assets, including the Agreement. After consultation with SWF's other officers, members of the board and SWF's advisors, SWF determined that availing itself of the protections afforded by chapter 11 was the best way to protect the value of SWF's assets in order to best preserve its ability to continue operating as a going concern."

Nestle Announcement 

In its May 7, 2019 press release, Nestle stated, “Nestlé USA today announced that it will exit its company-owned frozen Direct-Store-Delivery (DSD) network for its Pizza and Ice Cream businesses and will transition to a warehouse model. This change will leverage the highly efficient warehouse network that Nestlé already uses for its frozen meals and snacks, which will enable the company to better meet the needs of retail customers and consumers. The phased transition will commence in the third quarter of 2019 and is expected to be complete early in the second quarter of 2020. 

The food industry is facing unprecedented shifts in consumer behavior; how they eat, shop and engage with brands. At the same time, retail customers also are evolving how they do business. Nestlé is adapting to this new environment, and this transition is part of the company’s broader efforts to transform its organization to accelerate growth and win in the market.

Steve Presley, Chairman and CEO of Nestlé USA, added “Ice Cream and Pizza are growing categories in which we hold strong leadership positions…Moving to a warehouse model has numerous benefits for us and our retail customers…By taking advantage of the unmatched breadth and depth of our existing frozen warehouse network, our retail customer partners can better leverage their existing networks. This change is a win-win for Nestlé and our customers.”

Presley added, “This decision came after careful consideration and, while critical to achieve our business goals, it will impact employees in our sales and supply chain teams, and will result in the closure of eight company-owned frozen distribution centers and our frozen inventory transfer points.

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