Seeing Floorgraphics survive--indeed, prosper--while a company the size of 3M dropped out of the competition had immensely buoyed the Rebhs' confidence. "We had succeeded in an environment where a corporation with deep pockets had been able to outspend us at every turn," George Rebh says.
Some retailers saw News Corp.'s message as an ultimatum: If you want to keep your in-store promotions contracts, stop dealing with Floorgraphics.
Although 3M's musclebound presence in the floor-ad market had hindered Floorgraphics, it also apparently had deterred others from entering it. Even so, 3M's departure would tempt other companies to compete, Richard Rebh reasoned, and he cast a particularly wary eye toward News Corp. "We thought that they were a potential threat just because of their resources and because, if you're already contracting with retailers and you have people servicing the stores, it's a natural add-on," he says.
The circumstances surrounding News Corp.'s aggressive expansion into in-store marketing were all the more disquieting. Since 1996, News Corp. and ActMedia, a division of Heritage Media, had been dueling rivals in the instant-coupon-machine business. The competition escalated into a price war that had caused a sharp drop in Heritage's stock value.
In 1997, Heritage Media called it quits, agreeing to a merger with News Corp. Murdoch paid $1.35 billion for Heritage, which owned TV and radio stations in addition to the ActMedia collection of in-store promotions programs, embracing the coupon machines and shopping-cart ads. Salomon Brothers termed $1.35 billion "a very reasonable price" in an analyst's report.
The swallowing of ActMedia enabled News Corp. to virtually corner the coupon-machine market, which gave it the leverage to pressure retailers into accepting lower fees. "They began going to retailers to renegotiate their contracts," Rebh says.
When Rebh looked into Murdoch's background, he was not reassured. One article, published by Fortune in 1998, was headlined ominously, "The Rules According to Rupert." It reviewed the media baron's relentless rise from a modest start--at age 22 he inherited a provincial Australian newspaper from his father--to the pinnacle of an international business with TV, newspaper, book publishing, and magazine properties on five continents.
Murdoch was, the article continued, a high-stakes gambler in his many ventures who was known for "breaking the rules, defying convention, waging war by any means necessary--and usually coming out on top."
Any company that stood in the way, Rebh came to believe, ran the risk of having to joust in court against a deep-pocketed giant. He was aware of what happened when Sullivan Communications Inc., based in New York City, had taken on News America in the freestanding insert market. In 1993, Sullivan sued News America in U.S. District Court, charging it with, among other things, predatory pricing. A year later, Sullivan quit the FSI business, selling out to News America reportedly for $15 million. (At least three other companies in the FSI or in-store marketing business--Theme Co-op Promotions, Menasha Corp., and Insignia Systems Inc.--would become embroiled in lawsuits in which they accused News America of anticompetitive conduct. The Theme Co-op case is pending, a judge's ruling dismissing Menasha's suit is on appeal, one involving Insignia is pending, and a second one was settled in 2002 under terms that were not disclosed.)
In spite of that reputation--or because of it--Rebh sought the meeting with Paul Carlucci in 1999. When Carlucci rebuffed the overture, saying the only kind of cooperation he could imagine was the sale of Floorgraphics to News Corp., Rebh braced for the worst.
He didn't have long to wait.
News Corp. not only entered the floor-ad business but also was soon portraying itself as the single-source provider of in-store advertising and promotion. As some retailers interpreted the message, it amounted to an ultimatum: If you want to keep your in-store promotions contracts with News Corp., stop dealing with Floorgraphics. That constituted an "unreasonable demand for exclusivity," wrote Dennis Hopkins, an executive with Giant Food Stores, in a November 9, 1999, letter to News Corp.
News Corp.'s negotiators wooed retailers by offering higher, guaranteed fees, according to industry sources. Floorgraphics had been paying its retailers 25% of the gross floor-ad receipts attributable to each one of them. That worked out to a 50-50 split of the profits, according to Rebh, which he considered a "principled" policy because it disclosed each partner's share of the benefits and denoted an equal partnership. Floorgraphics' rate schedule soon went by the boards.
In talks with retailers, News Corp.'s negotiator Jeffrey Jensen pushed for an all-or-nothing deal, according to Hopkins. Jensen "was aggressive. [He] was forceful. It was, like, 'Here's the money, you either want the money or you don't want the money, take it or leave it, I really don't care," testified Hopkins, who represented Giant and four other major U.S. grocery chains owned by international food provider Ahold, in a lawsuit unrelated to the negotiations.
The tough talk backfired in some cases--notably, in News Corp.'s dealings with A&P. According to Floorgraphics, the people at A&P said they didn't like how they were being treated. "They [A&P] were not happy with anyone dictating terms to them as to how they would run their business," says Mike Devlin, a Floorgraphics senior vice president. (A&P declined to comment for this article.) As a result, A&P asked Floorgraphics to be its one-stop in-store marketing partner and sign a contract covering floor ads and all other in-store marketing at the 700-plus stores it then had nationwide. Despite Carlucci's warning that Floorgraphics would enter News Corp.'s business at its peril, Rebh accepted A&P's offer.
