Skimming The Cream

By RICHARD BEHAR

Dancing milk cartons. Banjo playing robot dogs singing Dixie over the frozen peas. A petting zoo with live geese and goats. Free balloons and ice-cream cones. Employees disguised as ducks waddling down the aisle. Yes, it's just another happy, cornball day at Stew Leonard's, "the world's largest dairy store," according to Ripley's "Believe It or Not." But where is Stew? Why isn't the 63-year-old retailing legend greeting housewives or patting kids on the head or wearing his cow suit? Well, brace yourself, Ripley. The folks who run the animated megamarket in Norwalk, Connecticut, pleaded guilty last week to what is being called the largest criminal tax case in the state's history, as well as the largest computer-driven evasion scheme in the nation. And Stew the showman may soon be wearing prison stripes.

Not surprisingly, many of the 200,000 customers who visit Leonard's two supermarkets each week prefer not to believe it. Leonard is a folk hero in this region, a onetime milkman who built a $200 million (annual sales) business by engineering an edible Disneyland. Shoppers don't just shop at Stew's, they arrive (sometimes by tour bus) and worship the experience of wheeling oversize carts down a 20-ft.-wide aisle that meanders through the 10- acre complex like a yellow-brick road. As a result, Leonard has been hailed as a monument to family enterprise and brilliant marketing by everyone from chicken toughie Frank Perdue to Ronald Reagan to Tom Peters, author of A Passion for Excellence. Companies such as Wal-Mart and Wendy's have sent executives on pilgrimages to study Stew's methods.

But Leonard had a dirty little secret. While his 1,300 smiling employees were evoking a bygone era, the company's executives were busy pulling off "a crime of the 21st century," says Michael Dreiblatt, a top IRS official in Hartford. In short, a computer-software program was devised that enabled Leonard to reduce sales data on an item-by-item basis and skim $17 million in cash, mostly during the 1980s. Computer tapes that contained the real financial figures were destroyed, while the company's auditors were given the understated books. In order to divert even more money, Leonard began to require customers buying gift certificates to pay cash.

Each day, according to prosecutors, cash was emptied from the registers into a "money room," where it was counted, placed in bags and dropped down a chute into the "vault room." Most of the unreported loot was lugged to the Caribbean, where Leonard owns a second home. Another executive, Leonard's brother-in-law, kept $484,000 stashed behind a false panel in his basement. Meanwhile, the computer program itself was hidden in a hollowed-out copy of the 1982 Business Directory of New England.

Leonard, who faces up to five years in prison, has agreed to pay $15 million in restitution. He also confronts new charges by the state of Connecticut that his emporium short-weighted hundreds of food packages. Even so, nobody expects Leonard's fall from grace to hamper the business. "We were packed today," chirps son Stew Jr. "Our customers are extremely supportive and sympathetic." And at Stew's, the customer is always right. It says so on the three-ton tablet of granite at the store's entrance. And it's firmly believed by the hundreds of positive-thinking Dale Carnegie graduates who work at the company. As Stew Sr. once said, "It's important to pass along our values to the staff."

Skim milk, anyone?