Editorial

Slotting fees: business as usual or bribes and extortion?

The article "Slotting fees threaten produce industry, groups tell Congress" in
 The Produce News, Sept. 25, 2000,  and industry sources were used in preparing this article.

11/10/00 Getting produce, and other products including cranberry juice, on the supermarket shelves isn't as simple as just offering the supermarket chain a competitive wholesale price and a product attractive to consumers. Common practice in the trade for supermarket chains requires a "slotting fee" for allowing a company to expand shelf space, have preferred shelf placement, or even sell their brand in the store. A reasonable justification can be offered for this, and for additional charges, for end of aisle and special displays. However, there's a point at which up-front fees for preferential display and shelf space becomes a de facto payment to compete in a way that is profitable for the food company. If they don't pay, their product could be relegated to a bottom shelf with very slow moving items.

A food company can try to convince supermarket executives to agree to arrangements to carry only their product plus the profitable house brand, with or without advance payments; but some up-front payment would seem to be in keeping with the usual practices even if a good case could be made for end-result profitability for the store. There's nothing in the law to stop a company from making  exclusive deals with a supermarket chain, even though such arrangements work to the disadvantage of the consumers who want a wide choice of brands in each category .

The Senate Small Business Subcommittee has been holding public hearings on slotting fee practices in the grocery store industry entitled "Slotting fees: are family farmers battling to stay on the shelf and in the grocery store?" There have been charges by farmer-backed produce organizations that these practices are anti-competitive and illegal. Western Growers Association president David Moore, according to an article in the Sept. 25, 2000 issue of  The Produce News, told the committee that "retail consolidation in the fresh produce industry is producing anti-competitive practices which go beyond the use of traditional slotting fees." He said that the message from retailers is that growers must "pay to stay" and the cost to sell can be extreme.

In a scene reminiscent of organized crime hearings, described in The Produce News article, some witnesses at the hearing were so fearful of being blackballed by retailers that they insisted on wearing cloaks and hoods, and having their voices electronically scrambled before they testified because the hearing  was being televised on C-SPAN.

The fees were creatively called "new warehouse opening fees," "computer technology fees," "interview fees," and "off invoice demands" and obviously never called bribes or kickbacks, although it seems clear that farmers felt they amounted to a form of extortion. According to The Produce News, one grower  was "encouraged" by a dominant retailer to contribute $30,000, under the guise of a promotional allowance, for a one-inch by three-inch ad for his commodity and still was not assured that additional product would be purchased or that any long-term relationship would be maintained.

Stressline has begun to hear reports that cranberry growers who have traveled to non-growing regions initially had a good response from local supermarket managers when they made proposals to sell fresh fruit directly, only to learn later that the deals inexplicably evaporated. Others have reported that they learned about this side of the grocery business first when they tried to have brokers handle their fruit and were told there would be upfront fees.

People familiar with the grocery business describe it as truly dog-eat-dog behind the scenes, with economic threats and intimidation not uncommon. The food companies with the inclination, and muscle, to make aggressive deals with the trade appear to have willing cohorts ready to profit from what may be anti-competitive practices. 

The Federal Trade Commission will be looking into slotting fee abuses in 2001. There has been recognition that small companies are hurt more than the large companies that can afford these 
"pay to play" costs, but  now there is an increased awareness as to how they are hurting the small farmer. Cash isn't the only way retailers extract money for favorable in-store treatment. They may receive free product, or advertising circulars with whatever advertising they choose in addition to the ad for the company paying for the circular. These deals are often verbal with a paper trail that would be difficult to follow. The General Accounting Office, known for its ability to uncover fraud, has been unable to collect the data it needs to prepare an analysis in slotting fees. The trade's excuse is that  information about who pays what and what they get in exchange  is "proprietary" and must be kept secret.

Senator Christopher Bond (R-MO) is the Chairman of the Senate Committee which will be investigating slotting fee abuses. He is quoted in he The Produce News as saying "...although retail grocers and food manufacturers assure the public that slotting is beneficial for small business and good for consumers, fact-finding critical to this committee's effort to examine slotting more closely has been blocked at every turn. The practice remains shrouded in secrecy worthy of a blockbuster whodunit."

The USDA's Economic Research Service is also looking into retail practices affecting agriculture.

Whether slotting fees, in some circumstances, can be a violation of law remains to be seen. If, as a cranberry grower, your handler is succumbing to the pressure from the trade, or taking advantage of the trade's practice of requiring - or accepting - fees or payment in kind for legal, but questionable, anti-competitive practices, you should be informed.  If you believe that your handler's practices are unethical, you should make your voice heard. Even if you decide the practice is legitimate, it represents a cost of doing business that may not be reported clearly, or at all, on financial statements. If you want to be informed about how your handler conducts business, you should insist that these off-invoice costs be included on financial reports.

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