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Grocery slotting fees deprive consumers and manufacturers of Shelf-Respect
Because producers pay to get their products on store shelves, consumers are deprived of choice and competition
By: Carole Pearson
Vancouver coffee roaster Roy Hardy isn't afraid to compete with the giants of the coffee industry. His problem is that, like many other grocery producers, he cannot afford to get his product on store shelves because of payments called "slotting fees" demanded by big retailers.
"One supermarket was willing to take two SKUs (stock keeping units) of 20 units each," says Hardy, "but wanted the first one free 'on spec.' That would mean giving away 40 pounds (of coffee) per store. That was really beyond us."
Hardy tried to get the big supermarket chains to carry his products but struck out. He just couldn't afford the high slotting fees demanded by local supermarkets and wasn't able to persuade them to carry his line of fair trade coffee. The experience left a bitter taste in his mouth and it's not from his coffee. "The big guys like A. L. Van Houtte, Sara Lee and Proctor and Gamble control the space and don't want us in there. There is so much money involved and the big guys control it."
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Slotting fees can range from a few hundred dollars to $25,000 per item per store or $3 million per supermarket chain |
It's not a random act of shelf stocking that puts those national brand canned peaches at eye level. Nor is it a shortage of space that has certain breakfast cereals stacked at the end of aisles.
Grocery suppliers pay supermarkets thousands of dollars to have their products stocked. These slotting fees can determine whether an item gets placed on a middle shelf or down at the bottom where it's harder to find. An end of the aisle or "end cap"display will cost extra because of its higher visibility. In the world of grocery marketing, shelf space and position are critical.
Consumers lose out in choice
What does this mean for shoppers? Critics say slotting fees curb fair access to the market and erode consumer choice. Big companies are able to use their big bucks to keep competitors' products off the supermarket shelf. And many small producers can't afford the high slotting fees and are relegated to low-traffic specialty stores and the corner market.
How high is high? In the US, the Federal Trade Commission (FTC) estimates $9 billion per year is spent on these promotional expenditures. Slotting fees can range from a few hundred dollars to $25,000 per item per store or $3 million per supermarket chain. TIME magazine reports, "Some companies pay $40,000 a year to hold down a square foot of retail space." These are all costs that get passed along to the consumer in the form of higher prices.
In a CBS News feature, California produce grower David Moore calls slotting fees "extortion." He says supermarkets charge him as much as $1,000 a week per store to carry his packaged almonds. Moore complains, "If we don't do it, we don't do business with them anymore."
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Manufacturers are reluctant to blow the whistle on slotting fees, fearing retribution |
Slightly less competition in Canada
Most available data relates to the American marketplace but Mike Murphy, a competition law officer with Canada's Competition Bureau, says, "The behaviour and characteristics are not very different (here), other than there's more concentration of ownership in Canada."
As in the US, Canadian grocery manufacturers face demands for slotting fees ("pay-to-play"), staying fees ("pay-to-stay") and failure fees. Stores can charge a company to remove a dud product or order a manufacturer to buy it back. Small manufacturers are sometimes allowed into a store if they provide a "free fill" in lieu of a slotting fee.
"A lot of people who have to pay these fees don't like it but don't want to complain," admits Murphy. Manufacturers are reluctant to blow the whistle on slotting fees, fearing retribution from chain retailers and dominant manufacturers. When a US Senate committee conducted hearings on the grocery industry, many producers refused to make any public comments even when offered anonymity. Those that testified did so behind protective screens and used a voice scrambler to conceal their identities.
While the FTC and the American Senate are able to launch wide-ranging inquiries into an entire industry, Canada's Competition Bureau cannot. "We don't have that power," Murphy says. He explains this authority was stripped away in 1986 in amendments to the Competition Act. Today, it can only investigate individual complaints which are specific to the complainant and the stores approached.
Grocery retailers argue slotting fees help to cover the cost of introducing new products onto their shelves. It compensates the stores for the risk involved in stocking an unproven item and for managing the15,000 new products that come out each year. "Pay-to-stay" fees are promoted as an efficient means of allocating limited shelf space in the stores. While small manufacturers acknowledge the expense in handling new products - setting up distribution, finding warehouse space and shelf space - they claim the high slotting fees have no relation to the retailers' actual operating costs.
There is no consensus on a better system. Some want voluntary guidelines or a self-regulated code of conduct for the industry. Others call for legislated equity. Nicholas Pyle, vice president of the American Independent Bakers Association, says the situation is "out of control." He told the FTC, "There should be a legal obligation to pay the same fee to all retailers. By law, they should offer the same discount to retailer's competition and the retailers should offer the same deal to competing vendors."
Distribution Canada Incorporated (DCI) represents over 70 businesses in this country. Its members are primarily independent grocery wholesalers and retailers - nearly 6,000 stores in total. The association wants food manufacturers to publicize any and all marketing programs to unveil the secret deals negotiated between dominant producers and retailers. In a written statement to a parliamentary committee, DCI proposed, "All marketing programs... should be available to all wholesalers and retailers buying on a direct basis from a manufacturer on a pro rata basis."
Despite the opposition, it looks like the practice of charging various promotional fees is here to stay. DCI warns, "Should legislation be enacted to eliminate slotting fees, you can be assured it will rise (sic) its ugly head in some totally different fashion or form."
Carole Pearson is a freelance journalist who does her shopping in Victoria.
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Posted: March 19, 2001
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