The various players in the produce industry -- from grower/shippers to retailers -- received a fresh peek late last month at the ongoing controversy over slotting fees and related retail trade practices, with the release of two U.S. government reports. The Federal Trade Commission's update, which recommends reviewing potential anti- competitive conduct on a case-by-case basis, examined the entire supermarket industry. The other, from the Economic Research Service of the U.S. Department of Agriculture, focused specifically on changes within the produce industry [see "Report Digs Deeper Into Produce Slotting Fees," SN, Feb. 12, 2001]. SN recently talked with the principal authors of the report -- Linda Calvin, Mark Denbaly and Barry Krissoff -- and asked them about some of the more intriguing findings to date:
fresh-cut product we examined, but interviews with retailers confirmed that slotting fees are only common in branded categories such as bagged salads, baby carrots, and dried fruits and nuts. Commodity shippers fear slotting fees may become common for them as well. Although some shippers had received requests for slotting fees, none of the interviewed firms currently paid these fees but some had lost business by refusing to pay.
SN: A "key finding" was determining that commodities remain largely unaffected by slotting fees. Was this a surprise and why?
ERS: Initially, we did not understand the characteristics that appear to distinguish bagged salads from commodities in terms of slotting fees. Bagged salad shippers, as sellers of a differentiated, branded product, requiring large capital expenditures and dedicated shelf space year-round, are more able to incorporate slotting and other types of fees into their pricing structures. They may also find that slotting fees can provide a benefit to their firms in terms of acquiring shelf space. Some slotting fees appear to have been a tool used by large bagged salad shippers to increase the market share for their brands. However, slotting fees are not paid on private label bagged salads. In contrast to fresh-cut product shippers, commodity shippers -- as price takers -- are less able to incorporate slotting and other types of fees into their cost/pricing structures, so incentives are low to offer slotting fees as a strategy for capturing market share from competing suppliers. Even if retailers have market power, it still might be difficult to apply slotting fees to commodities unless and until they are available year-round from a relatively consolidated shipper structure.
SN: Besides consolidation, what other factors remain strong in shaping the produce distribution channel and the various relationships within?
ERS: Changes in consumer and retailer demand have led to many shippers providing a broader line of products on a year-round basis and more fresh-cut products. This ongoing trend may favor larger shippers. Consumer and retail demand for more specialized products, which cannot necessarily be acquired reliably with daily sales, will continue to favor the growth of advance pricing arrangements and contracts. If technology continues to make possible more fresh-cut products, we should expect to see more products marketed like bagged salads. New business strategies, arising in the mass merchandiser sector, that emphasize preferential relationships with shippers instead of slotting fees, may also affect the development of trading practices with traditional retailers.
SN: Were shippers' fears of losing negotiating power with retailers, and feeling more obliged to fulfill retail service/fee requests, validated in the study?
ERS: We asked shippers if they were more fearful of losing retail accounts if they did not comply with buyer requests. In general, they responded that over the last five years they had become more concerned about this issue, that it was due to retail consolidation, and that it harmed their business (tomato shippers were less concerned, possibly because many of them deal with repackers, not retailers). This finding was supported by data showing shippers' heavy dependence on their 10 largest buyers ranging from 39% to 59% of shipper sales, depending on the product. We also asked shippers about whether they lost business when they did not comply with requests. For 41% of the types of requests, shippers reported that they did not comply and lost business for at least one account. This may underestimate the lost business. Many shippers said that if they did not comply but still kept the account, they sometimes noted a decline in purchases from that buyer. These firms expressed concern that they could not fully measure the opportunity cost of noncompliance, since it was not possible to know what would happened with an account if fees had been paid.
SN: Some shippers reported that fewer (but larger) retail buyers helped reduce their costs. Did these types of comments help cast new light on the whole issue of retailer consolidation and its impact on the supplier community?
ERS: This study emphasizes the diversity in the produce industry. Some shippers have the resources to gain with the changes accompanying retail consolidation, but others do not. While some shippers viewed retail consolidation as lowering their costs for dealing with the large retailer, most did not. Some shippers thought they could benefit, in theory, from fees such as promotion allowances but were suspicious that the monies provided to buyers were not necessarily being used to achieve the stated goals. With consolidation, shippers who retained large buyer accounts gained, but those who lost accounts to other shippers did not benefit. Changes in volume demands by large retailers and requests for fees and services may hurt smaller shippers disproportionately, since they spread costs over fewer units. However, retailers reported that they expect more fees and services from their largest suppliers for any particular product because of a perceived greater ability to pay. With retail consolidation each buyer becomes more important and reduces ability for shippers to resist pressure for fees and services. On the other hand, large buyers that develop preferred supplier relationships with shippers may provide a winning situation for both. Some retailers focus on the efficiencies of handling relatively high-volume products, negotiating long-term agreements with suppliers, and then requiring these preferred suppliers to provide services such as automatic inventory replenishment, use of returnable containers or other special packing.
SN: What is your reaction to the disclosure by some bagged salad shippers that suppliers may have first approached retailers with fee offers, bringing a "grocery mentality" to the category in their initial marketing efforts?
ERS: In retrospect, it does not seem that surprising. Initial processors focused on a branded marketing approach and branded marketing requires dedicated shelf-space. Slotting fees have traditionally been used in the grocery category to acquire shelf-space. Since lettuce shippers and others developed a new category that is more like a standard non-produce grocery product instead of the typical seasonal commodity product, bagged salads moved into mainstream food marketing practices.
SN: Were there any interesting differences between the types of fees considered "new" and those that weren't?
ERS: Fees that the majority of shippers said were new in the last five years included commerce fees, retail capital improvement fees, pay-to-stay fees and slotting fees. Old fees included volume incentives, promotional allowances, "other" rebates, free product discounts and buy-back unsold product fees.
SN: In those commodity cases where fees were paid, they seemed to affect specific items. What forces were at work?
ERS: In this study we only considered seven products: California grapes, California oranges, Florida grapefruit, California and Florida tomatoes, and California and Arizona lettuce and bagged salads. We looked at fees as a percentage of sales for shippers' top five retail and mass merchandiser accounts. Tomato shippers in our sample did not pay fees since they generally sell to repackers. We assume that repackers pay fees to retailers. Fees were 0.66% of sales for grape shippers, 1.13% for oranges, and 1.77% for grapefruit. In the case of grapes, the fragmented shipper structure may provide some protection from retailer requests for fees. Given an implicit need for retailers to spread purchases among more grape suppliers than for commodities with more concentrated supply structures, retailers may be less able or inclined to charge certain fees such as volume incentives. Grapefruit fees may be related to the supply-demand conditions, since grapefruit supplies are high and domestic consumption levels are declining. Bagged salads shippers reported that fees paid on all sales to all types of buyers represented 1% to 8% of the value of sales. Information on fees was not available for lettuce shippers.
SN: Throughout the discussion of individual fee types, you paraphrased at least some shippers as saying that the fee in question wasn't considered bad. What does this opinion say about the evolution of these practices in produce?
ERS: Some fees provide expected benefits equal to their cost, some don't. Shippers responded that fees might not be negative if they clearly received a benefit equal or greater to their cost. For example, some shippers reported that volume incentives could potentially lead to a great volume of sales and lower per-unit costs of marketing.
SN: "Other rebates" garnered the most "lost account" responses. Why? What elements comprise those fees?
ERS: We defined "other rebates" as fees without a performance standard. The lack of a defined benefit, besides keeping an account, probably explains why "other rebates" are complied with less often than volume incentives and promotional allowances, which often have performance standards. We are not certain why shippers were more likely to lose accounts when not complying with this type of fee request.
SN: Did you find a correlation between fears of lost business with compliance rates? What conclusions could be drawn from it?
ERS: We did not look at this issue specifically, but we would hypothesize that the importance of the account is highly correlated with compliance rates. However, in cases of non-compliance, even for important accounts, shippers often reported that certain fee or service requests were simply too costly to make business sense. In these cases, shippers felt that even the undesirable result of losing the account was better than serving an unprofitable account.
SN: Shippers reported increases in business with alternative customers, like mass merchandisers. What does this say about larger business forces working on the produce industry?
ERS: Produce follows consumers whether they are buying it from grocery stores, mass merchandise establishments or food service. As more volume is sold via mass merchandise channels, in particular, competitive pressures may influence the procurement practices of conventional retailers, inducing them to be more supply-chain oriented, working more on a coordinated, partnership basis with suppliers.