REPORT DUE ON SLOTTING FEES IN PRODUCE SECTION

ROBERT VOSBURGH

WASHINGTON -- The first of three reports from federal researchers on the origins and implications of certain controversial trade practices in the produce department is due out shortly, said coordinators for the federal study.

According to Mark Denbaly, chief of the food markets branch of the Economic Research Service of the U.S. Department of Agriculture here, the first report sketches the changing landscape of the produce industry as it applies to the relationships between retailers and grower/shippers.

"It looks at national-level data, the dynamics of how the channel has changed and forces behind retail consolidation and how that may play into [buying practices]. It's a backdrop for the following two studies, which are the main focus," he said.

The three-part inquiry is being conducted quietly while a higher-profile battle tinged with politics is under way in Congress. The most recent chapter of that ongoing saga unfolded in dramatic fashion in September, when the Senate Small Business Committee heard testimony from both sides, including two suppliers who were frightened of retailer retaliation, and spoke only on the condition of complete anonymity.

During that session, John J. Motley 3rd, senior vice president of government and public affairs of the Food Marketing Institute here, reminded the panel that such fees and allowances have already been scrutinized by regulators and deemed lawful. Rather, he said, "there is a great deal of misunderstanding" about the fees, which in the process have become a "lightning rod for a more fundamental problem" -- namely, the pace and quality of new product introductions.

"Slotting fees, if properly structured, are a legal and rational approach to allocating the cost of new product introductions in a way that can benefit consumers," he said. "Without them, there might not be a way for smaller manufacturers to break the hold that large companies with their massive advertising budgets would have on shelf space."

Motley went on to say that it's much easier for manufacturers to blame market forces seemingly outside their control than to admit the product they've researched, developed and worked so hard to produce may not be, in the end, a hit with consumers.

"Well-conceived products that are popular with consumers can, and do, make it to shelves without regard to the level of slotting or promotional allowances," he said.

During the Senate hearing, both committee chairman Kit Bond, R-Mo., and ranking member John Kerry, D-Mass., expressed concern over the practices and announced that they will seek a thorough study of the practices by the General Accounting Office -- one similar to the ERS study already under way. Critics of the fees say that retailers have become greedy and have sought to boost the bottom line by setting the fees at a level that goes beyond costs incurred to introduce a product. They allege that stores use the allowances as an easy source of additional profit.

Both supporters and opponents agree that today's produce department has become eligible for slotting fees and related promotional allowances due to the recent, huge influx of value-added, fresh-cut items, the emergence of "brand" names on traditional commodities, and the increase in year-round availability of seasonal items. All three phenomena have contributed to the revival of produce as a consumer destination, a mark of competitive differentiation and a hallmark of a retailer's commitment to freshness, quality and variety. In short, the produce department has become hotter than a Habanero chile.

This renewed dominance of produce in the retail setting is the subject of the ERS' second study, which is a detailed descriptive report examining the effect of retail concentration on grower/shippers. According to Denbaly, the study seeks to examine the subsequent changes in retail buying practices, and the changes in the supplier industry that have occurred in the face of retailer merger/acquisitions. Also of concern is whether the potential effect of retail concentration varies by grower/shipper size.

"This phase of the project is looking at how retailers and grower/shippers, by size, connect to one another, and what sort of marketing practices they're using, and to put the whole picture into perspective with regard to specific products," he said.

To date, the products are a mix of commodity and branded items, including California head lettuce, bagged salad mixes, California and Florida tomatoes, California table grapes, California oranges, and Florida and Texas grapefruit. The ERS is trying to add other items, such as baby carrots, he said.

Getting the data required to present an accurate picture of the market forces currently at work requires the ERS to solicit input from suppliers and retailers. Specifically, researchers are looking for personal interviews with regional and national supermarket chains and wholesalers on the extent of allowances, as well as a limited number of suppliers. They have also launched an in-depth mail survey of grower/shippers to obtain proprietary information as to sales volume, length and structure of contracts, marketing strategies and the size of the operation.

On this, Denbaly laments the struggle to reassure companies that may be reluctant to turn over such protected data.

"Obviously, the success of this study depends upon being able to get data. So, we have gone to great lengths to ensure confidentiality. I have sought specific agreements for our own staff and our cooperators to ensure absolute confidentiality, that no one will have access to who is providing the data -- it will be coded -- and that they cannot share it with anyone. And, that after the project, the data would be secured," he said.

However, because the ERS is part of the USDA, a public agency, the information is subject to the terms of the Freedom of Information Act. Denbaly says the ERS has dealt with this potential hurdle to gaining privileged information before.

"We have a letter that the providers of data will sign, saying that this data is confidential, a trade secret, and that its release will have an adverse commercial effect on them," he said. "We could deny a request based on that letter."

The third and final study is probing the produce industry as it is currently organized, and assessing the economic relationships between grower/shippers and retailers. One query in particular will look at how mergers and acquisitions can effectively reduce producer prices below competitive levels; another aspect will examine the relationship between retail consolidation and prices at store-level.

"We're going to buy some other proprietary data on retail prices and retailers focusing from different regions [and] different markets of the country, try to connect them to [applicable] grower/shippers and examine whether these prices are competitive or not," said Denbaly.

The other data will come from a number of universities that also have been conducting research into the retail practices targeted in the ERS probe, he added.

The project was launched last February after several produce-industry associations representing grower/shippers approached the USDA with concerns over "potentially discriminatory" practices that were infiltrating the produce department. The organizations, led by the United Fresh Fruit and Vegetable Association, Alexandria, Va., also include the California Grape & Tree Fruit League, California Citrus Mutual, Florida Fresh Fruit and Vegetable Association, Northwest Horticultural Council, Texas Produce Association and Western Growers Association.

Once the reports are completed, the volumes will be available for Congress or any public entity or person to use as they see fit.