SLOTTING FEES EXAMINED BY SENATE SMALL BUSINESS PANEL

JOANNA RAMEY

WASHINGTON (FNS) -- Two witnesses -- their identity masked by black hoods and their voice electronically altered -- were among those who told a Senate committee here last week that slotting fees are barring food-product manufacturers without ample capitalization from expanding their distribution or entering new markets.

Slotting fees -- the long-controversial charge food retailers and wholesalers often impose to introduce a product into their distribution systems -- were the focus of hearings held by Sen. Christopher Bond's (R-Mo.), Small Business Committee, members of which have studying the issue for six months and plan to do so for another year. Last week's hearings were intended to to draw attention to current findings.

Witnesses at the hearing included two small-business owners who were shrouded in black hoods as they entered the hearing room, and further concealed by a plastic screen as they testified.

The mystery witnesses claimed they feared retaliation from retailers in the form of loss of favorable shelf space and consequent market-share loss, especially since they were unable to match fees paid by well-capitalized manufacturers.

Such a case was illustrated by one of the anonymous witnesses who said per-store sales of her product declined to $50 from $500 when a competitor, paying a higher fee and offering a per-unit bonus to retailers, bumped her product to lower shelves. The company has had to lay off workers.

"It's a scary thought -- I might not be in business tomorrow," said the hidden witness. "It's not because I have an inferior product. It's about money."

The disadvantage of not being able to pay slotting fees at all was cited by Scott Garfield, vice president of Lee's Ice Cream, the sole small-business executive to be identified at the hearing. He testified that his product and marketing ideas have produced good sales at the Lee's ice cream stores in Baltimore and in the export market for retailers in Saudi Arabia and South Korea.

But, he asked, "how can a [domestic] grocer justify upward of $10,000 per stockkeeping unit to list a new product?" He claimed that such amounts far exceed retailers' cost of distribution and shelf-label changes.

In reaction, Bond remarked, "This all makes slotting allowances an unusual business practice to say the least: [seemingly] legal in some circumstances, illegal in other circumstances and gray in far too many cases."

Slotting fees have been an industry practice for as long as 30 years, but have increased in the last five years. In the aggregate, they amount to about $9 billion annually, according to committee estimates. Food distributors generally defend the practice as a means to allocate scarce resources and to offset the cost of handling and promoting a product. In the case of a new product, the fees are seen by distributors as a means to offset costs associated with frequent failures. It's also argued that the fees ultimately keep consumer prices low by fostering efficient distribution.

John Motley, senior vice president of government and public affairs at Food Marketing Institute here, testified: "It is well settled that properly structured slotting programs and promotion allowances are lawful." However, Motley said he would not discount some of the objections broached by small suppliers.

In the case of companies being unable to pay the fees, Motley said, many retailers have small-business programs that waive or mitigate the fees.

He said cases of fee misuse should be directed to federal regulators. "There will always be bad actors," Motley told SN after his testimony.

Jeffrey Schmidt, counsel to the Grocery Manufacturers of America here, testified that GMA doesn't take a position on slotting fees.

"From a holistic, supply-chain perspective, it may be understandable for a retailer to be compensated in some fashion for its costs incurred in connection with the introduction of a new product," Schmidt testified. "Nevertheless, many manufacturers view slotting allowances as controversial and, indeed, objectionable, because of the concern that the slotting allowance may exceed the costs incurred by the retailer."

GMA has led a joint-industry initiative to help reduce costs of handling products by manufacturers and retailers.

Committee investigators are seeking to sort out what instances of slotting allowances might overstep laws governing fair competition. The committee's inquiry has detailed various cases of small-business owners being asked to pay a fee or service to get favorable retail display and promotion for their products. They include a food broker recommending that a small-business owner offer to paint the house of a retailer and a buyer asking another supplier to pay their child care costs. Another supplier complained to the committee that his competition was paying the lease on a buyer's BMW.

While such cases of currying favor are being scrutinized, the broader issue of small businesses not having the wherewithal of larger suppliers to pay for slotting fees and thus secure key shelf space appears to be of overriding concern to the committee. In addition, how a dominant supplier might dictate terms of shelf space for other suppliers is also up for review, as well as what has been described by witnesses as the secrecy of slotting-fee arrangements. Antitrust laws generally require that competitors be extended equal terms.

Sen. John Kerry (D.-Mass.), ranking minority member on the committee, who spurred the panel's inquiry, questioned why consumer demand often doesn't seem to be the criteria for retailers keeping a product on its shelves. He criticized the market power created by a dominant supplier doing business with a large retailer, particularly when the supplier, able to pay high slotting fees, can call the shots in a store regarding overall product placement. "It seems as clearly anticompetitive as it can be," Kerry said.

Although stories abound where small suppliers are at a disadvantage to those with deeper pockets, historically they haven't been considered by courts to be violations of the anti-monopoly Robinson-Patman or Sherman acts, testified lawyer Robert Skitol, on behalf of the American Antitrust Institute.

However, Skitol said challenges under certain circumstances can be brought in cases, such as where there have been "unreasonable" restraints of trade or "exclusionary" practices, both instances with high legal hurdles. But cases have been brought, however few. He cited two antitrust slotting-fee cases filed in the past six years -- although they've been settled out of court with undisclosed terms. A third case, a challenge by a Maine magazine distributor against a retailer, is due for trial in February.

Not all retailers charge slotting fees. One example, according to the committee, is Wal-mart Stores. And results from a 1998 ACNielsen survey issued by the committee found that 14% of manufacturers don't pay slotting fees. Of the remaining manufacturers, 11% paid $3 million or more in fees; 3% paid $2 million to $3 million; 24% paid $1 million to $2 million; 20% paid $500,000 to $1 million; and 28% paid less than $500,000.

At this juncture, Bond, the committee chairman, said he hasn't decided whether to propose legislation, however he is asking the General Accounting Office to study the issue, and ultimately the Federal Trade Commission may have to issue guidelines for slotting fees, he said. The FTC is also currently studying the issue and has a telephone number (877-FTC-HELP) through which observations about slotting fees may be registered.