SLOTTING FEES PRICE EFFECTS AIRED AT FTC WORKSHOP

JOANNA RAMEY

WASHINGTON (FNS) -- Higher retail food prices would be the likely result if supermarkets stopped receiving slotting allowances from suppliers, according to a major retailer.

However, slotting fees also threaten the viability of smaller players, countered a produce grower, packer and marketer.

These charges were exchanged last week during a two-day workshop at the Federal Trade Commission, which has been investigating slotting fees. The workshop was designed to help FTC officials figure out whether, and in what form, slotting fees -- which by some estimates amount to $9 billion annually -- might be anticompetitive and thus illegal.

"Slotting allowances allow us to defray the real cost of bringing a product to our shelves," said Donald Sussman, executive vice president for purchasing at Ahold USA, Chantilly, Va., adding that these fees gain even more importance when one considers how the company's Stop & Shop alone carries 15,000 products.

Sussman explained how slotting fees push the financial risks associated with carrying a new product onto the supplier. The fees also compensate retailers for the loss of business associated with replacing a product and, moreover, are built into the company's bottom line.

"Every dollar of slotting we generate is a dollar we don't have to generate" from sales, he said. "If they weren't there, the pressure on prices would rise."

Pierre Tada, chief executive officer of Limoneira Co., a Santa Paula, Calif.-based produce grower, packer and marketer, said the levying of so-called pay-to-stay slotting fees has a chilling effect on suppliers, particularly on produce, where companies traditionally have competed on delivery, freshness and innovation.

He said produce suppliers are increasingly being notified of these surcharges from retailers with whom they've done business for years.

"We're talking about charging and extracting money for products that have been [in a store] for a long time," Tada said. "It adds costs and in the long run it will increase consumer prices."

Tom Stenzel, president and chief operating officer of the United Fresh Fruit and Vegetable Association, Alexandria, Va., offered a similar assessment. "It's easy to play one [supplier] against another," Stenzel said, citing one occurrence where a retailer opening 20 to 25 new stores unilaterally deducted $500 per store from a produce-supplier's account.

The workshop consisted of five panels of about a dozen people representing retailers, wholesalers, suppliers, consultants and academics. Aside from pay-to-stay slotting fees and surcharges for carrying new products, the discussions also touched on other fees levied on suppliers, including surcharges for displays and presentations. The reasons a product may fail to catch on with consumers were also examined.

Scott Hannah, chief executive officer of Pacific Valley Foods, Bellevue, Wash., who has in the past negotiated lower slotting fees with retailers, said "the consumer loses" when new-product surcharges are levied. Hannah cited concern for small and medium-size businesses such as his being shut out of the market by larger suppliers who can afford slotting fees that have been reported as high as $25,000 per item per store.

Hannah said retailers have stopped negotiating the fees "and I'm not sure why," noting how surcharges for his goods on the West Coast seem to be stuck at $75 to $100 per product per store and, on the East Coast, at $200 to $250.

David Nickila, co-owner of the Portland French Bakery, Portland, Ore., said he has no qualms offering retailers promotional allowances, in addition to the 25% return stores get selling his baked goods. As far as slotting allowances, "we can't afford it." He said independent suppliers "are having a tougher and tougher time to survive and they are the one traditionally promoting innovation."

However, there are stores that waive or otherwise minimize slotting fees for small suppliers. Sussman cited Ahold's extensive program for nurturing these businesses, which also boosts the chain's regional marketing strategy. "There are ways to get on our shelves," he said.

Not all retailers charge slotting fees. John Eagan, vice president of Costco Wholesale, Issaquah, Wash., said the nature of the club format doesn't lend itself to slotting fees since the chain is looking to buy in bulk and offer consumers discount prices.

"We want the lowest cost the manufacturer is offering in the marketplace," he said.

Eagan, in a discussion about power in the food industry in relation to slotting fees, later noted that "there has been a shift from the manufacturer to the buyer as to who holds the clout" over buying decisions. But, he said, retailers should nonetheless continue to focus, as Costco has, on bringing variety to their shelves by seeking out new products made by smaller companies

Regarding power in the food industry, Sussman said "it's a mixed bag" that "varies from product to product and store to store." He gave the example of a manufacturer having clout in the case of the popular and growing coffee company Starbucks, Seattle, which he said refuses to pay slotting fees. "Starbucks has the power to impose its brand," Sussman said.

Robert Ukrop said his 27-store Ukrop's Super Markets, based in Richmond, Va., has turned into a proving ground for small, local food suppliers who might otherwise be shut out of larger supermarket companies because of slotting fees. "Our competitors won't [carry some products] until they're successful at our store," Ukrop said. He questioned whether the need for large chains to charge slotting fees is the result of pressures on public companies to increase shareholder returns.

Jay Campbell, president and chief operating officer of Associated Grocers, the Baton Rouge, La.-based wholesale distributor for independent grocers in the region, said slotting fees as a means to cover costs for carrying a product are a justified business practice dating back 20 to 30 years. However, he questioned whether other surcharges and business practices between large retailers and manufacturers are being applied equitably across the retail sector.

He is concerned larger suppliers are making deals with "power-buyer" chains, offering them promotional allowances, pricing, packaging and products not extended to smaller retailers and wholesalers.

The sensitivity of these smaller suppliers toward slotting fees also carried over to the workshop, where panelists from these companies, as well as academics, noted there were only two large retailers present and no large manufacturers. The FTC staff said invitations to speak were extended throughout the food industry.

A spokeswoman for the Food Marketing Institute here said "there was good representation of retailers" at the workshop. A spokesman for the Grocery Manufacturers of America, also here, said officials of the association, which represents leading suppliers, were in the audience observing. He said he couldn't speak for individual companies. "A lot has to do, perhaps, with a company's proprietary sense," he said.

FTC officials haven't said whether they will use their antitrust regulatory power to move against slotting fees.