BAKERS' REPRESENTATIVE TURNS UP THE HEAT ON SLOTTING FEES

STEPHEN DOWDELL

ORLANDO, Fla. -- While slotting fees are increasingly becoming the price of admission for some products in the produce department, the practice of charging them is being increasingly scrutinized by the government, according to a food industry representative bent on chasing slotting fees out of the business.

"The slotting issue is becoming more prevalent in your industry," said Nick Pyle, an antislotting-fee crusader who briefed a room full of produce industry executives on slotting and current efforts to attack the practice. Pyle, a representative of the Independent Bakers Association, based in Washington, spoke at the United Fresh Fruit and Vegetable Association's convention here.

The Independent Bakers Association, a trade group representing about 300 small bakery wholesalers, has spearheaded an industry coalition to combat retailers' penchant for charging suppliers fees for carrying their products in stores. In a workshop Pyle detailed the controversial practices and made a bid to drum up support for his coalition's efforts. After first asking for a show of hands of any retailers present -- there were none in evidence -- he described what forms slotting takes and how the coalition will encourage government-led investigations into the practice.

"The 'payola' aspect of slotting," Pyle said, "is what we consider the biggest ripoff of the food industry" since the days when gangsters like Meyer Lansky shook down local bakers.

Pyle said slotting most often hits suppliers in two ways, as an entry fee or a "pay to stay" fee. "These have been known to finance a lot of retail acquisitions and leveraged buyouts," he said.

Pyle said Wal-Mart's acquisition of the Pace membership warehouse chain for its Sam's Club subsidiary spurred new slotting demands placed on the store's suppliers.

Other popular forms of slotting, he said, include fees for exclusivity, which he said are a favorite practice of convenience store chains; failure fees gaining favor in supermarkets for new product introductions that falter; and "computer charges" tacked onto products being integrated into retailers' information and inventory management systems.

Pyle questioned the legality of some of these practices, and added that "none of them add any value for you suppliers."

Market development fees, however, do ostensibly add value since they are usually tied to some kind of real marketing efforts, but at a high price. Examples he offered were charges for more favorable placement on store shelves, which can dramatically affect sales volume, and demands for street money that pave the way for prominent in-aisle displays and other favorable merchandising. Cooperative advertising money is another marketing-related fee that, while widespread, does at least "offer a benefit to you as a supplier," said Pyle.

The price of slotting can be prohibitively high for entire economic classes of suppliers, Pyle said, quoting estimates of a typical burden of $100,000 to launch a new product in the Northeast, or even $1 million to gain entry for a product nationally in stores. "Basically, it eats up about half your total costs of introducing a product," he said.

IBA members have serious problems with slotting fees, Pyle said, because fees tend to favor manufacturers and distributors with deep pockets.

"It stifles innovation," he complained, "and affects new product expansion. It has regional manufacturers suffering because slotting fees are being paid at national levels."

Questions about the legality of slotting, meanwhile, are "being considered on a lot of fronts," Pyle said. He noted that the Federal Trade Commission is examining the position on store shelves that a major snack manufacturer has gained through acquisitions and whether it is using its clout to secure that shelf space at the expense of other suppliers.

"What can you do about slotting? Not a lot," Pyle admitted, alluding to the fact that few suppliers, in produce or any other industry, are going to be willing to flatly refuse retailer demands for fees, since such a refusal would entail the risk of getting shut out of the stores. "But you can negotiate better. You can refuse to pay, but it does not work very well. You can send a lawyer's letter, or you can sue; but my bakers are very reluctant to sue retailers, since that means biting the hand that feeds them."

Pyle said one way to fight back is to create demand pull through with ads, celebrity endorsements or couponing floods, thus putting pressure on retailers to carry specific products regardless of whether the supplier submits to demands for fees.

Another way, he said, is to support the coalition that IBA leads in concert with consumer groups, other trade associations, food cooperatives and individual manufacturers.

Pyle said the coalition's antislotting efforts are concentrating on lobbying and petitioning for action by the FTC, the Justice department, the White House and the U.S. Congress.