FTC urged to get tough on retail slotting fees

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Small marketers were pitted against megamarketers and retailers during U.S. Federal Trade Commission hearings to examine the sometimes shadowy world of slotting fees.

The parties took radically different views of whether the payments illegally limit competition.

The two-day workshop last week was the first ever held by the FTC's Bureau of Competition, which usually handles merger and competitive activity cases. It offered unusually detailed chapter and verse on the fees retailers request -- including slotting fees for new products and pay-to-stay fees for existing products -- and a flat acknowledgment from one major grocer that slotting fees sought exceeded retailer costs.


Smaller manufacturers charged that trade allowance and category management programs undercut their ability to support brands. They urged the FTC to take a more aggressive stance by issuing fee guidelines or taking enforcement action against retailers and mega-marketers that wield enormous market power.

"The marketplace discriminates against small firms," said Bob Skitol, an attorney who represents independent bakers, tortilla makers and chewing gum makers who have petitioned the FTC to issue guidelines.

"The payments enable larger firms with more resources to foreclose against smaller competitors."

Major retailers "don't know your product. They don't know anything about your media plan, but say, `If you're unwilling to pay $100 a store for 100 stores, don't bother to come in,' " Scott Hannah, CEO of Pacific Valley Foods, told workshop participants.

Marketers such as Mr. Hannah maintained the fees, combined with a growing consolidation of supermarket retailers that reduces alternative distribution channels, prevent them from bringing new products to market or improving existing ones.

"The consumer loses," said Mr. Hannah, whose company canceled plans to market a potato with more vitamins because it would have required payment of slotting fees.

Retailers and consultants took the opposite view, suggesting it would be certain retailing death to reduce store variety. They added that with club stores providing insurance against price hikes, there was no indication the fees hurt consumers. The fees are reasonable, and the FTC should limit its action to enforcing major abuses if any even exist, they said.

"Slotting allowances are relatively insignificant," said Win Weber, president of Winston Weber & Associates, an industry consultant.

Noticeably absent from the hearing were megamarketers, which were accused repeatedly of anti-competitive actions. A representative of the Tortilla Industry Association and his attorney, for example, complained that payments from an unidentified "dominant maker" of tortillas were forcing competing products off store shelves.

Much of the hearing focused on supermarkets, but auto, drug and computer stores were also mentioned.


"We treat it as another portion of gross profit," said Donald Sussman, exec VP of supermarket giant Ahold USA, a company that is more progressive than some retailers in limiting the level of slotting fees. "Slotting is a little on the high side, but helps us offset costs."

Among the charges:

* Retailers are demanding slotting fees not only on new products but also as add-on fees when they open new stores or merge with another chain. Marketers that already had paid one slotting fee to get an item into a store reported that after mergers they are asked to pay again.

* Fees vary. Mr. Sussman said at Ahold's Stop & Shop chain, slotting fees are set by category and aren't charged in some cases. David Nickila, president of Portland French Bakery, however, said he got a letter from another retailer demanding every supplier provide two free cases per stock-keeping unit for a new store, which would have amounted to $568. Mr. Hannah said "pay-to-stay" allowances that once cost $25 per SKU have now grown to $75 per SKU -- and added he has heard of some stores charging as much as $250.

* Slotting charges are high enough to prevent some marketers from entering a market. Karen Carver, CEO of Elan Natural Waters, said one grocery chain wanted $5,000 per SKU as the price of entry to its stores, which would have required Elan to come up with $50,000.

"It's a major stumbling block for us," she said. And Jack McMahon, CEO of Gallant Greetings, said the fee demanded by one retailer for him to stay on shelves was too dear.

* Some grocers control category management themselves; others let leading marketers act as "category captains" under strict guidelines that limit captains' ability to cut out competitors (following the logic that captains know their category best and will act responsibly). But a few grocers have shown clear indications that the captain's role is not an impartial one. The chains let marketers bid for the role of captain, then allocate shelf space.

* Small marketers accuse larger marketers of using the fees to promote exclusivity illegally.

"Of real concern is whether the dominant manufacturer is bribing the retailer to produce exclusivity," said Rick Warren-Boulton, an economist at consultant Micra.

Some retailers at the hearing said they have gone out of their way to promote diversity, with a number of retailers setting up programs to benefit smaller manufacturers. A Costco executive said his company doesn't ask for fees, but instead seeks the lowest possible prices.

FTC officials said they will review information from the hearing.

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