Businesses fighting for space on grocery shelves know how difficult it can be to secure a precious few square inches for their products. Part of the reason is slotting fees, which some retailers charge small manufacturers as the price of gaining access to their shelves. But the Federal Trade Commission (FTC) is taking another look at these fees. A workshop held in Washington, DC, May 31 to June 1 may have laid the groundwork for upcoming FTC enforcement actions.
"The demand for slotting allowances has increased significantly, as have complaints about their exclusionary nature," says an FTC official, who declined to be identified.
In March 2000, the FTC forced spice manufacturer McCormick & Co. to sign a decree promising not to pay grocery stores in return for those stores limiting shelf space to competing spice sellers, all of them entrepreneurial businesses.
Some slotting fees are legal; for example, when a retailer demands payment for services in conjunction with launching a new product. But it's usually illegal for a retailer to demand a slotting fee simply to stock a product. In a gray area are slotting fees charged for preferential shelf or aisle space.
Allegations of illegal slotting fees were aired at hearings in September 1999 in the Senate Small Business Committee. Three witnesses appeared at the hearings, two with hoods over their heads to thwart identification, because they were worried about reprisals from retailers and manufacturers, according to the committee's Craig Orfield.
Committee staff interviewed 79 witnesses for those hearings. Additional interviews have taken place with allegations going beyond the grocery industry to bookstores, brand-name-apparel retailers, electronics merchandisers and auto-parts stores. "The stories we have heard are very blatant," says Orfield.
Nicholas Pyle, vice president of the Independent Bakers Association, says, "Our bakers consider slotting fees 'payola,' commercial bribery, extortion and simply a shakedown."
The grocery industry's considerable consolidation over the last five years has heightened concerns. The fewer the number of supermarkets, the easier it is to make the case that slotting fees-which keep products off the shelf-are anticompetitive. Moreover, new product categories on the market have been hit with slotting fees, drawing the ire of sectors formerly untouched by fees. For example, fresh fruit and produce, when sold individually, has never been a target for slotting fees. But once produce began to appear in bags, such as carrots and premixed salad, supermarkets began demanding slotting fees.
When the FTC last looked at slotting fees in 1996, the staff report said no evidence had been presented by any small manufacturer showing consumers had been harmed. The fact that the FTC was able to get a consent decree with McCormick in March indicates that more persuasive evidence is floating to the surface. Says Pyle, "FTC chairman Pitofsky has more than a passing interest."
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Stephen Barlas is a freelance business reporter who covers the Washington beat for 15 magazines.