Supermarket corporate mergers are receiving closer federal scrutiny from anti-trust investigators in response to processor and consumer concern about market domination, potential for price-fixing, and market monopolies. At the heart of the issue are slotting fees, also known as slotting allowances. The term applies to cash paid by food marketers to retailers to gain or expand shelf space in supermarkets. The $460 billion grocery industry contends that these fees are a necessary way to recover the cost of new product introductions, more than 80% of which fail. Many manufacturers, especially small and medium sized companies, contend that the fees represent extortion, restraint of trade, and higher prices for consumers.
Slotting fees total approximately $1 billion per year. In addition, marketers pay approximately $25 billion in “trade dollars” for retailers to promote and discount their products. This amounts to 13% of sales allocated to trade promotions and slotting fees, a nearly three-fold increase over the last two decades, according to data compiled by Forbes magazine.
As supermarket chains continue to merge, small regional manufacturers worry that slotting fees will rise unchecked by local competition. This could result in companies with big budgets outbidding their smaller competitors for space. The big chains appear to be poised to get even bigger, as they seek greater efficiency and economy of scale. Within the next few years, the industry may be dominated by just three global players, according to Cees van der Hoeven, president and CEO of Royal Ahold, a multinational company based in the Netherlands. Its U.S. holdings include Stop&Shop, Giant, BI-LO, and Tops, with locations throughout the East Coast. He includes French-based Carrefour and Wal-Mart, along with his own company, as the dominant players.
Currently, Albertson’s, Delhaize America, Kroger Co., and Safeway have acquisition strategies designed to absorb smaller regional chains. Among the most likely targets are Fleming, Grand Union, Pathmark Stores, Shaw’s Supermarkets, and Weis Markets. Many smaller regional chains also are willing targets as they seek an exit strategy in response to tighter margins and intense competition.
The Federal Trade Commission already has blocked or held up several mergers as a result of anti-trust fears. “Many mergers among direct local competitors in food retailing have raised competitive concerns,” stated FTC chairman Robert Pitofsky in testimony before the House Judiciary Committee last spring. His agency ordered Delhaize America to divest 37 stores that were part of its acquisition of Hannaford Bros., and it withheld approval of Kroger’s since-canceled purchase of 74 Winn-Dixie stores in Texas and Oklahoma.
Behind the concern, slotting fees loom large, although few food companies will openly criticize the practice for fear of retribution. During congressional hearings last year, only one company out of 200 interviewed testified publicly; two others hid behind screens.
In September, the agency’s Bureau of Competition announced that it is scheduled to receive almost $1 million in its FY 2001 budget to further investigate retail slotting fees. The appropriation came in the wake of a heated FTC workshop in May that was designed to assess alternatives to slotting fees, and a General Accounting Office study of slotting fees that concluded without concrete results. “We have been unsuccessful in gaining the cooperation needed from the industry to conduct this study,” lamented Lawrence Dyckman, GAO Food & Agriculture Issues director, in written comments submitted to the Senate Committee on Small Business at a hearing Sept. 14.
Criticism for slotting fees is rooted less in the need to recover the cost of new product introductions and more in potential abuse. In some cases, food marketers have allegedly used slotting fees to exclude competitors. Food marketers complain that slotting fees generally must be paid in full and in advance.
The Senate Small Business Committee heard testimony last year in which marketers alleged that retailers were charging fees simply to stock a product, not solely new products. In that hearing, three witnesses appeared with hoods over their heads, according to Craig Orfield, a top staffer for Senate Small Business Committee Chairman Christopher “Kit” Bond (R-Mo.). Clearly, the FTC and congressional committees show an intensifying interest in the role and potential abuse of slotting fees, although no specific remedy has yet been formulated.
During the FTC forum last spring, both sides of the industry debate floated proposals. An attorney filed a petition for guidelines on behalf of the Independent Bakers Association, the Tortilla Industry Association, and the National Association of Chewing Gum Manufacturers. The organizations favor guidelines over legislation and aim them at retail chains in markets where they have more than a 20% share. Other attorneys attending the forum argued for more clearly defined rules drawing a sharp line between legal and illegal slotting fee activity.
Ultimately, consumers pay the price for more expensive retail products. “If you decided to take away slotting fees, then you’d need to replace them with something else. Or else retailers will just put the price up for the consumer,” stated Mark Husson, a retail food analyst at Merrill Lynch. This ultimately will drive government interest in controlling and regulating the practice and in evaluating the anti-competitive nature of mega-mergers among big grocery chains.
by PIERCE HOLLINGSWORTH