Shelf Wars : Markets Put a Price Tag on Space
When Chiquita Brands brought out a line of frozen juice bars in 1985, supermarket chains were more than willing to accommodate with space in their freezer cases. All they asked for was money.
“It was not uncommon to have chains present us with a bill for $100,000,” a former Chiquita Brands sales executive said.
Consumers might find it astonishing that supermarkets these days get money coming and going. They make money selling groceries, of course, but increasingly they seem to be turning some profit stocking the shelves as well.
Faced with a barrage of new items each year, grocery chains have gotten more brazen about demanding payment from manufacturers in return for slots on crowded store aisles. As the battle for shelf space has heightened, some food companies have begun paying millions of dollars to get new products into supermarkets.
Recent Escalation
These up-front fees, which have escalated in the last couple of years, go beyond the customary “introductory allowances” and advertising fees that food suppliers have paid for years to help grocers promote products. The practice of seeking big sums of front money has erupted into a heated controversy between retailers and manufacturers in the $295-billion-a-year grocery business.
Critics are alarmed at what they see as a growing tendency to auction off grocery store space like so much choice real estate to the highest bidder. They fear that the trend will not only force out new, untested and underfinanced products but also could lead to higher food prices.
Although many food companies and grocery chains are reluctant to discuss this latest wave of front-money payments, it is rampant. “I don’t know of a chain in the United States that doesn’t do it today,” one food company executive said.
Grocers defend the new up-front fees, known as slotting allowances, as necessary to offset the substantial costs of squeezing new items onto already-crowded shelves and unloading the many products that fizzle.
‘Flexing Their Muscles’
“You can’t walk into a food manufacturer’s office without hearing all about slotting allowances,” said Ken Stevens, a management consultant with the Los Angeles office of McKinsey & Co. “Retailers are flexing their muscles . . . like you’ve never seen before.”
Payment of these fees is cranking up in the Midwest but is most prevalent along the East and West coasts. And the rules keep changing. One food company executive groused that some Southern California chains are charging three to four times what they were earlier this year. “I think this is a real cancer in this industry,” he said.
“They (up-front fees) have become whatever the market will bear,” agreed Peter A. Cosgrove, vice president of marketing with Affiliated-Horn, a large food broker in Hollywood.
In the view of many observers, these new fees--on top of special volume discounts, “introductory allowances” and “cooperative” advertising money that food makers have provided to help with promotion efforts--are all part of retailers’ efforts to shift costs back to manufacturers.
Some observers contend that supermarkets’ success in winning these new payments signifies a fundamental shift in power to retailers from manufacturers. While food makers in the past often dictated what and how much went where in stores, now the tables appear to have turned, observers say.
Supermarkets’ greater clout, they say, can be traced to a variety of factors. Most important, as the grocery industry has experienced a wave of mergers, notably in Southern California, retailing power has become more concentrated. If a 100-store chain doubles in size overnight by buying a competitor, it suddenly carries a lot more weight with food suppliers. At the same time, these debt-laden retailers need cash.
More Adept at Technology
Moreover, grocery chains have also become more adept at using technology. In particular, many retailers are armed with up-to-date product information gleaned at checkout stands where lasers scan black-and-white bar codes on grocery items and immediately record sales data.
These emerging advantages, many experts say, could keep retailers in the driver’s seat even in the face of current food industry mergers, such as Philip Morris’ planned $13-billion takeover of Kraft.
In the past, a slotting allowance referred to a nominal, one-time fee that suppliers paid grocers strictly in return for setting up space in a warehouse. But recently the idea has been expanded to cover shelf space in the stores. The fees generally range from $10,000 to $100,000 per item, with each variety of a product such as cake mix counting as a separate item.
Such fees can erect hurdles for young companies with innovative products but limited resources. Some, experts fear, will be unable to get their products into stores or to defend their turf if giant rivals choose to “buy” the space out from under them.
Buck Elton Sr. and Debra Sarkisian are two veterans of the Southern California shelf space wars.
In late 1986, Elton, 70, came out with a line of flavored seltzers made from the spring waters on his Olancha, Calif., ranch. He quickly found that having a good-tasting product was not enough to ensure success. Grocers also wanted marketing help.
Elton offered to guarantee sales to Vons and Ralphs by issuing coupons good for one free six-pack, a promotion that ended up costing him $280,000.
Chunks of Up-Front Money
Lately, he said, chains have been asking for big chunks of up-front money--in some cases, $10,000 for each of his six flavors. And that is not all. “You’re on the shelf for 60 days,” said Elton, who lives in Granada Hills, “and if somebody else comes in and offers them money for that space, they sell it to them.”
A few months ago, Elton said, a competitor’s product started supplanting his in the major chains. “I know the slotting allowance is what they were looking for,” he said. (A Vons executive said the chain decided to discontinue Elton’s product because “in today’s environment his sales were very poor.”)
Today, Elton’s seltzer is carried in some mom-and-pop stores. But his company, High Sierra Springs, has lost $1 million and is nearly bankrupt.
“I’ve borrowed money on everything I own in the world, including that ranch,” he said. “I couldn’t stand up to those chains.”
In 1980, Debra Sarkisian, then 19, inherited the reins of her father’s gourmet coffee bean company after he died of a heart attack. Founded in 1972 in Irwindale, Sark’s Supreme Foods was for years the only marketer of gourmet coffee beans in Southern California supermarkets. Its trademarks were bright red packages and custom fixtures that customers could use to grind their own beans.
After her father’s death, “the chains saw that we stepped right into it and took over,” she said. “They felt a sense of protectiveness toward us.”
Big Competitor
Then, Sarkisian said, in 1986 General Foods came on the scene, offering Southland supermarkets hefty introductory allowances to stock its new Maxwell House Private Collection line of coffee beans.
“I was having to go in . . . and basically beg (stores) not to throw us out,” Sarkisian said.
By October, 1986, Nestle, which had tried earlier to buy Sark’s, came calling again, and the next July the Sarkisians sold to the huge Swiss food company’s Hills Bros. Coffee unit, partly because the big company offered a cushion against rivals.
Sarkisian, who stayed on as Sark’s vice president of sales and marketing, has fond memories of how the chains helped her family through, but her opinion of General Foods is harsh. “The chains had usually helped us through the hard times,” she said. “They really didn’t want to see General Foods come and eat us up. But money talks.” (A General Foods spokesman said the offer on Private Collection was “absolutely routine” and not intended to force out a competitor.)
Sark’s is still No. 1 on Southland supermarket shelves, and General Foods’ gourmet coffee bean line has made no serious inroads in this region.
Some observers fear that consumers could feel the effects of slotting allowances and similar practices in the form of higher prices.
“If I were a manufacturer and I consistently had to pay the slotting allowances . . . what are my alternatives?” said Stevens of McKinsey & Co. “One . . . is obviously pricing, which means consumers will pay more.”
In their defense, grocery chains rattle off a list of expenses involved in putting an item on the shelves. For each product, a supermarket must clear a slot in the warehouse, list the item in the computer, rejigger the design of store shelves and pay workers to stock the products. These costs, grocers say, shave the industry’s already razor-thin profit margin of 1% to 2.5%.
Furthermore, they contend, food makers’ rush to get new products into stores frequently results in inadequate marketing research and promotional support. Many products fail, forcing grocers to mark them down or otherwise dispose of items that do not sell.
“In some cases, we’re looking at near wanton product proliferation,” said Stuart A. Rosenthal, executive vice president of marketing at Vons, based in El Monte. Although many new products have “definite consumer utility,” he said, some manufacturers “are just grabbing for shelf space. . . . Often, our vendors look at our stores as if the shelves were made with elastic.
“If a manufacturer comes out with a new flavor or a scented instead of an unscented (product), you have to ask yourself: Is that something the shopping public needs?”
Indeed, many observers agree that new product activity has reached a hysterical level.
80% Expected to Fail
Tom Vierhile, executive editor of the Product Alert journal in Naples, N.Y., reports that 15,000 new food and consumer items--most of them mere variations of well-known brands--will be introduced this year. By many estimates, roughly 80% of them will fail, usually within six months.
Put another way, since 1981 the amount of shelf space has increased by 6%, primarily because of new stores, whereas product introductions have increased 300%, noted Gary M. Giblen, a vice president with the Rotan Mosle Inc. investment house in Houston. Of the 100,000 items available, a typical market carries between 20,000 and 30,000, at least twice as many as offered 10 years ago in about the same space.
In the last two years alone, Kellogg Co., for example, has come out with 13 new cereal products. In frozen foods, another area bursting at the seams, 150 new “novelty” products were introduced last year on top of 150 the year before. Consider the surge in frozen products geared to owners of microwave ovens. And when Clorox came out with a new detergent containing bleach, a retailer noted, “literally minutes later Tide (made by Procter & Gamble) was out with it.”
“Obviously, there’s an imbalance,” Giblen said. “It’s not 1950 when you could come out with roll-on deodorant and fulfill a fundamental need.”
Opponents maintain that retailers are viewing slotting allowances as a quick source of profits, a notion that retailers dispute.
“The retailer is looking at making money buying instead of making money selling,” complained Don Potter, president of a Westwood consulting firm that advises small and medium-size firms on packaging and marketing.
Responded Timothy Hammonds, senior vice president for research and education for the Food Marketing Institute in Washington, the supermarket industry’s largest trade group: “The key retailers that we have talked with . . . feel it is at best a partial recovery (of costs).”
Some supermarkets are more blatant than others at charging fees. Keith R. Lively, general manager of Shamitoff Foods, a maker of frozen fruit and cream bars based in Redwood City, Calif., recalled seeing a slotting allowance fee schedule posted in the headquarters lobby of Pathmark, a New York chain.
When Chiquita Brands, a unit of United Brands, came out with its Chiquita Pops frozen juice bars in 1985, stores “just started jacking up the prices and said, ‘If you’d like nine flavors . . . in, that’ll be $100,000,’ ” said Tom Cox, a former Chiquita Brands executive who is now vice president of sales and marketing for Vie de France, a McLean, Va., baking company.
Although such fees are routinely charged on a one-time basis, Cox said, suddenly stores were asking that the company pop for a payment each summer. Two years ago, Chiquita Brands spent more than $2.5 million on slotting allowances alone, he added.
Another promotional-fee wrinkle came out of the recent sale of Safeway Stores’ Houston division to a group led by management. The new owners soon asked the food trade for a one-time fee on items already in the warehouse. According to the trade publication Frozen Food Age, food makers so far have refused to accede to this “pay to stay” fee because they fear opening a Pandora’s box.
With some chains, food companies say, the charging of fees comes down to semantics. At Great Atlantic & Pacific Tea Co., operator of nearly 1,200 stores, “we don’t like the term (slotting allowances),” a spokesman said. “It’s misleading.” However, A&P; does ask manufacturers “for any allowance moneys that they’re offering to anybody else.”
(Some food companies, notably Kellogg and Campbell Soup, maintain that they do not pay slotting allowances. Stores are obligated to stock most of their brands to keep customers happy. But they both acknowledged payments of promotional or introductory allowances.)
So far, the furor over slotting allowances has not really spread outside the trade. Consumer groups have not risen up in protest. No headline-grabbing lawsuits have been filed.
Anna Davis, a spokeswoman for the Federal Trade Commission, said the regulatory agency is starting to “familiarize” itself with the practice but has no plans to undertake a formal investigation.
But many agree that there is potential for a challenge under laws such as the federal Robinson-Patman Act, which prohibits price discrimination and was designed to create a level playing field for small and large retailers and manufacturers.
‘Sensitivity on the Subject’
“There is sensitivity on the subject,” one Southern California supermarket executive acknowledged. “There are legal questions. We cannot knowingly demand of a manufacturer something we know in good faith he is not offering to others.”
When it comes to rebates and fees such as slotting allowances, “the potential for illegality is there if fees are being taken or demanded of some manufacturers and not of others on an equally proportionate basis,” said Barbara A. Reeves, a partner with the Los Angeles office of the Morrison & Foerster law firm.
Despite the uproar, some industry watchers figure the controversy will blow over. “My prediction is that over the long run it will get negotiated out,” said James H. Stevenson, director of the food industry management program at USC. “In two years, we probably won’t hear that much about slotting allowances.”
In the meantime, Al Rosenfeld, publisher of Frozen Food Age, hopes that such practices do not prove lethal to innovation.
“Some of the brands which are household words in frozen (food) could not have been started today,” he said. “Could a small independent broker like Charlie Lubin in Chicago have started Sara Lee? Could Vernon Stouffer, who had a restaurant chain but no identity in grocery stores, have started Stouffer? The answer is a resounding no.”
