Supermarket Fees on Stocking of Produce Undergo Scrutiny

Potatoes, onions and other basic commodities hardly seem like risky items for supermarkets to stock. However, growers say they are increasingly being charged tens of thousands of dollars in upfront fees usually reserved for food manufacturers introducing unfamiliar products such as a new flavor of ketchup or variety of potato chip.

Growers, regulators and others will gather today in a U.S. Senate Small Business Committee hearing to discuss how these fees, also known as slotting fees, are moving into the produce aisle, and the economic impact they’re having on the family farm.

Supermarkets used to collect slotting fees on only branded items in the center of stores such as bread, cereal and frozen food. But now they are asking distributors of unbranded commodities such as melons and mangoes to pay thousands of dollars for space on their shelves and, in some cases, to promote their crops in advertising circulars and to pitch in on construction of new warehouses.

“It’s just ridiculous,” said David Moore, a San Joaquin Valley grower who heads Western Growers Assn., a produce industry trade group. “These are known items that have been proven [to sell] over the years.”

Supermarket industry representatives explain that as the variety of produce they stock has almost doubled over the last decade, they’ve had to take a harder look at how much space they’re devoting to slower-moving items.

“The produce aisle, like all of the other departments in the store, is getting very scarce in shelf space,” said George Green, general counsel for the Food Marketing Institute, a trade group representing supermarkets. Green noted that the number of items in the produce aisle mushroomed to 335 in 1997 from 173 in 1987 as products such as baby carrots and bagged salads were introduced.

“Retailers are looking for a product mix that will attract customers to their store,” he said. And if they are going to gamble on slower-moving crops, they want help in promoting these products and covering their costs.

However, the expense of slotting is placing a heavy burden on small manufacturers and growers, said Sen. Christopher S. Bond (R-Mo.), who chairs the Senate committee. And, he said, it’s reducing consumer selection by giving only those companies who can afford to pay access to shoppers

“We have found that slotting is potentially a major problem for small businesses and consumers,” Bond said. “And it’s my belief that there may be serious violations out there of antitrust and anti-competitive laws.”

In a survey last year by research firm AC Nielsen, 90% of retailers said they charged slotting fees for new product introductions, an increase of 84% from the year before. Analysts say the increase was primarily due to the adoption of slotting by independent chains.

Under federal law, all retailers are supposed to get the same deals from food suppliers. But officials with KV Mart Co. in Carson, the owner of the Top Valu chain, believe they are getting less than other chains. “We hope that we are, but there’s really no way of knowing,” said Ty Hitt, KV Mart’s chief financial officer.

The country’s major chains declined to comment on how much they charge and for what products. However, many such as Kroger claim the fees are necessary to cover the costs they incur introducing new products, such as warehousing, computer inventory management, stocking and promotion.

However, manufacturers say that the tens of thousands of dollars they are forced to pay per item far exceeds these costs and prices them out of the market. One Southern California frozen food manufacturer said he has been reduced to making products for other large companies who can afford to pay the fees.

Slotting’s anti-competitive potential has prompted greater regulatory scrutiny in the last year. However, these investigations have raised more questions than they have answered.

The General Accounting Office, which began a probe of slotting fees a year ago at the request of Bond’s committee, has been unable to complete its investigation because retailers won’t disclose their practices. GAO officials declined to discuss the matter further.

Moreover, this year’s flurry of big mergers and acquisitions has kept the Federal Trade Commission from devoting more time and resources to its slotting investigations and pursuing litigation against specific offenders.

The FTC had held workshops on the matter and settled a case earlier this year with spice maker McCormick & Co., prohibiting it from offering supermarkets special slotting deals in exchange for a majority share of the spice aisle.

However, agency officials admit that they can’t handle everything. “We’re quite strapped,” said David Balto, assistant director for policy in the FTC’s Bureau of Competition.

The flurry of food industry acquisitions also is raising alarms about reduced competition among suppliers.

To remedy the situation, Bond has attached a $900,000 allocation for the FTC’s investigation of slotting practices to 13 appropriations bills moving through Congress.

“The retail industry stiffed the GAO,” Bond said. “We are stepping up the heat by giving an enforcement agency the power to go after the information.”