[Senate Hearing 106-]
[From the U.S. Government Publishing Office]
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SLOTTING FEES: ARE FAMILY FARMERS
BATTLING TO STAY ON THE FARM
AND IN THE GROCERY STORE?
----------
THURSDAY, SEPTEMBER 14, 2000
United States Senate,
Committee on Small Business,
Washington, D.C.
The Committee met, pursuant to notice, at 1:10 p.m., in
room 628, Dirksen Senate Office Building, the Honorable
Christopher S. Bond (Chairman of the Committee) presiding.
Present: Senators Bond, Burns and Kerry.
OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND,
CHAIRMAN, COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES
SENATOR FROM MISSOURI
Chairman Bond. Good afternoon. The hearing of the Small
Business Committee will come to order.
I have to apologize. For those of you who are familiar with
the way the Senate works you will realize that Murphy was an
optimist when he propounded Murphy's Law. We have just had a
vote that started a few minutes ago. That is why I am late.
Several other of my colleagues are tied up in votes. We also
have Floor debates and other activities going on, but I thought
it was important that we get started on this extremely
significant hearing. I want to thank everybody who has come
today, witnesses and those who came just to learn more about
it.
One year ago today the Small Business Committee held its
first hearing on the use of slotting allowances by the retail
industry and the impact that that has on small manufacturers.
That hearing came about because of complaints expressed to my
Ranking Member, Senator Kerry, and me from small manufacturers.
I am pleased that we have worked on this problem in a
bipartisan manner.
Since that first hearing, the Committee continued
investigating this practice and, at the Committee's request,
several Government agencies initiated efforts to take a closer
look at slotting allowances and the impact of these fees on
competition.
This afternoon the Committee will continue reviewing what
we have learned about this issue within the last year, what
remains to be examined, and the steps Congress and Federal
agencies should now take, among other things, to gain a better
understanding of slotting fees.
Additionally, this hearing will address produce farmers
being compelled to pay slotting allowances and similar fees.
Many small produce farmers and the associations representing
them contacted the Committee to express their grave concern
about the type of fees contributing to the downfall of
America's small family farms.
As we will hear today, small farmers receive only a small
fraction of the price consumers pay for produce. When farmers
are also required to pay up-front fees or provide free
merchandise to retailers to stock their produce, it becomes
significantly more difficult for farmers to make a profit and
continue to farm. We will hear today about these types of
retail practices and what they mean for small farmers and
consumers.
The Small Business Committee began looking at the issue of
slotting in response to numerous complaints, as I said,
received from small businesses about what appears to be a
fundamentally unfair and perhaps unlawful retail practice which
has continued to be concealed not only from the eyes of
Congress and the agencies but from consumers and the public at
large.
There are many definitions about what a slotting fee is,
but most agree that slotting fees generally take the form of
up-front payments of cash or product from a manufacturer to a
retailer in exchange for the retailer stocking the
manufacturer's products. Through the Committee's investigation
hearing last year, we learned that large-chain retailers
routinely demand substantial up-front slotting payments from
manufacturers to get products on the shelf or to keep them on
the shelf. We are talking about the most expensive real estate
in America.
Chain retailers often exclude the products of small
businesses simply because they cannot afford the excessive
payments. Retailers frequently ignore the quality of a
manufacturer's product when determining who gets on and who
stays on the shelf. Whether a product is available to shoppers
may depend solely on how much the manufacturer is willing to
pay the retailer.
During its investigation the Committee has heard countless
theories and anecdotes about what these fees are, how retailers
request the fees from manufacturers, how they are treated for
tax purposes and how these fees harm consumers through
increased prices and decreased consumer choice and innovation.
In order to make informed policy decisions about this issue
Congress needs to get the full picture of what is occurring in
the marketplace. To truly know when these fees are acting as an
anti-competitive force, Congress and relevant Federal agencies
must be able to compile the facts about how much retailers
collect, how the fees are negotiated, and for what the fees are
used. Acquiring this data, however, has been almost close to
impossible.
It seems that these fees are the ``dirty little secret'' in
retailing. Often nothing is in writing between the manufacturer
and the retailer, and the amount of money paid in slotting fees
is usually known only to supermarkets, their brokers and
distributors.
In addition, most small manufacturers have expressed
considerable fear of retribution from chain retailers for valid
reasons and we have heard too many instances where someone
complaining about slotting fees has been totally excluded from
the market. Anybody who complains about the fees publicly, even
anonymously, if they are discovered, gets dealt with.
Following the hearing last year this Committee requested
the GAO to conduct a study on the use of slotting fees and
other related fees in the retail grocery industry. We asked the
GAO to collect the basic information on the types of fees being
charged, the amounts, how manufacturers and retailers account
for the fees, whether the fees are the same for everyone, the
manner in which retailers demand such fees and the existence of
the fees in other retail environments. Unfortunately, the GAO,
despite its best efforts, could not satisfy this request.
Now we think the Small Business Committee has been very
patient and we worked with both the retail industry and food
manufacturers for the last year. We tried to get the industry
to disclose data on slotting fees voluntarily. Unfortunately,
these efforts have been futile.
Committee staff has expressed that frustration by drafting
possible language to require disclosure on an annual basis of
these fees. Unfortunately, the industry representatives were
unable to appear today to answer questions about it to justify
the process and we are going to be asking them some questions
about it and asking them why we should not take steps to assure
that these fees are disclosed to competitors and to consumers.
The Federal Trade Commission has been focusing on slotting
fees. They held a workshop in May to address the legal issues
surrounding the practice and we appreciate the FTC's work. The
FTC has told us they cannot address the workshop findings until
a final report has been considered by the Commission.
Therefore, the staff is not participating today. We appreciate
their cooperation and interest and I have undertaken an
initiative to include in the FTC's budget $900,000 in the
Commerce, Justice, State appropriations bill to examine the
anti-competitive effects of slotting fees and possible
remedies. The Committee intends to follow-up with the FTC to
make sure that the Federal Government gets a full and complete
picture and deals with any abuses they find.
One disturbing issue that arose in the workshop was the
phenomenon that retailers charge up-front fees for small fruit
and vegetable growers just to get their products on the shelf.
The Committee had heard from other farmers about these unsavory
practices.
At the hearing last year, representatives of the industry
said the reason they have to charge fees is to mitigate the
risk of putting new products on the market. Well, when you are
talking about a product like this, a tomato, or like this, an
orange, there is not a lot of risk. When I go into the
supermarket to buy citrus fruit or a tomato, I am going to buy
the best looking, best quality I see on the shelf.
You do not need a slotting fee to convince somebody that
they need to buy tomatoes. That is usually on my shopping list
when I go to the grocery store. In any event, these are not new
products, and accordingly, the Committee decided it was
appropriate to hear about why fees are requested from the
produce industry and what they mean for the small farmer.
[The prepared statement of Senator Bond follows:]
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Chairman Bond. Our first panel, and I invite them to come
forward, are witnesses representing almost 90 percent of the
companies and farmers in this country who supply fresh fruits
and vegetables. They will address that issue.
The second panel includes the Administrator of Economic
Research Service of the Department of Agriculture. The GAO will
testify on the second panel about their unsuccessful efforts.
And rounding out the second panel will be a distinguished
academic, Professor Gregory Gundlach, who will speak on the
status of research on slotting allowances and the evolving
theories on the effect this practice has on consumers and
competition, and why it is important for the Federal Government
to receive data on slotting fees.
We begin the hearing by welcoming Thomas Stenzel, president
of United Fresh Fruit and Vegetable Association; David L.
Moore, president of the Western Growers Association; and
Michael Stuart, president of the Florida Fruit & Vegetable
Association.
Welcome, gentlemen. We look forward to your testimony. We
will begin with Mr. Stenzel.
STATEMENT OF THOMAS E. STENZEL, PRESIDENT AND CEO, UNITED FRESH
FRUIT AND VEGETABLE ASSOCIATION, ALEXANDRIA, VIRGINIA
Mr. Stenzel. Good afternoon, Mr. Chairman. Thank you very
much for having us at this hearing.
United Fresh Fruit and Vegetable Association is a not-for-
profit trade association representing the producers,
distributors and marketers of fresh produce in the United
States, working together with many our colleagues around the
country representing regional associations and also working
with our retail and food service customers. Our members range
from the smallest family businesses to the largest
multinational produce growers and marketers.
I am pleased to testify today on an important issue to
consumers and to our industry and congratulate the Committee
for its attention to this issue. Our industry is committed to
providing Americans with a wholesome and abundant supply of
fresh fruits and vegetables at the lowest possible cost, and
that goal will be paramount in my testimony.
Food retailing, distribution, processing and production are
experiencing today greater change and consolidation than at
anytime in history. Companies are responding to marketplace
forces to seek greater efficiencies that better serve the
ultimate consumer. Yet, at the same time pressures to compete
in this environment are sometimes leading buyers and sellers of
produce to become adversaries rather than partners and often to
the detriment of consumers.
Now our industry strongly believes in a free market in
which produce suppliers and food retailers share the common
goal of serving the consumer. The Perishable Agricultural
Commodities Act assures fair trading standards for fresh
produce in the United States. And we are ever vigilant in
seeing that the Department of Agriculture enforces this
extremely effective law. Yet, congressional oversight is needed
in today's rapidly changing marketplace. The Federal Trade
Commission, the Department of Justice, and the U.S. Department
of Agriculture all have an obligation to understand the
changing business dynamics in the food delivery system and to
ensure that marketplace trade practices do not become
marketplace abuses of power.
In recent years, a number of trade practices more familiar
in the dry grocery area have become familiar to produce
companies. Beginning within the last decade and the growth of
packaged salads in the produce department, we have often seen
requests for slotting fees and similar payments in order to do
business.
Now perhaps we were naive not to anticipate this, but many
produce growers simply had no experience with packaged foods
and were taken aback. It just somehow did not seem fair to have
to buy shelf space rather than simply offer your best price and
the best quality and let the chips fall where they may.
We are not so naive today, and our larger challenge is the
seemingly growing appetite for side deals, slotting fees,
rebates, allowances, promotional fees, and all sorts of charges
ranging from warehouse construction to store remodeling that
are not contained in contracts, do not appear on invoices, and
are otherwise unaccounted for in transactions.
As this Committee and the Federal agencies involved
evaluate the topic of slotting fees, I urge you to look with
broad perspective at the impact of all of these types of off-
invoice fees and not be constrained by a more narrow definition
of slotting.
Our industry's concern about slotting fees and these off-
invoice payments is based on several factors. First, we believe
that consumer choice and access to produce will be reduced. Let
me emphasize that I do not just refer to the up-front slotting
fees. Today, produce companies are being asked by some
retailers, not all, to pay numerous off-invoice fees unrelated
to the actual product costs. These rebates and allowances are
sometimes tied to promotions or advertising which can serve
consumers and growers alike. But in many cases they are more
likely to be unrelated to any particular incentives or
performance. Because of its charter, this Committee will
naturally be concerned that small- to medium-sized growers are
particularly vulnerable to these demands, but even the very
largest produce companies are concerned about these practices.
Certainly we are concerned about fairness to our industry,
but in some cases these fees paid in advance can leave a
retailer with very little incentive to move more produce volume
if their profit is tied to buying the produce rather than
selling it to you as a consumer. That raises serious questions
about public health as well, as government authorities tell us
the simple step of eating at least five servings of fruits and
vegetables a day is critical in preventing cancer, heart
disease and other chronic diseases. The soaring cost to public
health of artificially high-priced fresh fruits and vegetables
should be a serious national concern.
Let me address the issue of transparency in how these
trading practices work. Mr. Chairman, you are to be commended
for helping to bring these issues out of the closet. The bright
lights of this hearing room are having their effect. I am
pleased to say that through your efforts, the reviews by the
Federal Trade Commission are having some beneficial effects in
the industry. We hear from our members that perhaps there is
some dampening of the most egregious abuses that we have heard
reported.
To that point, transparency and knowledge of industry
practices will help everyone in produce marketing whether they
are a grower or a retailer. In this mysterious world of off-
invoice fees, suspicion grows and trust cannot flourish.
Competitors battle ghosts rather than respond to true economic
incentives. Many times we have found retail buyers who ask for
fees simply because they are afraid their competitor is and
they do not know what is being done anymore than the growers
do.
Our organization does not believe this is simply a battle
between produce buyers and sellers, but is rather a wake-up
call for the entire fresh food production chain to better
understand the cost and the values of delivering produce to
American consumers. Basic business economics will prevail in an
environment in which these transactions are not cloaked in
mystery, but are negotiated openly, displayed on invoices, with
specific performance requirements.
Finally, let me mention a slightly different concern.
Traditional antitrust concerns have focused on regulating
manufacturers' behavior to ensure fair competition, rather than
focusing on the powerful buying groups. Frankly, we are
concerned today that produce growers may be at greater risk
than their customers who demand some of these payments. There
is great dissension within the retail supermarket industry
today. Many independent grocers feel that they may not be
offered the same deals as some other chains get and they are
madder than heck and say they are not going to take it anymore
either.
Under the Robinson-Patman Act, sellers of products are
required to offer the same terms to all competitive customers.
When one retailer demands a special up-front deal to do
business, a grower is placed in a difficult position. What from
one side looks like a demanded concession may look like
``special terms'' to competing customers in a given market. As
an observer of the stresses in food retailing today I see a
real risk that grocers who imagine they are not getting the
same deal as other retailers may be more likely to take action
against the growers under these antitrust laws.
In addition, as produce suppliers begin to adapt to the
marketplace size of their retail customers, we again face the
risk of litigation if we even discuss slotting practices among
suppliers. Let me say that my association and our industry
fully comply with antitrust laws regarding pricing. But we also
believe that many of the demands currently made in the
marketplace should not be considered part of price
negotiations, as they are off-invoice matters unrelated to the
sale of any lot of produce. In these cases, we believe Congress
and the regulatory agencies should specifically recognize and
protect the ability of produce suppliers to discuss such
practices openly, without regard to antitrust concerns about
price setting.
I would call your attention to one exhibit here today, the
example on the chart to my right of a request for a warehouse
stocking charge. In this case produce suppliers fear even
talking about whether they would agree to pay such a demand.
And yet, this is clearly a case in which we believe that
suppliers should be able to simply look at that demand; say it
does not make sense; we do not want to pay it. Under antitrust
laws we have great fear about retribution in terms of price
setting from suppliers discussing whether to pay these fees.
[The chart follows:]
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In conclusion, today many growers are concerned with what
they see in the marketplace. We recognize that many of the
changes are going to require new ways of doing business, and
that is true both for produce growers and our retail customers.
We believe in effective free market solutions for both buyers
and sellers to serve the ultimate consumer. But to find those
solutions we think the changing nature of our food system must
be addressed by all parties openly and constructively.
We appreciate the Committee's commitment to this process.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Stenzel follows:]
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Chairman Bond. Thank you very much, Mr. Stenzel.
Mr. Moore.
STATEMENT OF DAVID MOORE, PRESIDENT, WESTERN GROWERS
ASSOCIATION, NEWPORT BEACH, CALIFORNIA
Mr. Moore. Good afternoon, Mr. Chairman. My name is David
Moore and I am a farmer and shipper of fresh produce in
Bakersfield, California. I also serve as president of the
Western Growers Association whose 3,500 members grow, pack and
ship fresh fruits, vegetables and nuts in Arizona and
California.
WGA appreciates the opportunity to testify before the
Senate Committee on Small Business regarding the impacts of
slotting fees and retail consolidation in the fresh produce
industry. Today, small, medium and large farmers are battling
like never before to remain economically viable. The
proliferation of slotting fees and other anti-competitive
business practices by the large supermarkets is a very real
threat to family farmers. Congress and the Administration must
take action to address this issue.
As retail consolidation continues, growers are seeing the
use of slotting fees and other anti-competitive business
practices expand. This is strong evidence which indicates that
retail consolidation has gone too far.
It is important to note that retail consolidation in the
fresh produce industry is producing anti-competitive practices
which go beyond the use of traditional slotting fees. Over the
past few years our growers have confronted the following
practices or fees imposed by retailers: pay-to-play, pay-to-
stay, these fees are appropriately named; rejection without
reasonable cause of perishable commodities and violations of
the Perishable Agricultural Commodities Act; computer/
technology-related fee charges; off-invoice demands;
advertising or promotional allowances; slotting fees; interview
fees; category management fees; warehouse construction/new
store opening fees; and indemnification and hold harmless
agreements.
As an example, one retailer in California known as Ralphs/
Food 4 Less Warehouse Stores demanded of grower/shipper
suppliers a ``new distributing facility opening fee.'' This
effectively required monetary payment either in free product or
direct payment to help underwrite the cost of construction of a
new warehouse that was constructed to benefit the efficiency of
the retailer. There is an all too subtle message that a refusal
to pay-to-play or refusal to pay-to-stay can be the difference
between the ability to sell or not sell to a particular
retailer. I know of no other industry that is required to
provide working capital for a customer's new distribution
facility.
Another example, multiple large retailers have demanded
food safety audits of grower/shipper farming operations by a
third party auditor. The recommendation requires the
utilization of a specific auditor recommended by the retailer
and also the dissemination of one's information on a web site
which incurs significant expenses for the grower/shipper. This
demand allows for no reimbursement for the cost of this extra
expense of validating practices that may have already been
documented by the grower/shipper's own internal farming and
good agricultural practices.
In another example, a prominent member has articulated that
his business was ``encouraged'' by a dominant retailer to
contribute $30,000 under the guise of a promotional allowance
for a small ad for the commodity he was selling. The shipper
was not assured that additional product would be purchased or
that any long-term relationship would be maintained or that any
priority for that shipper would be provided in supplying
product to the retailer.
Most recently, our grower/shippers have been encouraged by
one major retailer to prepare for participation in a new e-
commerce venture for selling and buying perishable commodities.
While these technological advancements which facilitate the
communication, transmission of an entire transaction via
computer will be beneficial to all in the distribution chain,
in this case the fee assessed for each individual transaction,
rather than being cost-shared by all parties involved, will be
a grower/shipper obligation exclusively.
Finally, a retailer recently assessed a fee to help
``support'' the opening of a new warehouse facility. I am told
that a supplier was assessed $2,000 per stock keeping unit
which, depending on the number of produce items you may sell,
can be tens of thousands of dollars that are unilaterally being
deducted from the remittance by the retailer. Clearly, a
unilateral institution of fees by the retailer constitutes a
direct violation of the Perishable Agricultural Commodities Act
(PACA).
Another disturbing practice our members are experiencing is
the rejection, without reasonable cause of perishable
commodities. Large retailers are rejecting produce and are
arbitrarily refusing to comply with the terms of the contracts
without giving any reason or opportunity for inspection. They
just do not want it. This also is a flagrant violation of the
PACA, and is a prime example of the dark side of excess retail
consolidation in our industry.
These are just a few examples of the many types of off-
invoice demands and other arrangements which have not
traditionally been a part of the produce industry. In short,
the balance of power between supplier and retailer has shifted
dramatically in favor of the large chain supermarkets over the
growers. The high degree of retail consolidation is providing
the large retailers with the market muscle needed to squeeze
small growers through anti-competitive practices.
Historically, the consumer would benefit from a surplus of
a given fruit or vegetable commodity through lower prices.
Today, however, declines in prices paid to growers are not
being passed on to the consumer.
WGA maintains a web site (www.wga.com) which reports the
price spread between the price paid to the grower and retail
price charged to consumers. We have seen price spreads of 400
percent to 1000 percent and even higher for commodities such as
iceberg lettuce, naval oranges, cauliflower. And if you will
notice the chart over here, we handle probably 24 different
items we have at all times on our web site but in the interest
of time and clarity we just brought these three examples here.
But you can see the spreads.
[The chart follows:]
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I might just highlight the fact that we have had a
disastrous year in the naval orange business because of
overproduction and other things, which is our fault, no one
else's but the price has not declined. It is a higher price
this year than last year when the retailers were paying a much
higher price to the shippers.
In many instances, wholesale prices have dropped without
any corresponding decrease in the retail price. This is strong
evidence that consumers are being adversely impacted when large
retailers have the market power to keep prices high when
wholesale prices paid to growers are declining. It is important
to note that the price spreads of 400 percent to 1000 percent
between shipper and retailer do not include any additional
payments by the growers to retailers in the form of slotting
fees, rebates, promotional allowances or other off-invoice
fees.
Unchecked retail consolidation is also adversely impacting
family farmers. The overriding trend is that growers are seeing
strong downward pressure on wholesale prices and operating
margins, while facing slotting fees and other new off-invoice
payments. In essence, the small farmer is being squeezed by
retailers who are getting larger and larger through
consolidation, becoming totally dominant in their market.
The downward price pressure is felt most acutely by the
smallest growers. Should this unhealthy trend continue, it will
be difficult for many U.S. fruit and vegetable growers to
maintain economic viability in markets dominated by large
retail chain stores.
WGA believes that the adverse impacts of the unchecked
retail consolidation on both growers and consumers demands
serious and urgent attention by the Federal Government. To
date, we have not seen an adequate response from the Federal
Government on this urgent matter. WGA urges the appropriate
Federal agencies to vigilantly enforce Federal antitrust laws
to maintain healthy competition and prevent anti-competitive
practices in our industry.
If the use of slotting fees and other off-invoice payments
falls into a gray area of antitrust law, then Congress should
amend the law to provide regulators with guidance in the area.
The FTC should examine the feasibility of developing specific
guidance to provide the foundation for acceptable or
unacceptable demands by retailers.
Possibly the best way to promote vibrant and healthy
competition in the fresh produce market is to prevent further
retail con-
solidation in our industry. Another suggestion is to require
the
disclosure of slotting fees and off-invoice payments in the re-
tailer's consolidated financial statements, such as the
company's Form 10-K.
In closing, WGA believes that slotting fee practices and
other anti-competitive practices are a serious problem that
demands further congressional attention.
I thank you very much, Mr. Chairman.
[The prepared statement of Mr. Moore follows:]
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Chairman Bond. Thank you very much, Mr. Moore.
Mr. Stuart.
STATEMENT OF MICHAEL J. STUART, PRESIDENT, FLORIDA FRUIT &
VEGETABLE ASSOCIATION, ORLANDO, FLORIDA
Mr. Stuart. Thank you very much, Mr. Chairman, and good
afternoon. Florida Fruit & Vegetable Association is a grower
organization that represents producers of fresh vegetables,
citrus, tropical fruit and a variety of other commodities. Our
members range in size from single-commodity growers of less
than 100 acres to larger, highly diverse grower/shippers. A
large portion of our membership is indeed family-based.
While the subject of today's hearing is obviously slotting
fees, I think it is important to touch briefly on what we
believe is really the root cause of all of this, and that is
consolidation of the retail industry. According to The Food
Institute Report, the five largest food retailers in the United
States accounted for a whopping 40 percent of industry-wide
sales of $271 billion in 1998 compared to 5 years earlier when
it took the top 20 companies to reach the same percentage.
As supermarket chains in the United States become fewer and
larger, these retail giants enjoy a considerable bargaining
advantage over their suppliers. This is especially alarming for
fresh fruit and vegetable growers, many of whom are, in fact,
small- to medium-sized family businesses. As buying power
concentrates within the retail grocery industry, fresh produce
growers have fewer customers to whom they can sell their
products. The net result is continued pressure to reduce prices
paid to growers.
Unfortunately, consumers rarely see the benefit of these
lower prices at the supermarket. For the past several years,
the Florida Department of Agriculture and Consumer Services has
conducted weekly surveys of average farm and food retail prices
and major metropolitan areas around the State. The data
generated by these surveys often show a wide disparity and a
general lack of relationship between farm and retail prices for
selected fruits and vegetables. When this happens, consumers
get no relief at the marketplace and growers see no increased
sales of their products.
In our opinion, it is not likely that U.S. consumers will
ever benefit from the continued consolidation of food retailers
in this country if consumers' experience in the United Kingdom
is any indication. A 1998 study by the Office of Fair Trading
in Great Britain, a country now dominated by four grocery
retail chains, suggests that British retailers are increasingly
able to retain the greater profits from their increased
bargaining power rather than passing them onto consumers.
A November 17, 1998 article in Britain's International
Express estimated that the average family in Britain pays over
1,000 pounds more a year for food than those on the European
continent.
That brings us to the issue of slotting fees which is
obviously the subject of today's hearing. In addition to these
heightened pricing pressures, fruit and vegetable growers and
shippers are increasingly being asked to provide payments such
as up-front fees, allowances or rebates to retailers,
ostensibly to support the marketing costs of the growers'
crops. In reality, however, growers tell us that these pay-to-
play or pay-to-stay payments rarely result in any visible
benefits and may only serve to boost the profit margins for
retailers. Many of these requests for payments come in the form
of per package rebates that have no relation to product
performance.
One request by a large retailer, it has been mentioned here
a couple of times today, involved a per package contribution in
order to fund the construction of its new produce distribution
facility. So in addition to growers having to finance their own
operations, they are also being asked to make direct payments
to pay for capital improvements for the customers.
I think we all realize that slotting fees have been a
mainstay in the dry goods section of retail supermarkets for
many years. We would argue, however, that slotting fees have
absolutely no place in the produce department of a supermarket.
The highly perishable and seasonal nature of our industry makes
that completely impractical. Because fruits and vegetables are
priced-based on supply and demand forces, these are costs that
cannot be passed along in the marketplace. The bottom line is
that growers cannot recover the costs of these fees.
Ultimately, the cost of this pay-to-play practice comes from
growers' profit margins, which in today's environment are very
slim and in some cases nonexistent.
In addition to slotting fees consolidation has resulted in
other trade practices affecting growers. In recent years,
retail buyers have put increasing pressure on growers to agree
to terms outside regulations under the Perishable Agricultural
Commodities Act. The net impact of this for a grower is not
only the loss of the use of his money, but also the potential
loss of his rights under the trust provisions of the law. In
order to keep business, growers also report that they more
frequently have to accept take-it-or-leave-it price adjustments
on product after delivery, even though there are no defects
that would warrant such a reduction.
Again, these are just but a few of the marketplace issues
and trading practices that growers are facing in the
marketplace. Believe me when I tell you that the scope and
variety of these fees are only limited by the creativity of
those requesting them.
Again, Mr. Chairman, we greatly appreciate your time, the
Committee's time, and your staff 's time in investigating this
issue and we look forward to your questions.
[The prepared statement of Mr. Stuart follows:]
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Chairman Bond. Thank you very much, gentlemen.
In both your written and oral statements, several of you
touched on the problem with getting farmers to come forward and
testify even anonymously about the charging of slotting fees.
Why are your members so reluctant to talk publicly about the
issue?
Mr. Stenzel.
Mr. Stenzel. It is a very difficult issue, Mr. Chairman.
Clearly, these are buyers and sellers in the marketplace. When
our members have a relationship with a particular retail
customer the last thing they want to do is call that customer
out, if you will, and talk about what is an extremely
controversial subject. I think it is very clear to everyone in
the room and certainly to the Committee that the retail
industry is not here to defend these practices. I think that is
part of the problem, that this has been that ``dirty little
secret'' that you talked about in your introduction.
The more we can do to bring this area out into the light,
let us talk about these fees and if they can be justified, if
they help the consumer, then fine. But let us have it discussed
and transparent and not cloak it in the hidden area between
just that business relationship where one party is in such a
weaker position.
Chairman Bond. We found in our hearing a year ago that out
of some 80-plus people we talked to only 6 of them agreed to
testify, 3 of those backed out. Two of them actually came with
hoods on and disguised voices. Frankly, we had to go to great
lengths to get them. This year we found that the fears were
even greater. Mr. Moore, how does it look from your standpoint?
Mr. Moore. Yes, we have had some cases where people have
challenged the retailer--not only do they lose the business,
they will never be able to do anymore business with that
retailer. They have a way of going out and warning the others,
``Are you going to do business with that . . .'' and I will use
the term, ``. . . SOB?'' We have actually had people cut out of
the market--not only the one that he is maybe addressing,
having a problem with, or has challenged some of their
practices, but as a result of their complaints, they have been
driven out of business.
Chairman Bond. Mr. Stuart, I might add another question
here. During the investigation the Committee heard arguments
that fees charged to growers whether variable or fixed really
are passed along to consumers in the form of lower prices and
that they do benefit growers. Have you any information on
whether price decreases have been associated with fees paid by
growers and do your members see any benefit for them in these
up-front fees?
Mr. Stuart. Mr. Chairman, quite the opposite. If I had to
list all of the calls I get on a weekly or a monthly basis from
my members, this particular issue ranks head and shoulders
above any other in terms of an issue that brings more--the most
emotion to the table in terms of marketplace practices. The
reason they are calling is because they see no value in the
marketplace. They see, as these charts exemplify, over the last
few years the returns back to the grower, back to the farm
being reduced, and becoming tighter to the point where you have
got a lot of red ink on the balance sheet, yet they see this
disparity between the farm price and the retail price seem to
grow on an annual basis.
So no, I do not see that there is any benefit whatsoever
back to the grower at this point in time. I see no evidence
whatsoever that there is any benefit to the consumer, certainly
not if you look at some of these markups and see what the
retailers are charging for some of these products in various
cities around the country.
Chairman Bond. Mr. Moore, you testified that besides being
president of the Western Growers, you are also a produce
farmer. Have you experienced personally any of these demands
for fees?
Mr. Moore. Yes, I have, Mr. Chairman, and a lot of time if
it is not directly, it will be because sometimes I am forced to
send my product through another larger shipping organization.
It gets passed through to growers so naturally those fees have
to be paid by someone. So I am affected on the products that I
grow.
Chairman Bond. Are any of you finding that these fees are
charged only in connection with exotic produce such as star
fruit, or are they charged across the board for the basics that
we all get in the produce department?
Mr. Moore. I will use some examples. We truly understand
why the retailers--are renting space. If they have a product
come in, they do not know if it is going to move. A few years
ago we had a product called broccoli flower. Well, when it
first hit the market, they did not know if it was going to move
or not. We understand why you might have to do something to
encourage the retailer to have that space used for that. Items
such as that or when these, what we call value-added products,
the lettuce mixes and all that, when they first started they
were not moving out rapidly. So we understand why you have to
do something to get your product on the shelf.
But again, the perfect example you made when this hearing
started, what is new about a cantaloupe, an orange, a potato,
or a head of lettuce? I mean that is the part that bothers me.
These are pretty standard and we know that they are going to
move and why isn't the 400 percent to 800 percent markup enough
without having to go to these other measures?
Chairman Bond. Mr. Stenzel, BATF has prohibited the payment
of slotting fees in relation to marketing of alcohol on the
grounds that the fees do not promote competition or benefit
consumers. Now we understand there are special policy
considerations surrounding the sale of alcohol, giving BATF the
authority but is there any reason why the similar rationale
should not apply in produce?
Mr. Stenzel. Mr. Chairman, I think one of the most
important things that this Committee has been able to do with
your leadership thus far is to work with the Federal Trade
Commission to really get the Bureau of Competition energized.
We salute what you have done with adding the $900,000 in their
budget for this particular issue. They have got to look at
that. They have got to look seriously at what type of
regulation might be appropriate in this whole area of slotting
fees for perishable products where they are clearly not
appropriate.
I think it is important that the FTC looks at guidance to
the industry. That may be certainly an outcome of the hearings,
the 2-day hearings that the FTC held earlier. I think they have
got to look at transparency. Again, I am going to come back to
that as I think the light of day shines an awfully big
spotlight, and that may be our ultimate best solution.
Chairman Bond. Do any of you know of any instance where
there is disclosure to any of the ultimate consumers of your
produce? Do consumers have any idea about the payment of fees
going on to get that produce on the market?
Mr. Stuart. No evidence of that whatsoever that I have
seen.
Mr. Moore. None whatsoever.
Chairman Bond. Mr. Stenzel.
Mr. Stenzel. No, and in fact, Mr. Chairman, we do not find
it in terms of disclosure and financial accounting within the
retail supermarket industry. I think that is one of the
concerns, as economic theory might hold that some of these
payments, particularly if they are variable payments or volume-
based would be passed on to the consumer. But that is making
the supposition that they are used to reduce the cost of goods
sold.
Clearly, in many of these cases these payments are
accounted for and there is no relationship to reducing the cost
of goods sold to the consumer. So not only are they not
disclosed to the consumer generally, they are not disclosed in
accounting particularly at the retail level.
Chairman Bond. If they are not disclosed, that is something
our friends at the IRS might be interested in. That is another
problem. In the slotting hearing in 1999, we heard instances of
special payments which included things like hiring babysitters
and buying cars that probably did not show up in anybody's 1099
or their 1040.
We have been joined by my colleague from Montana, Senator
Burns. Would you have any questions? Is there anything that you
would like to put in at this point?
OPENING STATEMENT OF THE HONORABLE CONRAD BURNS, A UNITED
STATES SENATOR FROM MONTANA
Senator Burns. Thank you, Mr. Chairman, and thanks for this
hearing. I did not know you started at 1 o'clock. I thought it
was 1:30 and here I come along, I am consequently a little late
and I want to apologize for that.
These slotting fees and selling shelf space, I understand
that Safeway is not buying any domestic lamb now, they only
want New Zealand Lamb and things like that, strike the fear of
the heart of all of us who represent the agricultural
community. We do not know how to break this practice to be
honest with you.
Things are not good on the farm. We are selling wheat now
for less than we did before World War II. We are not getting
along very well out there, but yet our cost of pickups and
equipment and everything else keeps going up and we are really
in a bind. And we do not see one son of a gun in this country
who gives a damn, not one, not a packer or a processor or
purveyor or a grocery store trying to keep our people,
producers, in business. Not one.
I think we are at the end of things. I have said what has
been wrong with agriculture for a long time, we cannot get
enough of the consumer dollar back to the farmer or ranch. But
as long as this country has its belly full, consumers will not,
they are not going to care. Do you realize right now if I could
gather up enough money to invest in an oil well on a
speculative basis or a gas well, do you know how long it would
take to put together a drilling crew? Forty-five days.
Our ability to look for, discover and lift petroleum from
this earth, that infrastructure has been decimated because all
of those roughneckers went to work somewhere else. The same
thing is going to happen in agriculture. It will happen because
we cannot take these low prices. And we have got very few
people to replace now. We have got a lot of people who think
they can farm but they will find out how hard it is, you know.
They do not pass along the consumer dollar and it is a bad
situation.
We have had a lot of mergers at the processing level. That
means that in livestock you have got three packers killing 85
percent of the cattle. We do not take it far enough as far as
antitrust and who holds the key, who has got their hand around
the sack. I am here to tell you that we have a crisis in
American agriculture right now. It is a crisis. And this
slotting business and this selling of shelf space is killing
us. You can have the best product in the world and it won't get
sold. I just brought this along because we had a little lunch
today.
How come you started at 1 o'clock anyway?
Chairman Bond. The staff, they did not want me to stay
there for that blueberry cobbler.
Senator Burns. I brought you some jam.
Chairman Bond. I wanted the cobbler.
Senator Burns. I will go back and get you the cobbler.
Chairman Bond. That is a deal.
Senator Burns. But this is what we are talking about. This
is the thing, what we are talking about. I can have a mediocre
product, which might not be worth anything but if I have a big
checkbook, I can get shelf space, not because of the product,
because of the checkbook. And that worries me, that really
worries me. So as far as questions go, I do not have any. I
want to put my statement in the Record.
Chairman Bond. Without objection.
[The prepared statement of Senator Burns follows:]
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Senator Burns. And I think as we see this thing unfold and
take a look at it next year, I think there are several of us
that will have a lot of ideas about how we will get more
dollars back to the man on the land because he is hurting.
I went to a funeral of an old cowboy friend of mine. He was
100 percent cowboy, 76 years old. He went out, stepped on his
horse in the latter part of August, and the old horse kind of
got a cold back. He bucked a little bit, and threw him off. My
good friend's head hit a fence post and now he is in the
ground. But he went in the ground happy and I think in
agriculture he is probably in the best place right now. I
really do.
But, we have got some real problems and we are going to
have to come up with some people who care. And I have not seen
those people surface yet.
Thank you, Mr. Chairman.
Chairman Bond. Thank you very much, Senator Burns.
Obviously, the Senator from Montana is one who does.
Gentlemen, we appreciate very much your testimony. We are
delighted to have you here. We will leave the Record open for
further questions and if any of the Members who are tied up in
other meetings have questions, we will submit those for the
Record and ask you at your earliest convenience to respond. If
any of you have any further comments based on what goes on here
today, the Record will be open for 2 weeks. Anything else you
want to add, Senator Burns?
Senator Burns. No.
Chairman Bond. Thank you again, gentlemen.
Mr. Moore. Thank you, Chairman.
Mr. Stenzel. Thank you, Mr. Chairman.
Chairman Bond. Our second panel is comprised of Lawrence
Dyckman, Director, Food and Agriculture Issues, Resources,
Community, and Economic Development Division of the U.S.
General Accounting Office; accompanied by Andrea Brown,
Assistant Director, Food and Agriculture Issues, Resources,
Community, and Economic Development Division of the U.S.
General Accounting Office; Susan Offutt, Administrator of the
Economic Research Service of the U.S. Department of Agriculture
in Washington; and Professor Gregory Gundlach, College of
Business Administration, University of Notre Dame in Notre
Dame, Indiana. Thank you very much for joining us.
Mr. Dyckman.
STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR, FOOD AND
AGRICULTURE ISSUES, RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE,
WASHINGTON, D.C.; ACCOMPANIED BY ANDREA BROWN, ASSISTANT
DIRECTOR, FOOD AND AGRICULTURE ISSUES, RESOURCES, COMMUNITY,
AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING
OFFICE, WASHINGTON, D.C.
Mr. Dyckman. Good afternoon, Mr. Chairman. With me is
Andrea Brown, Assistant Director, who has been responsible for
our attempt to work on slotting fees. Again, I want to thank
you for the opportunity to be here today to discuss our plans
to study the use of slotting fees in the grocery industry.
Slotting fees are generally payments from grocery
manufacturers to retailers to introduce new products. As you
are well aware, there is much anecdotal information about the
use of slotting fees and its impact on small business and
consumers but very little hard evidence is available. You,
therefore, asked us to conduct a study illustrating the use of
slotting fees by individual companies for various grocery
items. In making this request, you recognized that we would
have to rely on the voluntary cooperation of the grocery
industry. It has not been a successful effort on our part.
In short, despite repeated attempts over the last 8 months,
we have been unsuccessful in gaining the cooperation needed
from the industry to conduct this study. Industry officials
expressed concern about providing us or any outside group
information that they consider sensitive and proprietary and
thus critical to their business success.
In your letter of October 20, 1999, you requested that we
study the grocery industry's use of slotting fees. Your letter
also stated that the Food Marketing Institute (FMI) and the
Grocery Manufacturers of America (GMA), the two primary
associations representing the industry, but not present today,
had assured you of their cooperation in our study.
Our overall plan was to conduct case studies of slotting
fee practices in the industry for various supermarket items at
several food manufacturing companies and grocery store chains.
The associations were to work with us to identify companies
willing to speak with us and to provide documentation to us.
However, companies are not required to provide us access to
their internal documents or discuss these trade practices with
us. Once the companies were identified, however, we planned to
visit them to discuss the extent of their use of slotting fees
and obtain documentation on the dollar amounts of slotting fees
on several food categories, accounting practices for these
fees, and related company policies and procedures.
We planned several strategies to safeguard the company data
we would be receiving. First, we planned to break the link
between the information and the source, and not attribute
information in our report to any one company or individual.
Second, we planned to safeguard this information. Third, we
explained to the industry associations that we are not subject
to the Freedom of Information Act and that we do not disclose
to the public any of our records containing trade secrets and
commercial or financial information.
We also obtained a pledge of confidentiality from you, Mr.
Chairman, to safeguard specific company information from
disclosure to your Committee, its staff and any other Members.
In separate meetings in January 2000, we met with leaders
of the FMI and GMA to discuss our study approach. The
associations told us that they do not compile detailed
information on slotting fees because of its sensitive nature,
and that we would have to obtain slotting fee information from
individual member firms.
Over a period of several months we sought from FMI grocery
companies that would be willing to give us detailed information
on slotting fees. FMI stated that several members they
contacted would not even want speak to us. However, the
association did identify two mid-size grocery chains that might
be willing to meet with us. Both of these grocery chains
eventually did meet with us, and we did discuss slotting fees
in general terms but neither provided documentation nor
specific information about the use of and accounting for
slotting fees in their businesses.
GMA, unfortunately, was even less successful in helping us
gain access to members and information. On our own we discussed
slotting fees with a mid-size grocery store chain and three
food manufacturers. Again, none of these companies were willing
to provide us with the type of documentation or the specific
information we were seeking.
Mr. Chairman, this concludes my prepared statement. We
would be happy to answer any questions after the witnesses
finish.
[The prepared statement of Mr. Dyckman follows:]
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Chairman Bond. Thank you very much, Mr. Dyckman.
Ms. Offutt.
STATEMENT OF SUSAN E. OFFUTT, ADMINISTRATOR, ECONOMIC RESEARCH
SERVICE, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.
Ms. Offutt. Good afternoon, Mr. Chairman. I am pleased to
be here this afternoon to discuss the preliminary findings of
our ongoing study, fresh fruit and vegetable markets, retail
consolidation and trade practices. It focuses on recent
structural and marketing changes in the produce industry.
Just last week the Economic Research Service published the
first in a series of reports associated with this project,
``Understanding the Dynamics of Produce Markets: Consumption
and Consolidation Grow.''
Today I will talk about the preliminary results of industry
interviews on trade practices. The final report is to be
published at the end of the year. A third report on retailer
market power will be published this coming spring.
The produce marketing industry has evolved considerably
since the 1980s. These changes are partly the result of shifts
in consumer preferences for produce and partly of the
reorganization of the structure of the industry itself.
Americans have become more health conscious and as a result are
eating more fresh fruits and vegetables than ever. At the same
time, consumers demand variety and convenience.
Retailers have responded to consumers by expanding the
variety of products offered. Stores now offer year-round
availability of many fruits and vegetables, pre-cut produce and
more packaged and branded products.
The first chart which appears to my left shows that the
number of fresh produce items carried by retailers doubled in
10 years, from 173 in 1987 to 345 in 1997.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T7960.024
The second chart which is to my right shows that during the
same period the share of branded produce increased from 7
percent to 19 percent of total sales while the share of fresh
cut produce and packaged salads rose from 1 percent to 15
percent of total sales. Accommodating these changes in consumer
preferences has, therefore, led to an overall increase in the
demand for shelf space in the grocery store produce section.
[The chart follows:]
[GRAPHIC] [TIFF OMITTED] T7960.025
Since rapid retail consolidation began about 5 years ago,
the nature of transactions and coordination between produce
shippers and retail buyers has evolved. Consolidation in the
retail industry has occurred as growth in sales has slowed due
to stable food prices. There have been reductions in household
spending for food consumed at home as people eat out more. In
addition, retailers have faced increased competition from the
non-traditional sector, such as Costco and Wal-Mart. The
retailers' inability to increase prices added to the higher
costs of providing greater variety, additional services, as
well as new store formats have encouraged grocery retailers to
offset costs by seeking efficiency gains through consolidation.
To take advantage of the potential efficiency gains, the
fewer, larger retailers have been changing the way they do
business, moving from spot cash purchases in wholesale or
terminal markets to greater reliance on long-term contractual
agreements and strategic alliances. The buying and selling of
produce has consequently become more complex. In today's
transactions, price may be just one component of a more
complicated exchange that may include fees and services, along
with the sale of produce.
Of particular interest today is the incidence of fixed and
variable fees or what we call trade allowances. A fixed fee is
a payment that does not vary with the volume of sales. Slotting
fees are defined as fixed, up-front payments to acquire shelf
space for the introduction of new products. They are but one
example of these fixed fees. Variable fees are assessed on a
per unit basis and so over a season vary with the volume sold.
Advertising fees, rebates and volume incentives are often
structured as variable fees.
When a trade allowance is a fixed fee paid by each and
every shipper, a small firm's average cost of operation is
greater relative to a large shipper. A small shipper's
competitive position may be eroded, and the imposition of the
fixed fee may act as an effective barrier to entry. In
contrast, the variable fee affects shippers equally by lowering
the effective unit price. In a competitive market, the retailer
passes along the lower price to the consumer, in the form of
overall lower retail prices or sales prices.
The shipper benefits when consumers buy more at lower
prices. Our interviews showed that shippers recognize the
distinction between fixed and variable fees and, in fact,
shippers are more likely to complain about a fixed fee, such as
a slotting allowance. However, it was the case that not all
fees and services were viewed as detrimental to the interests
of shippers. Variable fees, such as performance-based volume
incentives and promotional fees, may help product movement and
may provide competitive advantage but shippers may question
whether these fees actually increase demand for their product,
either because of limited consumer response to the price
changes or to a lack of accountability regarding the retailer's
performance.
Based on the information obtained in our interviews, we
find that most shippers and retailers reported trade
allowances, that include fixed and variable fees, and services
had increased in incidence and magnitude over the last 5 years.
The predominant type of fees charged in bulk produce sales were
variable fees which included volume incentives, promotional
allowances and other per unit rebates. Fixed fees, which would
include slotting fees are also more likely to be associated
with sales of fresh-cut and value-added items as compared to
the bulk produce.
Our analysis required information on the terms of exchange
between produce shippers and retailers. When these exchanges
occur in spot transactions in terminal markets, prices are easy
to observe. Indeed, the USDA collects and publishes just such
data on prices. However, when exchange takes the form of direct
sales, or a proprietary agreement between a supplier and a
retailer, its terms, that is prices, trade allowances, services
required, are not so easily observable.
As the produce business has moved increasingly to direct
sales, we have had to adjust in the way we conducted this study
to turn to a limited number of time-intensive, detailed
personal interviews with fresh fruit and vegetable shippers and
national and regional retailers. The main disadvantage of this
approach is the lack of uniformity in response, with respect to
the details on the terms of exchange, on exactly how much
people will tell us about a fee, how often it is charged and
its size.
There are also concerns when we are limited in the number
of interviews we can do about how well the respondents actually
represent industry norms.
Let me close by noting that our study focuses so far just
on the terms of exchange between shippers and retailers. We did
not examine the upstream relationship between growers and
shippers. While some growers are also shippers, many are not,
and our future work will seek to consider how growers
experience the effects of the increased incidence and magnitude
of these trade allowances, of the fixed and variable fees.
Growers and shippers may benefit or suffer equally when
retailers offer incentives or require fees, but if there is a
lack of competition in the market between growers and shippers,
the opportunities for passing the fees on to growers certainly
exists.
Thank you very much. I would be pleased to answer any
questions at the end of the presentations.
[The prepared statement of Ms. Offutt follows:]
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Chairman Bond. Thank you very much.
Professor Gundlach.
STATEMENT OF GREGORY T. GUNDLACH, Ph.D., PROFESSOR OF
MARKETING, MENDOZA COLLEGE OF BUSINESS, UNIVERSITY OF NOTRE
DAME, NOTRE DAME, INDIANA
Mr. Gundlach. Thank you, Mr. Chairman and Members of the
Committee. In summarizing my more lengthy statement I will
concentrate on four main points.
Chairman Bond. I should have pointed out earlier as is
standard practice, we make the full statements of all the
witnesses part of the Record. And I apologize for not having
done that. Thank you for summarizing.
Mr. Gundlach. Thank you. My first point regards the
widening conceptual domain of slotting. As noted by others
today, although originally defining supplier payments to obtain
a slot in a wholesaler's warehouse, the term's meaning has
expanded in practice. This expansion has led to varying
interpretations and some confusion.
While some confine the term to its original meaning, others
use it to refer to an assortment of trade-based payments that
range across a product's entire distribution life cycle and to
apply to both new as well as existing products. Opinions also
differ as to what constitutes slotting based on the nature of
payment terms that are involved. Some narrowly view payments
that are unconditional, fixed in nature, handled off-invoice
and paid up-front to be slotting fees. Others view slotting
more broadly to encompass other payment terms.
Opinions also differ as to the characterization of slotting
fees as either motivated by retailers and imposed on suppliers
or motivated by suppliers and offered to retailers. Finally,
though attention toward slotting has focused on its application
in the marketing of food products, slotting is known to exist
in other industries and also on the Internet.
My second point relates to the status of research and
challenges faced by those studying slotting. Though examined by
academics, members of industry and policymakers, our knowledge
of this practice is still in the early stages of development.
My examination of published studies suggests that research on
slotting has largely been devoted to exploratory work and the
development of theory. The empirical research that has been
conducted has been mainly descriptive, reporting on the form
and occurrence of slotting. To my knowledge, only a few studies
have conducted empirical tests of theory against information
and data acquired in the field.
Beyond acknowledged variation in terminology,
interpretation and practice, those studying slotting face
considerable challenges. As pointed out in Chairman Bond's
opening remarks, most difficult is overcoming the apprehension
of some participants to cooperate in discussions or grant
access to information and data. Further contributing to this
challenge is that many slotting arrangements are verbally
negotiated and often go undocumented.
My third point addresses theory and emerging insights for
the consequences of slotting. In this regard, research that has
been conducted provides some understanding of their effects on
competition and consumers. The pro-competitive benefits of
slotting are generally explained in two ways depending on how
the payments are characterized.
Slotting arrangements thought to be motivated by retailers
and imposed on upstream suppliers are explained mainly in
relation to the proliferation of new products and their high
failure rate. Slotting is theorized to improve the efficiency
of introducing and distributing these products.
Slotting arrangements thought to be motivated by suppliers
and offered to retailers to assist them in marketing the
supplier's products are explained mainly in relation to the
rising importance and increasing effectiveness of trade
promotion and in-store marketing. Slotting is theorized to
improve distribution efficiency, facilitate stronger inter-
brand competition and to address free-riding concerns that
suppliers have for their marketing efforts.
Theories of anti-competitive harm from slotting focus
mainly on how they might be used by retailers and suppliers to
distort the competitive process and result in harmful effects
for consumers. For retailers, attention focuses on the ability
of a dominant retailer with bargaining power over its suppliers
to discriminate and charge fees that are unrelated to or in
excess of their associated costs. When practiced in this way,
concerns focus on the creation of barriers to entry and the
potential for increased supplier concentration, lower rates and
quality of innovation, reduced variety and choice, and less
consumer information that may result.
Additional concern centers on the prospect that the
dominant
retailer may also face limited competition in its downstream
consumer markets. Under such circumstances the concern is that
having charged an unreasonable fee the retailer may exercise
its market power, keeping the surplus rather than passing it
onto consumers in the form of lower prices or applying it in
other beneficial ways. Where this occurs consumers can end up
paying higher prices and/or receiving fewer benefits than they
would but for the slotting.
For suppliers, attention focuses on the ability of a
dominant supplier to condition its payments to retailers on the
right to exclude, limit or otherwise marginalize rival
competitors. Concern centers on the prospect that excluded or
disadvantaged suppliers may no longer be in a position to
constrain the exercise of market power on the part of the
powerful supplier. Some forms of slotting payments may be
conditioned on the right to exclude rivals or to simply limit
or disadvantage their ability to compete. Where these rights
materially raise rivals' costs, they can marginalize existing
rivals or deter entry by potential competitors. Costs are
raised given the added burden of overcoming the imposed
competitive limitation or disadvantage.
In the absence of sufficient offsetting benefits or where
such benefits could be achieved in some less exclusionary or
restrictive way, slotting arrangements of the kind described
can diminish competition and result in harm to consumers.
Consumers are harmed where the arrangement enables the powerful
supplier to create, preserve or enhance market power.
My fourth and final point addresses recommendations for
future research. Let me first applaud this Committee's efforts
to appropriate funding for examining slotting practices. Future
research that is conducted should first acknowledge the
increasing array of trade arrangements and practices that have
come to fall under the rubric of slotting. Future research
should also emphasize a deeper conceptual and more empirical
understanding of slotting.
Data gathered in future studies should in particular
include disaggregate or transaction level data that enables
researchers to more fully understand the nature of slotting
arrangements and how they are conducted. Future research should
also focus on the continued development of theory for
understanding slotting. Specific efforts should be devoted to
slotting that is motivated by retailers and imposed on
suppliers. Though considerable anecdotal evidence characterizes
slotting in this way, we continue to be challenged to fully
understand these arrangements and their effects.
Finally, research should be directed toward understanding
slotting in other industries and in particular its emergence in
electronic commerce. Though important efforts currently focus
on slotting in the marketing of food products, much could be
learned through examining its application in other settings.
Thank you, Mr. Chairman, and Members of the Committee.
[The prepared statement of Mr. Gundlach follows:]
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Chairman Bond. Thank you very much, Professor Gundlach.
Let me ask Mr. Dyckman. The GAO has in the past
successfully obtained confidential information from other
industries; has it not?
Mr. Dyckman. Yes, on a case-by-case basis we have had some
success, for example, in the airline industry and then in the
defense industry. Frequently it depends on whether or not the
contractor or the private firm has some interest in cooperating
with us but we have had some success stories; that is correct.
Chairman Bond. And have the confidentiality agreements
worked well? Have you had any problems with information that
you have been turned over, proprietary information leaking out?
Mr. Dyckman. Not to my knowledge, sir.
Chairman Bond. How does the cooperation you have
experienced in that area compare with, I would use the word
cooperation lightly, but the relationship you had in these
industries?
Mr. Dyckman. As you know, Sir, we do not have the
information that you desire. We went to the associations. We
made a good faith effort. We explained to them and they knew
quite well that we did not have authority but we made certain
assurances to them. You went out of your way to write us a
letter giving a pledge of confidentiality.
They told us they contacted some of their members. One of
the associations e-mailed 55 of their members or so. They did
not encourage their members to cooperate with us. So I think
without encouragement from the associations it would have been
very difficult, and we anticipated that quite frankly. I have
worked for GAO for 31 years and this is the first time I have
had to report to a committee that I have been unsuccessful in
trying to carry out the work. So we do not feel fulfilled.
As you said in your opening statement we gave it our best
efforts, but without the cooperation of the industry we could
not carry this out.
Chairman Bond. Thank you very much, Mr. Dyckman. Ms.
Offutt, it is clear from your testimony that payments, up-front
fees have been increasing. Is this practice increasing over
recent years?
Ms. Offutt. Yes.
Chairman Bond. You mentioned something that struck me. You
mentioned in the competitive marketplace, in the real
competitive world--we all like to think there may be a real
competitive world out there--that these prices would result in
lower prices that the consumer would pay because obviously
there would be competition. Do you have any evidence that these
payments have, in fact, lowered fees, the ultimate price that
consumers pay at retail?
Ms. Offutt. We did not look directly at evidence that would
have suggested that, for instance, a fee paid for an
advertising campaign, to advertise a sale, actually resulted in
lower supermarket prices or actually induced people to buy
more. We did not ask for that kind of transaction data from the
retailers.
Chairman Bond. You suggest, in your written testimony, that
the study did not review how the increased incidence and
magnitude of fees effects growers. Based on what we have heard
here today can we expect you all to pursue this question and
look to the impact it may be having on growers?
Ms. Offutt. Yes.
Chairman Bond. Did you review any individual markets to see
the competitive impact generally?
Ms. Offutt. In the third stage of the study we are going to
look more directly at the question of whether or not the
practices are having anti-competitive effects. The study that
we are completing now that I spoke about this afternoon is what
was referred to as a more descriptive approach. What are the
fees? How are they incurred?
But it does not actually allow us to draw a judgment about
their harmful or beneficial effect. It just gives us the basis
for going on to ask more.
Chairman Bond. We need that basis and it seems to me that
we have outlined a pretty clear area for inquiry here because I
think certainly the testimony we have had today, the testimony
that was presented to the FTC indicates there are potentially
some very serious problems. Did the economic research service
run into any of the problems that the GAO encountered in
finding--you said you talked only about shippers or retailers
willing to talk about the practices and about the fees?
Ms. Offutt. Yes, we did. We had on both sides shippers and
retailers, people who were not interested in speaking with us
at all. Some were more forthcoming about the nature and the
size of fees but I think it is fair to say overall the
retailers were less forthcoming than shippers were in answering
our questions. And really we got very little of the kind of
detailed transactions data that you have to have to make these
determinations of benefit and harm.
Chairman Bond. As I stated at a previous hearing, in one of
my prior lives I was an antitrust attorney working on the
Robinson-Patman Act and related matters. I know how much fun it
is to compile that kind of information. Nevertheless, it seems
to me that that could be critically important and I would hope
that the Economic Research Service would pursue the information
and the impact that this has on growers as well as those down
the line and ultimately the consumers. Are the consumers
getting any better deal, or are they simply losing choices that
should be available to them?
Professor Gundlach, while we are speaking about that, you
talked about some of the considerations. Based on your review
what kind of antitrust laws or consumer protection laws might
be called into play here? Talk about having additional laws. Do
you think, No. 1, are there adequate laws and what would they
be and what, based on your experience, might be needed from
here?
Mr. Gundlach. Mr. Chairman, I hesitate to make a comment
regarding the nature of laws that might apply to the specific
practices that we are talking about. Though I do have a legal
background, my expertise is more in the behavioral aspects of
the fees and how they might have implications for competition.
So I respectfully would not like to answer that question, if I
may not.
Chairman Bond. OK. I will throw out a few, in addition to
the Robinson-Patman Act, sections I and II of the Sherman Act,
section V of the FTC Act, the Clayton Act. It sounds like there
are some good weapons out there but based on your study with
the growth of these slotting practices what would you say the
future holds for the small grower in this instance or, more
broadly, the small manufacturer who is seeking access to retail
shelves?
Mr. Gundlach. If I can take a step backwards, I think that
slotting is really symptomatic of the confluence of three
distinct forces. One of those forces has been spoken of today
and that is the shift of power that has occurred in many of our
distribution channels into retailers' hands. The second force
is the proliferation of new products and the third force is the
increasing importance of trade promotion. All of those are
coming together in terms of their effect on slotting.
In terms of what the future holds, at the present rate of
progress slotting will make it very difficult for small,
independent and those suppliers without resources, overcome
some of the barriers that these forces have brought forth.
Particularly that these fees will provide high-entry barriers
for smaller firms.
Chairman Bond. And what is your analysis of the impact that
those fees themselves may have and the results of those fees in
limiting access of smaller manufacturers have on the choices
available to the ultimate consumer? When the consumer goes into
the marketplace, does she have fewer choices? When I go into
the marketplace, am I cut out, likely to be cut out of having
an opportunity to buy a better quality product at a lower
price?
Mr. Gundlach. To the extent that they do create barriers to
entry for firms that would offer higher-quality products--more
innovative products in the marketplace, I do think they create
challenges of choice. These challengers are not only in terms
of the options, but in the process of choice that consumers
have. While smaller suppliers may be able to find access to
consumer markets through other forms of distribution, these
challenges will raise the costs to consumers of having to seek
out these other forms of distribution to secure the options and
variety that they desire.
Chairman Bond. Thank you very much, Professor. We have been
joined by my colleague and Ranking Member, Senator of
Massachusetts, Senator Kerry. Welcome.
OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, RANKING
MEMBER, COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES
SENATOR FROM MASSACHUSETTS
Senator Kerry. Mr. Chairman, thank you very much. I
apologize to you and to all the panelists for not being able to
be here sooner. I personally started the ball rolling on the
issue of slotting fees over a year ago, and I wanted to
participate in the entire hearing. But today has been one of
those exceptionally conflicted days around here and I apologize
for that. On the other hand my able staff has been here
throughout and I look forward to reviewing the Record when it
becomes available.
The practice of charging slotting fees, in my judgment, is
highly questionable. The industry's conduct and its
unwillingness to cooperate fully with the efforts to understand
the use of slotting fees has effectively invited Congress to
put the practice under a microscope in order to determine to
what extent it does effect small businesses and consumers. I
want to thank you, Mr. Chairman, for your significant and
genuine interest in this and for your significant collaboration
in it. I think that your own experience as an AG and your
experience as a Governor have prompted you to be automatically
tuned in to what this means. In a free-market system, which we
pride ourselves on having, this practice does not seem right,
nor does it smack, at least on the surface, and I emphasize on
the surface, nor does it smack of normal free-market practices
to know that somebody could have a really rather extraordinary
product, but be very small and not have the power to be able to
get their product to consumers. Even though it could
conceivably cost significantly less and be a better product.
Now, conceivably, just as a cost of doing business, like
franchising costs, it might, conceivably under some readily
interpretable, clear fairly arrived at and accessible system,
be a cost that people who manufacture something need to factor
into their cost of goods and ultimately pass onto the consumer.
But, that does not appear to be what we are seeing here.
Neither accessible, nor rational, nor clear, and most
importantly, instances that we have had reported to us by
individual small retailers which appear to be on many occasions
spontaneously arrived at, perhaps in some cases even without
the knowledge of upper management or of corporate headquarters.
Though that does not appear to be true in cases involving
chains. But, there are instances where we have seen a form of
creative entrepreneurial effort engaged in by people who happen
to control the access to those shelves.
So, there is a lot going on here. And frankly, as I said
earlier, it invites an even greater level of scrutiny and much
more suspicion that we are having trouble getting answers.
There have been a number of retailers that I have talked to
privately, and I have heard all kinds of horror stories, which
I could repeat, and some of them have been repeated, but they
will not go public. And the reason they will not go public is
pretty clear. I mean the capacity for being blackballed and for
suffering economic injury as a consequence, particularly in a
world where they do not quite know how far Congress is really
going to go here? What is the sustainability of Senator Bond
and Senator Kerry and the Small Business Committee's interest
in this? How far will this go? So if we go public a year from
now, their interest may weigh in and they get burned. I
understand that.
And so it is important for us to be very clear about the
sustainability of this effort and our efforts to try and
understand it. I have not talked to the Chairman about this
yet, but maybe this is something that is more perfectly suited
to the Permanent Subcommittee on Investigations, which might be
able to be of greater assistance to the GAO and/or the FTC in
their efforts to pursue it.
I do not know the answers to these questions. I did not
come here with a predetermined outcome, but in the absence of
our ability to be able to create a rationale and an
understanding of this, and in the face of increasing reports
from people who testify as they have today and on other
occasions about an uncooperative industry, we need to
understand it better.
So my message today, I am not going to ask questions of the
panel because I do not like coming in late and being
repetitive, but as I said I will review this record carefully.
I first raised the issue because a businessman in the
Midwest told me how his business had suffered time and again
because he was hit with onerous fees to sell his product
instead of another brand. Rather than both brands competing
fairly, even when there was shelf space for both and even when
his brand was selling well--making money for the business and
he was filling repetitive orders based on consumer demand--he
was forced to pay fees to get his product on the shelves. And
that sparked my interest because it just did not seem right. It
did not seem fair. It did not seem consistent with the concept
of this Committee's commitment to help small businesses thrive.
So, Mr. Chairman, I thank you for your energy and effort.
And I hope, clearly, that the FTC and the GAO will be able to
complete their task. For those out there who are fighting this
practice, our message to you really is come and talk to us.
Help us to understand. We have proven our ability, to maintain
anonymity. We have proven our ability, I believe, to maintain
even our interest and we will do so as we go down the road.
Thank you, Mr. Chairman.
[The prepared statement and attachment of Senator Kerry
follow:]
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Chairman Bond. Thank you very much, Senator Kerry. Thank
you for your initiative and support for this effort and for the
authority that you bring to our efforts.
A couple points you mentioned, we have been able to gather
information from many aggrieved parties by slotting. If you
will contact this Committee, we can assure you of
confidentiality in hopes of learning more.
Second, under transparency I would only reiterate what the
Senator from Massachusetts said. One of the first things you
want to know about this process is if it is justified, if it is
reasonable, if it is necessary and economically beneficial, why
in the dickens is it kept so secret? That, more than anything
else, makes us suspicious. If you have got a good
justification, why don't you lay it out? If it is the best
thing since sliced bread, why isn't somebody willing to talk
about it? That is why the lack of transparency as discovered by
the GAO and by our continuing efforts makes it highly
suspicious.
Third, you mentioned the Permanent Subcommittee. I had an
opportunity to talk with Senator Collins of Maine about this
today. She had been approached by a number of produce farmers
from Maine and I think that this may be a good area for us to
refer to the Government Affairs Committee for their work and
assistance on this as well so they can continue to help us.
But I want to thank all of our witnesses for taking time
out of a busy schedule to attend today. I know we have a number
of produce farmers in the audience who are here and taking time
out. If you choose to do so, would you hold up your hands so we
can see who is here? Thank you all very much. We will only take
pictures of the backs of your heads. We appreciate very much
your coming. It has been an informative hearing.
There is clear evidence of a very disturbing impact on
small produce farmers from these fees. The use of fees raises
numerous issues, not the least of which is why the fees may be
necessary. It is unfortunate that the industry representative
did not appear today. We will be asking them to explain why
they chose not to and why if the process is such a good one,
they are not willing to defend it.
We again note there has been much work done on slotting
allowances, including increased attention by the FTC. We would
urge our friends at the FTC to give careful consideration to
analysis of this practice and determine the competitive or
anti-competitive effects. We, as I said, intend to follow up
with the FTC and we have urged, at this point have included in
the Senate mark on the
Commerce, Justice, State, and the Judiciary Committee's
Appropriations bill $900,000 for them to do further work in
this area. We intend to follow up with them to assure that that
additional money, if we can get it to them, will be used to
collect the data, establish guidelines and take such other
necessary steps.
I would urge the ERS to continue and expand upon its work
as well. Professor Gundlach, we will look forward to hearing
from you, and your continuing analysis. Finally, for anyone who
does have information, we would ask that you forward it to the
Small Business Committee.
I thank all witnesses and those who are here in the
audience today for joining us. We obviously are going to
continue to be revisiting this as long as this practice remains
widespread, and particularly if it remains hidden from view, we
are going to continue to do our best to see that it is brought
out in the open. Thank you very much. The hearing is adjourned.
[Whereupon, at 2:40 p.m. the Committee was adjourned.]
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