High price of shelf space Competition: The heavy demand for grocery store shelf space has manufacturers paying retailers "slotting allowances" to guarantee their products are adequately displayed to consumers.


Australian conglomerate Burns Philp & Co. wasn't the only loser in a costly war for shelf space against Sparks-based spice giant McCormick & Co. Inc.

Just ask Daniel Martinez, whose family owns Phoenix, Ariz.-based National Spices. He said National Spices lost about $400,000 in annual sales when McCormick gave two grocery chains hundreds of thousands of dollars in 1994 to sack National's line of spices in favor of McCormick's Mojave brand.

"We could never have paid the kind of money that they were paying," said Martinez, 40, who helps his father run the business. "It would have taken six or seven years to recoup. I guess the big dog wins."

McCormick's response is that it pays a slotting allowance determined by the market, and that it never violates an existing contract. "That's the way it's been traditionally done throughout the industry," said Carroll Nordhoff, McCormick executive vice president.

The auction among spice companies is a winner-take-all version of the battle for grocery store shelf space that requires manufacturers to give retailers up-front payments, experts say. The payments, known as slotting allowances, contributed to the financial struggles of Burns Philp, which is selling its spice business. Burns Philp has marketed Durkee, French and Spice Island brands in the United States.

"What you have is a bargaining situation where the retailer has shelf space that's scarce and a lot of manufacturers that want the space and will bid for it," said Greg Shaffer, an Indiana University economist.

Slotting allowances provide part of the answer to an enduring mystery: Why some items are so prominent that they almost grab shoppers and others are so inconspicuous that they seem impossible to find.

The practice garnered new attention last month, with the disclosure that the Federal Trade Commission is investigating McCormick's marketing practices.

McCormick said the FTC investigation focuses not on slotting allowances, but on "exclusivity" agreements with a few chains that limit competition. But some analysts say slotting and exclusivity are intertwined because exclusivity agreements would likely translate into higher slotting payments.

Some industry experts say the allowances raise consumer prices and that small manufacturers have been crushed by the practice. But the FTC says it has not challenged slotting allowances because it lacks evidence that they are anti-competitive in a universal sense or harmful to consumers.

Slotting allowances in grocery stores include a broad range of expenditures -- "slotting fees" for new products, "pay-to-stay" fees to remain on shelves, "facing allowances" to increase space or improve position and "street money" for aisle displays, Shaffer said.

No one knows precisely how much retailers collect in slotting allowances. But Shaffer estimated it ranges between $6 billion and $18 billion a year.

Marianne M. Jennings, professor of legal and ethical studies at Arizona State University College of Business, called slotting a peculiar part of the grocery store industry. "What you find is this amazing practice that is sort of under the table and sort of not," she said.

Jennings said the fees have helped to drive several smaller manufacturers out of business. "I'm afraid that we're ultimately going to have only Budweiser and Doritos on the shelf because they're the only people who can afford to pay," she said.

Similar practices are growing outside grocery stores. The retail book industry now demands fees from publishers to give books prominent space. Ocean City recently signed a deal to make Coca-Cola products the only beverages sold at city-sponsored events and in municipal vending machines.

Slotting allowances grew so quietly that even their origin is a matter of dispute, Jennings said. As early as the 1930s, A&P; supermarkets demanded extra free cases of products as the price of carrying them, Shaffer said.

A key moment came in 1984, when Cincinnati-based Kroger's supermarket chain started demanding cash payments for new products to defray its costs. "What's not in dispute is that the practice of paying for shelf space has grown considerably since" then, Shaffer said.

Some retail chains have a flat fee of $5,000 for new product introductions, Jennings said. Others have a graduated fee schedule tied to location, with eye-level slots costing more than knee- or ground-level spots. Spaces at the end of grocery aisles bring high fees because they guarantee attention.

Grocery stores argue that allowances are necessary to evaluate the 20,000 new products that compete every year to be among the 50,000 items carried by the average grocery store.

"About 90 percent of new products fail or get withdrawn," said Edie Clark, a spokeswoman for the Food Marketing Institute, whose 1,500 members include supermarkets, retailers and wholesalers. "For our industry, the issue has been the cost of a failure."

She said a store's buyer has to decide what product to carry and what product to remove to make room for it -- all costs that need to be paid.

Louis Denrich, president of Baltimore-based Valu Food stores, said the chain asks for slotting payments, but does not always receive them. "It's strictly to cover costs," he said. "A lot of companies don't give them. The more desperate a company is to get on the shelves, the more likely they are to pay them."

Giant Food Inc. said it doesn't have a uniform policy when it comes to slotting fees. "If they're available, we take them," said Dave Herriman, senior vice president for grocery, pharmacy and bakery operations. "We ask a manufacturer if he does have one. If he says yes, we say we would like our fair share."

But he said slotting fees do not alone determine whether something gets on the shelves. "Normally our policy is that a product lives or dies by its own merits and not because of size of slotting allowance," Herriman said. "We've taken products with slotting allowances and products without them."

He said slotting fees can hurt business by tying up space for products that don't sell.

The Grocery Manufacturers of America, whose members pay the fees, says it objects to slotting fees when they exceed the cost of doing business -- a frequent occurrence, say experts. "Within some retail chains, slotting fees represent net profits," Jennings said.

Manufacturers are generally reluctant to discuss slotting, for fear of alienating retailers and jeopardizing their sales, experts say. Some manufacturers, like Procter & Gamble, don't pay them at all. They rely on advertising that spurs strong demand for their products.

But Jennings said Frito Lay pays $100,000 to chains to carry new products. Truzzolino Pizza Roll was charged $25,000 by one chain to carry its products and Lee's Ice Cream, a Baltimore company, was asked to pay $25,000 for each flavor it wanted stores to carry.

In many cases, the amounts are arbitrary and secret, Jennings said. She believes stores should publish slotting schedules for manufacturers and that the allowances should be uniform and more closely tied to costs.

Scott Garfield, vice president of Lee's Ice Cream, made a run at supermarkets a couple of years ago before giving up. He encountered a particularly hard time because ice cream sections are generally very small.

"You need a certain financial wherewithal to play the game," said Garfield, whose business sells packaged ice cream to stores abroad, but not domestically.

He said stores demand slotting allowances with varying degrees of audacity. "Some are very bold," he said. "They say they're not going to take a product without slotting fees. Another gave me a chance without a fee right off the bat."

Ultimately, the costs of packaging just to get a chance to be on shelves, plus the possibility of continuing fees proved too expensive, he said. Lee's currently sells ice cream domestically only to dipping parlors.

Ann Wilder, whose Towson-based Vanns Spice has operated in McCormick's shadow for 15 years, said her company has lost space to McCormick's deep pockets on a couple of occasions.

Eighteen months ago, Wilder said, she had every reason to believe she was going to get her products into a grocery chain in upstate New York that she would not identify. "The buyer said he would take the product and even told me which distributor to go through," Wilder said. "Then I was told that they had signed an agreement with McCormick."

Because of a scarcity of information about slotting, the effect of the practice on consumers is unclear. Jennings said consumers not only pay higher prices so manufacturers can pay slotting costs, but that the laws of supply and demand are circumvented by the jockeying of manufacturers and retailers.

Shaffer sees it differently. "The consumer is paying higher prices, but on the other hand they also are getting a better selection," he said.

Without slotting allowances, a retailer would have no motive to displace a product that is selling. In such instances, he said, slotting costs help manufacturers and retailers share the risk of carrying a new, unproven product.

So far, slotting allowances have attracted scant attention from federal anti-trust regulators. "It's a pretty complicated area," said Mike Antalics, the FTC's assistant director for nonmerger litigation. "Even the term slotting allowance is used in different ways by different people. The bottom line is we would be looking at the effect on competition as opposed to the effect on individual competitors. Another way of saying that is the effect on consumers."

Robert A. Skitol, a Washington antitrust lawyer, said the FTC could investigate slotting fees under the Robinson-Patman Act of 1936. One section of the law forbids a seller's favoritism for one buyer over another in regard to price. Another prohibits unreasonable payments from sellers to buyers for services rendered.

"When a manufacturer pays a large allowance to one chain, but doesn't make a comparable payment to every other competing supermarket chain, then there is a substantial question presented of violation of Robinson-Patman," he said.

But Skitol said the FTC has scarce resources and that investigating slotting allowances would be a huge undertaking.

Experts said enforcing reforms would be difficult because slotting payments could be hidden in marketing costs or lower prices for goods. "It's not clear you could stop it even if you wanted to," Shaffer said.

That leaves companies like National Spice with a gnawing feeling that something is amiss. Martinez said the company had supplied the Smitty's chain in Arizona for 27 years, from the time it opened its first store.

One day Smitty's called and told National to take down its displays. McCormick had paid Smitty's $100,000, Martinez said. "The way it was explained to us was that the store was only so big and could carry only one item," he said. "There's no illusion to it. We believe if they hadn't paid slotting fees, we would still be in there."

Pub Date: 6/01/97

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