Alternative mechanisms to slotting fees designed to ensure retailers that unsuccessful products will not remain on shelves should be considered for the grocery industry, panel members asserted at a Federal Trade Commission public meeting on slotting fees in Washington, D.C. May 31-June 1.

Slotting fees - allowances manufacturers often pay retailers for rights to place their products on shelves - often are not worth the expense, panel members said. "The offering of $50,000" up front as a slotting fee to put a product on-counter "will not make it sell," Pacific Valley Foods CEO Scott Hannah maintained.

Test groups could be used as one alternative, Hannah suggested. Pacific Valley entered a five-store test during which a company won space in the store if the partnering retailer's profits increased over a six-week period versus a control group. "There is a risk, but the retailer has to share the risk. We are all in the...business together," he said.

Offering a guarantee that products will sell is a method already used by manufacturers, wherein products are withdrawn from the store if they do not perform well and the retailer is reimbursed. "The buyer doesn't have a risk of having to close these out and take a loss. Our brokers pick these products up and get them out of there and give our apologies," Hannah said.

FTC's consideration of slotting fee practices comes at the request of the Senate Committee on Small Business, which held a hearing on the issue Sept. 14 (¹ Also see "FTC "Slotting Fee" Practices Investigation Requested By Senate Cmte." - Pink Sheet, 20 September, 1999.).

While slotting fees and display fees are the most commonly used allowances, presentation fees, pay-to-stay fees and failure fees also are used.

"The cost of failure is quite high for the retailer as well as the manufacturer," agreed industry consultant Winston Weber, Memphis, Tenn. "There is no winner in failure. On the manufacturer side, just about every retailer today asks for guaranteed sale."

"Forget the slotting allowances, forget failure fees. There is a point of time, if an item is not selling, the retailer will tell the manufacturer to ship back the goods from the warehouse," he said.

Offering a different take, Department of Justice Antitrust Division Economist Mary Sullivan argued slotting fees could be preferable to failure fees in certain scenarios. "If slotting serves some sort of signaling role, you would be more likely to choose a good product with the slotting fee," she observed. Failure costs can be prevented if you can stop "a bad product from being introduced."

Failure fees are "less efficient" because they are harder to charge than up-front slotting allowances "especially when the manufacturer wants to get the products on the shelves," Sullivan continued. Also, there could be disagreement as to what constitutes "failure," she noted.

In other industries, slotting fees often are offset by markdown allowances at sell-in. In such a case, "the bottom line is the supplier has not spent one more dollar" and costs are balanced, Weber maintained.

"There is a perception that certain retailers are making more money with their slotting allowances. I can argue the retailer is not getting one dime more. We are just moving stuff from bucket to bucket," he asserted.

"If the retailer wants a slotting allowance, give them a slotting allowance," Weber advised. Manufacturers "will just take it away from promotion [and] display expenses," he said.

"What you are doing as a manufacturer," however, "is shooting yourself in the foot," Pacific Valley's Hannah countered. "In other words, we buy these displays to increase sales six to seven times" and to increase consumer awareness. "If we cut those down to one to two displays a year and apply [the monies] to slotting, I don't see what the gain is."

"Slotting fees are bad, they are evil," Hannah concluded, noting the end result is a loss for the consumer. Required slotting fees are "more expensive than the trade advertising that we do - the displays, the ads, the shelf talkers. They are much more expensive than the media advertising we do."

"They have to be built into the cost of the product, they add no value to the product," he maintained. "It is very detrimental to small- and medium-sized business."

Slotting Fee Replacement By Post-Marketing Methods Suggested To FTC

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