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GROCERY STORES Prime shelf space comes with a price for products



Published: Sun, April 20, 2003 @ 12:00 a.m.



A Senate probe into slotting fees, which are legal, died from lack of cooperation.

MINNEAPOLIS-ST. PAUL STAR TRIBUNE

Ever wonder why one kind of ice cream in your grocer's freezer is at eye level while another is stocked knee-high, or why a certain brand of potato chips seems to be everywhere shortly before college basketball's Final Four championship?

It's not because they taste better than rival products. Chances are, those food companies paid "slotting fees" or other incentives to the retailer to command a premium position in their stores, or in extreme cases, to limit shelf space available to competing products.

Executives at smaller food companies complain that slotting fees limit competition and translate into higher prices for consumers. But retailers defend the fees as a legal price to pay for introducing new products.

Pinpointing the amount paid to grocers is difficult. A U.S. Senate investigation estimated that food retailers collect up to $9 billion a year in fees.

"It's one of those things that has become a norm in the food industry," said Joel Kozlak, chief executive of Thomson Foods in Duluth, Minn.

The price for advantage

Thomson Foods has paid a steep price to stock its goods on grocers' shelves.

To reach its goal of $2 million in sales last year, Thomson spent $300,000 -- $90,000 cash in upfront slotting fees and $210,000 on in-store promotions -- to get its Thomson Berry Farms line of fruit preserves, flavored vinegars and fruit-based syrups in 1,500 stores. Getting into additional stores will require paying more fees, Kozlak said.

"It's a terrible problem because consumers are ultimately paying for these fees," said John Ausura, a former food-company executive and a principal at Crossroads LLC, a California management and strategic consulting firm.

Recent accounting scandals at Kmart Corp., Fleming Companies, Nash Finch Co. and other food retailers have shed a harsh light on payments between foodmakers and food sellers, but most would rather not discuss them.

Staying mum

The yearlong Senate probe petered out in 2000 largely because food manufacturers and retailers refused to cooperate. Two witnesses who appeared before a Senate panel in 1999, fearful of reprisals from retailers and manufacturers, wore hoods to hide their identities.

Akshay Rao, an associate professor at the University of Minnesota's Carlson School of Management, testified before the Federal Trade Commission in 2001 on the topic and interviewed dozens of manufacturers and retailers for a paper that will be published later this year. None would talk on the record.

Slotting fees first emerged in the early 1970s, when they were charged to companies that wanted their products placed in the racks near the cash register. Eventually, use of the fees spread to all aisles of the grocery store.

The legalities

Slotting fees are not illegal -- as long as they are deemed reasonable and charged uniformly. But some companies have gone too far. In March 2000, the FTC forced spice manufacturer McCormick & amp; Co. to sign a decree promising not to pay grocery stores for limiting shelf space available to competing spice sellers.

The competition to get a product into a store is fierce. About 100,000 grocery items are available on the market, but a typical grocery store has room for about 40,000. In addition to slotting and other assorted fees, there are under-the-table payments as well, such as tickets to concerts or sporting events.

Most manufacturers acknowledge that retailers have a right to recover some costs that come from placing new products on their shelves or in their warehouses, especially because new products often fail. The Food Marketing Institute, a trade group in Washington, said retailers spend almost $1 million per store per year on new products that fail.

But as the grocery industry has become dominated by a few large retailers, the fees have gone up and the definition of "new product" has expanded to include a new flavor of ice cream or different permutation of an established breakfast cereal.

Food manufacturers now pay grocery stores $5,000 to $30,000 per new product per store, Ausura said. They also fork over money for advertising, sales and in-store promotions, known as "pay to stay" agreements.

"The whole purpose of these fees was to shift a lot of the costs that retailers used to bear to the manufacturers," Ausura said.

But he, like others, wonders whether the pendulum has swung too far.

"Like everyone else, I've heard that retailers make more money off these fees than they do off groceries."




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