DRAFT - NOT FOR RELEASE PRIOR TO 2:30PM, WEDNESDAY, 11/8

STATEMENT BEFORE THE
FEDERAL TRADE COMMISSION
SLOTTING FEES HEARING

November 8, 1995

Good afternoon Mr. Chairman, ladies and gentlemen of the commission. My name is Nicholas A. Pyle, and I appear before you as Vice President of the Independent Bakers Association for Legislative and Environmental Affairs. It is with great pleasure that I speak today on the impact of slotting fees on independent bakers.

The Independent Bakers Association is a Washington, D.C. based national trade association of over 360 small to medium sized, mostly family owned, wholesale bakers and allied industry trades. The organization, founded in 1967, protects the interests of the regional mostly urban independent segment of the baking industry.

The wholesale baking industry sells breads, rolls and sweet goods to institutional food service accounts as well as grocery and convenience stores for retail sale to the public. The popularity of breads and other grain-based foods have increased in recent years with a typical bakery now offering bagels, pitas and other regional and ethnic varietal breads. The growth in varietal breads has led to an explosion of new products in bread aisles, in-store bakeries and freezer cases. IBA's membership grows, despite a consolidation of traditional white bread baking in the United States, as "niche" and varietal bakers swell the ranks.

Beginning in the late 1970s, supermarkets began charging slotting fees for the placement of "new" products on grocery shelves. We consider a supermarket as a single store or chain of stores with greater than $2 million in annual sales. The term supermarkets includes conventional, combination, superstore and warehouse formats. Convenience store chains also charge slotting fees. New products is a term to describe innovative concepts, brand extensions, line extensions, upgrades, replacements and seasonal offerings.

Slotting fees originated from a 1970s bidding war for space to locate "branded" in-store cigarette point-of-sale devices called a "merchandiser." These end of aisle cigarette merchandisers place the manufacturer's products at eye level while a competitor's products are placed on the bottom shelves. It didn't take long for slotting fees to spread across the grocery aisles to other products and to markets in other areas. The success of supermarkets in collecting these fees from small and some large manufacturers illustrates their power in the marketplace.

Food marketers are quick to justify slotting fees as the cost of the competitive store-admission process. By charging slotting fees, the retailer is seeking a profit from selection of a grocery item for stock. The retailer profits again when the public buys the items in a second commercial transaction. Furthermore, retailers typically require volume discounts and substantial advertising promotions to coincide with a new product's entry. These lucrative promotions require discount coupons, in store demonstrations, radio if not television spots, newspaper co-ops (with the retailer) and stand-alone advertising. A common retail practice is to set a volume target for six months and then charge the manufacturer a subsequent "failure fee" if the product doesn't meet sales expectations. Besides the failure fee, the store can discontinue a product after the demonstration period and order the manufacturer to buy back the product. This allows the retailer the opportunity to sell the space again.

IBA understands that supermarkets have a right to be selective when deciding which of the 100,000 grocery items mix well in their chain when a store only has room for 40,000 items. The industry experiences approximately 10,000 new grocery introductions a year and less than one-tenth survive 12 months in the marketplace. The independent segment of the baking industry's chief concern lies with supermarkets that use the highly negotiable and competitive store-admission process as a profit center. This is particularly disturbing when 80% of new products are simply minor changes to existing products or line extensions. The rule of thumb for innovative product concepts is to provide the chain buyer or store review committee with enough market research to justify the success of a product. No company, large or small, despite the slotting dollars, could get an untested product onto a supermarket shelf unless armed with basic market research.

Regional independent bakers have unique problems selling to large chain supermarkets. Bakers service grocery accounts with direct delivery of fresh baked goods to all or part of a chain's individual stores. Often a baker finds slotting charges based on national accounts counting all the stores in a chain when in fact only a portion will be served. The slotting charges stifle innovation by smaller bakers since they often cannot afford the slotting charges to launch a new product. Slotting also hurts consumers who don't get the advertising message and coupon incentives to try new products with budgets stretched to meet demands for slotting fees. Smaller manufacturers with fewer locations and items at the store have a difficult time passing along the cost of slotting to the real payer - the consumer.

Unfortunately, slotting has broadened in the food trade to include costs other than first time product trade deals and allowances. Besides failure fees there is a "staying fee," which is an annual form of rent charged by some chains. When a major warehouse chain purchased another warehouse retailer in the early 1990s, the latter's suppliers received notices from the new owners that they would be asked to pay an up-front fee in exchange for the "supplier's right" to continue to do business with the company. This type of slotting is defined by industry as "pay to stay." If a smaller manufacturer has a product with potential and marketing research, they will be allowed into the chain for a "free fill." This practice involves the manufacturer supplying the retailer with free product in lieu of the slotting fee. Bakers can be requested to provide a "free fill" for a new store.

The amount of money a baker pays in slotting fees depends on the size of the supermarket chain and the number of products being introduced. If a product features different flavors, such as plain and onion bagels, the chain usually considers these different products, each with its own slotting fee. Slotting fees, which are very negotiable, typically start at $3,000.00 per product for a regional chain and as high as several hundred thousand dollars for a national chain. There are press accounts following a 1990 joint industry task force on new grocery product introductions detailing slotting charges for a new product in excess of one million dollars.

It is hard to argue the legality of slotting fees because of the different forms of slotting and differing industry practices. One thing is clear - there is a legal obligation for the manufacturer that pays a slotting fee to one retailer to then pay the same fee to other retailers. By law, the manufacturer must offer that same "discount" to the retailer's competitor. The same problem exists for the retailer who requires payment from certain manufacturers for premium shelf space and does not offer the same or comparable deal to competing vendors in the same product category.

The following are a few anecdotal slotting reports. Please understand that in all of these the names are disguised to prevent identification of the source.

• A New England supermarket chain was purchased approximately five years ago by an individual who used the proceeds of slotting fees to cover a portion of the equity for the purchase. A "pay or stay" slotting fee was required for each item in the supermarket.
• A New York area supermarket chain regularly charges $20,000.00 for each new item introduced by a food manufacturer, as well as "requesting" annual contributions to the purchasing manager's Christmas party.
• A West Coast supermarket chain was solicited and paid a one million dollar fee to change from one food manufacturer's products to another's. The justification was cost of computer reprogramming.
• A national supermarket chain recently quoted a six figure amount to a specialty baker to carry its items for a single period with no assurance of retention.
• When opening new stores, one Eastern supermarket chain takes a six-month grace period before paying its first invoice. This "extended fill" gives the new store time to generate cash-flow, while the baker waits for payment.
• It is not out of the ordinary to have requests of $200,000.00 and above for slotting from larger chain stores. If an independent baker cannot afford the fee, they lose out.
• The issue is growing beyond direct payments for carrying a product. For example, many food manufacturers are regularly forced to purchase space in a home shopping food catalog and send representatives to a variety of food shows and events.
• More and more retailers are requesting that manufacturers pick up other costs -- marketing research, advertising, product demonstrations, and so on.

In conclusion, IBA members' concerns about slotting fees are sincere. The situation, according reports from our members, is "out of control." In order to stop the proliferation of the more serious practices and prevent flagrant abuse, IBA seeks voluntary efforts between suppliers and the grocery trade for a level playing field for all manufacturers and retailers regardless of size. This might involve voluntary adherence to some form of a supplier/retailer code of ethical standards. Thank you for your interest this afternoon.

Contact:

Robert N. Pyle, President
Independent Bakers Association
1223 Potomac Street, N.W.
Washington, D.C. 20007
(202)333-8190
fax-(202)337-3809