June, 1990

Fruits of Thought

Danger: Slotting Fees Ahead

Until recently, the produce department has been an island of tranquility as turmoil over slotting fees bubbled up around it. But with the growth of branded produce and these firms’ continuous need for outlets for their produce as well as supermarkets’ continuing desire to increase revenues, some think that the age of the slotting fee in produce is near at hand.

The whole idea of slotting fees, basically payments made by suppliers to ensure a certain amount of display space at retail, has the potential to dramatically alter the way produce is purchased and merchandised. A lot depends on how it all works out, but there is a minefield of issues to be resolved:

  • One big challenge is the Robinson-Patman Act. Roughly speaking, this law requires that similarly situated customers must be charged the same price. Merchandising and promotional allowances need to be offered in a proportionate manner. Robinson-Patman hasn’t affected the produce industry much because the enormous and rapid fluctuations in quality and price make it very hard to determine if, in fact, similarly situated customers are being charged differently. Payments to one retailer may obligate payments to another.
  • Retailers may not come out as well with slotting fees in produce as they do in packaged goods. Sure, a produce guy may pay a fee to guarantee shelf space for his product, but at what price for the produce? Packaged goods manufacturers usually have a list price and though they offer promotions, in general, prices are not subject to the volatility of produce. Produce is sold at market price. If the retailer agrees to sell one man’s produce but doesn’t have a prearranged price, the retailer loses all bargaining leverage over price. In fact, retailers who do not get caught up in a slotting fee rat race in produce may benefit by having more sources of product to turn to, thus sometimes being able to offer better quality product to consumers. In fact, this advantage of not accepting slotting fees would surely show up in some stores’ advertising.
  • What happens to wholesalers? Wholesalers have to sell produce to retailers who have to compete with the big chains. If special allowances are given to big chains, might not wholesalers need cheaper F.O.B.’s in order to sell to their customers at a price where these retailers could compete with the big chains?
  • If commodity promotion groups start devoting substantial portions of their budgets to slotting fees, harmony within their membership may be difficult to preserve. Generally speaking, the largest chains rely on the largest suppliers because they need the volume. Which retailers get these fees can become a nightmare as growers who sell to smaller firms fight those who sell to bigger ones. Those who sell for export will fight those who sell domestically; those who sell regionally will be against those who sell nationally and so on.
  • How can product quality be preserved? The nature of produce is that it fluctuates in quality. Two apples that both meet U.S. Fancy grade can be dramatically different in appearance. Seasons, weather, seed variety and other factors influence product quality. Once a retailer commits to carrying a certain firm’s products, how can quality be ensured? We are not talking Coca-Cola; this stuff doesn’t come from a factory.
  • Will the image of agriculture be sullied if small farmers start showing up on Nightline explaining how they lost their farms because they could not afford to pay the big slotting fees the big agribusiness firms were able to pay? And will retailers be worse off as they lose small growers as an important source of produce? Especially if lessened competition reduces supplier pricing flexibility.
  • Will new products find it more difficult to get into the store? A lot of the excitement of produce involves new items, exotic items and low volume items. Will these be charged fees? It’s easy to say no now, but as pressure for revenue continues to grow, these items may start to look as if they are an untapped income source. When you have a customer ready to buy the space, the temptation to take it away from low volume items and not give new items a try will be enormous.
  • Will small companies suffer? Could a small grower/shipper get shelf space? Or will small groups have no choice but to market their product through large organizations?
  • Will the consumer be as well served? Today, produce departments are the number one reason consumers select a given store to shop in. Perhaps this is, at least in part, due to the fact that produce buyers and merchandisers have had the flexibility to purchase and display produce based solely on what they believe consumers will accept. This is a flexibility that grocery buyers and merchandisers have lacked.

The great buyers and merchandisers of produce are the ones who are most flexible, the buyer who catches an extraordinary lot of peaches and gets it at a bargain price, the merchandiser, who seeing the peaches, changes his display plan to make them more prominent. All for the purpose of serving the consumer by offering produce they want to buy.

If the produce industry can no longer simply serve the consumer, but instead must serve two masters, the consumer and the contractually committed space, it may serve neither well. The produce department could become boring and restricted. And those excellent peaches at the bargain price will remain in their original slot, barely seen, barely purchased, barely eaten. What a shame.  pb