November, 2000

Fruits of Thought

Just Say No???

What is the proper response by a shipper when a retailer asks for a slotting fee? The Western Growers Association wants to head off the question and has sent a letter to major retailers asking that they pledge never to ask for slotting fees. To be more specific, the WGA acknowledged that slotting fees might have a place with regard to genuinely new items; the association wants an assurance that retailers would never ask for such fees on common items.

Although I’m not certain the focus on retailers is correct – some big foodservice buyers are even more demanding – the motivation behind the WGA’s letter is understandable. Produce shippers in general are being assaulted by demands for various fees and they are, in many cases, confronting a breed of buyer that is less a creature of the produce industry than of Wall Street.

The controversy over slotting fees is thus a battle as much between two different perspectives on business as it is a financial issue.

Slotting fees are generally a terrible idea because they detract from doing things that could add value for the consumer. In other words, if a company can make its money on the back end – with fees and charges – then it is less worried about making it on the front end by providing consumers with value that will result in increased sales.

Still, it is a free country, and if a buying company wants to demand that its suppliers structure their relationships with it in a certain way, this doesn’t seem a legitimate cause for industry bans or federal intervention. Industry groups need to address the slotting fee issue in another way – by offering training to shippers on how to deal with this new business reality.

It is probably not legal for growers’ groups to urge their membership to “just say no” to slotting fees as it might be construed as a form of price fixing. But I am not really convinced that this would be the correct approach anyway.

Many years ago, my family opened a few supermarkets and, though we had never heard of slotting fees, we did know how to tell the dairy company that if they wanted to supply us they would have to help reduce our upfront capital needs by supplying us with dairy cases.

Economically, these cases were indistinguishable from a slotting fee. Were they immoral? I don’t think so.

Business is all about finding two “partners” whose needs and capabilities can complement one another. Now, here is the dirty little secret: If one needed one’s milk supplier to provide the cases, one always overpaid a little for the milk.

In business I believe in trying to say yes to one’s customers. So if a retailer or a foodservice distributor wants a big upfront fee or a set payment per box or some other financial concession, my inclination is to try to accommodate that desire. Then the key is that one has to price one’s product to compensate for the costs of the arrangement.

The argument against this is that the buyer won’t give you the business unless you are the cheapest in the world. That is the same thing as saying that the whole slotting fee plan is a farce, because the buyer will buy from the cheapest guy irrespective of any slotting arrangements.

Right now the industry needs to reposition itself. For decades retail demands were episodic and minor: A table for an anniversary dinner, an ad page in a church bulletin, a donation to some favored cause.

These were accounted for out of general funds and were accepted as part of the cost of doing business. Today’s demands are continuous and extensive and have to be accounted for differently.

If, as a shipper, you pay slotting fees to some customers and not to other comparable customers and yet you charge everyone the same price, you are playing your most loyal customers for a fool. That won’t last. Either they will go out of business because they can’t compete or they will catch on and demand the same fees you pay everyone else.

The key is that vendors are not helpless and do not exist at the sufferance of big buyers. Vendors are businesspeople and have to structure their dealings intelligently.

If you are a wholesaler used only for emergency fill-ins, you can just say no to all these plans because the buyers only use you when they need you anyway. If you are a shipper shipping 20 loads a week to a chain and the chain informs you that they would like you to send them a quarter a box, you say yes and then make sure you are satisfied with the pricing on the account.

In effect, one is doing separate P&L for customers, taking into account not only what they pay, but also what they cost.

This is not a simple matter. If you have a wholesaler somewhere and you cuff him whatever you can’t sell elsewhere, his average price may make him look unprofitable, but he may be your most profitable customer.

All of which is to say that business requires hard work and intelligence. Many buyers are driven to make money through fees and assessments because they have no idea how to make more money through increasing sales. This is a fact, and if the industry wants to help grower/shippers, it will work to help them deal with such challenges.  pb