July, 2000

Fruits of Thought

Looking At Retail Fees

Wal-Mart’s Bruce Peterson has sent in a letter to the editor that we publish on page 16 responding to a recent column of mine on retail fees and assessments. The letter raises important questions for the industry to ponder: 1) Who exactly winds up paying for these various programs? 2) Do those buyers that refrain from demanding fees and assessments get that added money in some other way, such as lower prices, or are they simply overpaying compared to competitors? 3) What is the proper role of the government, if any, in dealing with these issues?

The produce supplying community isn’t dealing with these issues very well. A few produce vendors who are being pressured to change their traditional ways of doing business are responding with inflammatory terms, using words such as bribery and extortion. We’ve had quite enough of those issues in the industry lately, and it is not wise to expand the definition of these terms.

To put it simply, any buying organization is both legally and morally permitted to buy from whomever it chooses to buy from. If the buying organization wants to demand a flat payment of a million dollars before one can get on the approved vendor list or insist on a monthly check of a quarter a box for anything it purchases, this may be smart or may be stupid, but it is morally neutral and legally unobjectionable.

Mr. Peterson is astute in pointing out the issues and indeed is doing the supplier community a favor by using this letter to put the trade “on notice” that this is a concern of Wal-Mart. However, there is a sense in which the proper response to Mr. Peterson is to say that if Wal-Mart is allowing its suppliers sell competitors – net after all allowances – well, shame on Wal-Mart for allowing that to happen.

Wal-Mart’s no-slotting-fee policy ought to be maintained, but it should be maintained because the policy benefits Wal-Mart and, ultimately, Wal-Mart’s customers by maintaining the freedom to buy from the most desirable source, rather than restricting buyers to those companies that have signed a fee or assessment agreement. However – and it is a big however – Wal-Mart, as with any large buyer, has to make sure it is buying competitively. So, if a large supermarket chain is being sold day to day at market price, but a rebate check is sent out every month for 15 cents a box, well, as the Wal-Mart buyer, I would have to make it clear that though we are not going to bother with monthly rebates, we sure expect to consistently buy at 15 cents below the market.

Of course, the industry is undergoing a transitional phase right now and Mr. Peterson is incisive in keying on the phrase that makes all the difference in the world: “…separate P&L’s for each customer.” Up to this time the demand for various fees in the fresh produce arena have been sufficiently infrequent that most suppliers could handle them as a general cost of doing business. But today, the dollars involved are much bigger; it is everything there was before plus big bucks for formal slotting fees, assessments in partnership programs and much more.

The first step for shippers who are burning up over supplier pressure for fees and assessments is to maintain detailed P&L’s for each separate customer. When a customer wants something, whether a quarter a box or tickets to the Superbowl, it gets charged against that customer’s P&L and, at the end of the month, end of the season or end of the year, the shipper is well positioned to A) Know which customers are really profitable and which are not, and B) To show these costs to the demanding buyers and let them know that they are the ones who are going to pay for these expenses.

I would differ from Mr. Peterson on one point: I would draw a sharp line between expenses incurred at the insistence of the customer and normal travel and entertainment genuinely proposed by a vendor. Although there are many reasons for retailers to set up internal policies regulating freebies – since there might be conscious or subconscious favoritism toward vendors that provide pleasant company and entertainment – it is wrong to view these types of expenses as necessarily wasteful.

And it is worth remembering the goal is not to simply reduce expenditures; it is to reduce waste. When Wal-Mart spends money on television commercials to attract and maintain customers, it is not a waste. In fact the high sales volume driven by that advertising will drive sales per square foot higher, which will drive expenses per dollar of sales down. So prudent marketing expenditures by Wal-Mart reduce costs, not increase them. Equally, a vendor’s marketing costs, including T&E, may well be wise investments.

For shippers, the great message in Mr. Peterson’s letter is that the end is neigh. Those retailers that are not demanding slotting fees need to be assured that they will not wind up overpaying. If suppliers don’t find a way to provide that assurance, then the retailers will have no choice but to demand “their share” – act now or be acted upon.

But what possible role could the government play here? Those who would have the law institutionalize their own preferred position will win out; tomorrow, there will be new battles and you may well lose. What makes those who fight so hard for government intervention so certain that they will fare better by having commercial terms established by lobbyists and politicians rather than through direct negotiations?  pb