How Some Manufacturers Secure Store Display Spots To Crush Competition
AILSA CHANG, HOST:
It's no accident that some products are placed near the supermarket register or on those shelves that are like at eye-level. Manufacturers pay fees to secure certain spots, to crush the competition. Sally Herships and Cardiff Garcia, from our podcast The Indicator From Planet Money, explain why the grocery store shelf is one of the most competitive and contentious arenas in business.
SALLY HERSHIPS, BYLINE: Imagine, if you will, the potato chip section at the grocery store. Do you ever gaze up at the chips and wonder, why are there so many options for kettle-cooked chips, and why is the cheaper brand of tortilla chips always so hard to find?
CARDIFF GARCIA, BYLINE: But you might think that the shelf would be arranged solely based on the needs and the wants of consumers, like in this case, Sally's need for low-quality tortilla chips. But in actual fact, there is a highly complex system that governs the placement of chips and of other products at the grocery store. And a lot of it is based on fees that manufacturers - the companies that make those chips - pay to store owners. And a fee structure to help determine product placement at a grocery store may sound simple - it really is not.
HERSHIPS: There are all sorts of fees that manufacturers pay grocery stores. One of the most contentious is called slotting fees. They're meant to cover the expense of the stores taking a risk on new products. Mark Baum is with the Food Marketing Institute, which represents the grocery store industry. He says slotting fees are a totally normal and even necessary part of bringing new products to the grocery store.
MARK BAUM: You have to make new room in the warehouse. You have to make new room on the shelf. You have to be able to mark down and sell off the product that's existing on the shelf in order to make room for the new products.
GARCIA: So if you're a grocery store owner, you don't necessarily want to use your expensive retail space as a product testing ground. Instead, store owners want to pass those costs onto manufacturers.
HERSHIPS: In 2015, Goldman Sachs says consumer goods companies paid more than $200 billion to retailers in placement fees. That space at the front by the registers where the candy bars are is so valuable manufacturers have to pay by the inch. It's referred to as beach-front property. Each category like bread, milk or mayonnaise has what is strangely called a category captain, the company which pays the most in fees. Julia McCarthy is with the Center for Science in the Public Interest.
JULIA MCCARTHY: The category captain gets to decide where on the shelves their product will go and where on the shelves their competitors' products will go.
GARCIA: Yeah. And according to Julia, there's more. If you're the company that pays the most in fees, she says you also get access to your competitor's data.
MCCARTHY: Yes. And for us, it raises real questions of antitrust, right?
HERSHIPS: And this is where Congress steps in. The concern was that this practice was outrageous, it was anti-competitive. So in the fall of 1999, the Senate held a hearing.
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UNIDENTIFIED POLITICIAN: Committee staff talked to 79 small businesses. Some small businesses wouldn't even talk for fear of retribution. Of the 79 we talked to, every single one of them said, if we tell our story, we're going to get knocked off the shelves, where we are now.
GARCIA: Only three small business owners would testify at that Senate hearing, and two of those were from behind screens with disguised voices. I mean, listen to this.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED PERSON: Today on the grocery store shelves, we are being eliminated to the point where it is not cost-effective to take our product to market.
HERSHIPS: Even the GAO, the Government Accountability Office, tried to do a study on slotting fees and it failed. Instead, it presented an eight-page paper about the reasons it was unable to perform the study. No one would talk. But we did find someone. Christine Hoh owns a Canadian snack company called SuperSnaps. They're seaweed chips.
CHRISTINE HOH: This is something that is really not talked about in the industry, but I have had where I would speak with a major retailer who would tell me, well, your so-and-so competitor is paying this much, what can you offer me? Meaning he or she would ask additional funds.
HERSHIPS: So just to be clear, your competitor, if they pay more, they could either pick where their product goes and your product or even knock you off the shelf altogether.
HERSHIPS: Sally Herships.
GARCIA: Cardiff Garcia. NPR News. Transcript provided by NPR, Copyright NPR.