Slotting Allowances and the Emerging Antitrust Enforcement Debate
Retailers and their suppliers face increased antitrust scrutiny of their slotting allowance and other product management practices by the Federal Trade Commission. This spring, the FTC sponsored a workshop that capped its study of the antitrust implications of slotting allowances in the grocery industry.1 Narrowly defined, a “slotting allowance” is a one-time, lump-sum payment to a retailer by a supplier in exchange for which the retailer allocates retail space for the supplier’s products, often new products. The FTC’s study appears to have been prompted by Congressional concern that dominant suppliers and retailers use slotting allowances and associated product management practices to diminish the competitive threat posed by their smaller rivals. This concern coincides with the FTC’s recent McCormick2 proceeding that may signal new vigor in the FTC’s enforcement of the Robinson-Patman Act.3 The FTC study and workshop also coincided with a pending request by several trade associations for the issuance of FTC industry guidelines on slotting allowances.4
In the aftermath of the FTC study and workshop, the promulgation of industry guidelines appears unlikely due to the present lack of sufficient empirical data concerning the competitive impact of slotting allowances and associated practices. The FTC’s workshop, however, provided an analytical framework for future antitrust scrutiny of these practices in retail industries. Two distinct schools of thought have emerged from the recent slotting allowance debate: the “Market Power School” and the “Efficiency School.” Students of the Market Power School generally view slotting allowances as an anticompetitive tool used by dominant suppliers to preclude smaller competitors from bringing new products to market; those in the Efficiency School see slotting allowances as an effective way to promote product innovation and to allocate risks and retail start-up costs between the retailers and suppliers.
Background
Slotting allowances have been common in the grocery industry for at least 30 years5 and their use is believed to be growing in other retail contexts such as auto parts, compact discs, and greeting cards. The term “slotting allowance” has been used, albeit imprecisely, to cover a wide range of practices between suppliers and retailers relating to product or category management.6 These include payments by suppliers to retailers:
1) For a product to be carried in the store;
2) For a fixed amount of shelf space;
3) For preferential display space; 4) For the right to be the exclusive, or nearly exclusive, supplier of a product;
5) To control what other products will be allowed on shelves;
6) To control the amount of time a product will remain on the shelves; and
7) To keep an existing item on the shelf in the face of competition—“pay-to-stay” fees.7
Antitrust enforcement agencies have long recognized the potential for abuse in the use of slotting allowances.8 Historically, however, antitrust enforcers have not targeted these practices in any systematic way in deference to what has been recognized as the pro-competitive aspects of such practices.9 Recently, however, the FTC has initiated in-depth investigations into the potential anti-competitive impact of slotting allowances and related category management practices.10
In part, these investigations stem from the recent “merger wave” and “product explosion” in the grocery industry. Overall, merger transactions reported under Hart-Scott-Rodino11 have more than tripled from fiscal year 1991 to fiscal year 1999; fiscal year 2000 filings are expected to surpass the record set in fiscal year 1998 by more than 15 percent.12 The grocery industry has not escaped this “merger wave.” In 1996, the top five U.S. grocery retailers accounted for about 20 percent of the overall market—in 1999, the top five U.S. grocery retailers accounted for 60 percent of the market while the top 20 retailers accounted for almost 78 percent of the market.13
This “merger wave” has even greater significance in light of the “product explosion.” Twenty to 30 years ago, grocery retailers struggled to find a sufficient variety of products to fill their shelves; these same retailers now find it difficult to choose between the seemingly limitless number of available products. Today, the average supermarket stocks approximately 30,000 items, but fully 100,000 grocery products are available from suppliers. Another 10,000 to 25,000 new products emerge each year.14 As a result, some believe that slotting allowances are becoming less a device used by suppliers to promote the introduction of new products, and more a device used by suppliers to keep their products on the shelf and for retailers to determine which products to stock.15
Those in the Market Power School, accordingly, see retailers as “gatekeepers” who can “exercise market power to determine the extent of a producer’s access to the retail marketplace and the terms on which such access will be made available—that role potentially affords large retailers significant leverage over producers and suppliers.”16 Some Market Power School proponents anticipate that further consolidation in the grocery industry will increase the retailer’s “gatekeeper” function and will increase the possibility that larger retailers will constrain and control the product supply market while at the same time extracting larger slotting allowances that are unrelated to risk allocation or start-up costs.17 In a $350 billion retail grocery industry, slotting allowances now account for roughly $9 billion each year.18
The FTC has expressed concern that increasing market concentration by retailers poses the “potential for practices such as slotting allowances to have anti-consumer rather than pro-consumer effects.”19 In addition to a handful of significant cases involving the use of slotting allowances,20 The FTC’s market power concerns on the supplier side of the retail equation were recently articulated in the FTC’s enforcement action against McCormick & Company, Inc., an action that some claim has, at least for the moment, breathed new life into the FTC’s Robinson-Patman Act enforcement activities.21
Broadly speaking, the Robinson-Patman Act prohibits a person from discriminating in price between different purchasers of commodities of like grade and quality.22 In McCormick, the FTC alleged that the world’s largest maker of cooking spices, McCormick, unlawfully discriminated in the pricing of its products to certain competing supermarket purchasers. McCormick, facing competition from another national firm, Burns Philip Food Incorporated, and several smaller, independent regional firms, allegedly entered into agreements to provide discounts to certain select retailers in exchange for certain benefits. These discounts included “up-front cash payments similar to slotting allowances,” free goods, off-invoice allowances, cash rebates, and performance funds that effectively reduced the retailers’ acquisition costs for McCormick’s products.23 In exchange, McCormick allegedly required, among other things, that retailers allocate up to 90 percent of their spice products shelf space to McCormick’s products, thus limiting the space available for competitive spice products.24 The FTC charged that the aggregate of McCormick’s discounts were not justified by a good faith attempt to meet competition, nor were they justified by cost savings associated with doing business with the favored retailers.25 Because the disfavored purchasers of McCormick’s products allegedly had few, if any, alternative sources from which to purchase comparable goods, the FTC concluded that McCormick’s conduct injured both primary-line26 competition ( i.e., Burns-Philip), and secondary-line27 competition (retailers) as well.28 The resulting settlement and consent order reinforced the provisions of the Robinson-Patman Act and prohibited McCormick from selling its products to purchasers at a net price higher than that charged to the purchaser’s competitors, except as permitted by the Robinson-Patman Act.29
Market Power School
v. Efficiency School
While it is premature to predict McCormick’s long-term impact, if any, on slotting allowances,30 In the short-term, McCormick has provided ample ammunition for the opponents of the practice. Advocates of the Market Power School refer to McCormick “as a first polite warning to [the grocery] industry.”31 On April 14, 2000, three trade groups concerned with the potential anti-competitive aspects of slotting allowances, the Independent Bakers Association,32 The Tortilla Industry Association,33 and the National Association of Chewing Gum Manufacturers34 ( collectively “petitioners”), jointly asked the FTC for the issuance and enforcement of industry guidelines to govern slotting allowances in the grocery industry.35
Market Power School proponents claim that slotting allowances create economic pressures from both powerful retailers, who force suppliers to pay for retail shelf space, and from suppliers, who compete against each other to gain shelf space. Such pressures allegedly are disastrous for the smaller supplier and smaller retailer.36 In support of their position, Market Power School proponents cite, albeit with disagreement, an alleged steep rise in the frequency of slotting fee demands and the sharp escalation in the size of fees demanded over the past decade.37 & #x201c;As one close observer recently noted, these fees ‘are now reported to account for up to $9 billion in annual promotional expenditures, or approximately 16 percent of all new product introduction costs.’”38
Building on the FTC’s fall 1999 testimony before the House Judiciary Committee, petitioners argued that: a) slotting allowances are neither always benign nor always anti-competitive; b) they can in some circumstances reflect efficient cost-sharing arrangements between suppliers and retailers and can in other circumstances reflect the misuse of both supplier and retailer market power; c) exclusionary and discriminatory slotting allowance practices can undercut the competitive viability of smaller suppliers and smaller retailers alike; d) they can thereby reduce competition generally and increase concentration at both levels of the distribution chain; and e) consumers are the ultimate victims in these situations as they then confront higher prices, less innovation and less choice.39
Purportedly striking a middle ground between those who believe that slotting allowances are beyond antitrust enforcement and those who believe that slotting allowances should be per se illegal, petitioners’ proposed guidelines provide a general slotting-allowance definition40 and then suggest different standards for various allowances within the definition.41 For purposes of the proposed guidelines, slotting allowances are defined as “any payment, discount or other consideration granted by a grocery product supplier for a grocery retailer’s acceptance, stocking, display or other favorable treatment of the supplier’s products.”42 The proposed guidelines would apply only to suppliers accounting for 20 percent or more of the market of an affected product category; and retailers accounting for 20 percent or more of the retail food (or supermarket chain) sales within an affected area.43 Petitioners’ guidelines are intended to “protect against (a) anti-competitive exclusion of smaller suppliers and prospective new entrants from access to retailer’s shelves (“upstream concerns”) and (b) competitive injury to smaller retailers (“downstream concerns”)”44 by employing provisions of the Robinson-Patman Act45 and the FTC act.46
Market Power School proponents see payments unrelated to actual costs savings associated with volume purchases to be serious entry barriers for smaller suppliers. They contend that these fees typically go to the retailer’s “bottom line” and are not necessarily passed on to the consumer in the form of lower prices. As such, slotting allowances unrelated to volume-purchase costs savings are more likely to cause competitive harm without offsetting consumer benefits. Conversely, Market Power School proponents see per-unit discounts and similar allowances related to volume purchases as more affordable by smaller suppliers and thus warrant more lenient antitrust treatment.47
Those in the Efficiency School, however, observe no competitive harm flowing from slotting allowances and view guidelines or a tougher government enforcement approach as detrimental to a legitimate form of promotional spending.48 Specifically, they contend that the proposed guidelines are “unnecessary, unworkable, and anticompetitive.”49 They contend that current FTC enforcement actions are adequate to address minor abuses where they may arise,50 and that the FTC’s Fred Meyer Guides already provide practical guidance on Robinson-Patman Act compliance relating to slotting allowances.51
To those in the Efficiency School, slotting allowances promote the introduction of new products at the retail level and allocate risks and retail start-up costs. Because of the “product explosion,” a high percentage of new products fail. Sources cited by the Food Marketing Institute claim the failure rate for new products is between 70 and 80 percent; the Independent Bakers Association told the FTC in 1995 that “less than one-tenth survive 12 months in the market place.”52 Given the limited shelf space available at most retail stores, those in the Efficiency School see slotting allowances as an effective and efficient tool available to retailers, enabling them to select from among the thousands of products those most likely to succeed. Slotting allowances can also provide a financial incentive to the retailer to try a new product or product line that otherwise would not be considered. To the extent that a slotting allowance brings a new product or product lines to market, consumers, presumably, have more options.
Efficiency School advocates also see slotting allowances as an effective cost-sharing tool. When a retailer adds a new product, whether it is an entirely new item, a line extension, or a new package size, the retailer often is required to remove or reduce the space allocated to some other item or discontinue the other item altogether. Costs associated with introducing and removing items include adding and removing items from the warehouse, distribution, and computer pricing systems.53 Arguably, slotting allowances allow retailers to share start-up costs and the risk of loss of new product failure with the supplier, who presumably is in a better position to assess the new product’s likely success. The willingness of a supplier to assume the risk of loss and back its product with a slotting allowance may be an effective “signal” to retailers of the product’s potential success.
FTC Workshop
Advocates of both the Market Power and the Efficiency schools participated at the two-day FTC slotting allowances workshop. The workshop proceeded as a series of five separate panel discussions addressing the following topics: 1) the types, trends, and effects of slotting allowances; 2) exclusionary practices and supplier market power; 3) price, choice, and retailer market power; 4) category management; and 5) policy recommendations. Panelists included economists, antitrust lawyers, business consultants, and representatives of retailers, smaller suppliers, and trade associations.
Although the central focus of the workshop was slotting allowances, certain associated practices received significant discussion. They included “pay-to-stay” fees, which have been confused with, but are distinguishable from, slotting allowances. “Pay-to-stay” fees are monies paid to a retailer by a supplier for the privilege of keeping its products on the retailer’s shelves. Another retail practice associated with but distinguishable from slotting allowances is the use of “category captains.” A “category captain” is generally a dominant supplier designated by a retailer as an information resource in managing product selection and allocating shelf space. Panelists expressed concern that “category captains” could be used to facilitate illegal collusion at the retail and/or supplier levels. Panelists opined that retail category managers should be well trained about the use of “category captains” and be sensitive to the potential antitrust pitfalls of certain category management practices.
Conclusion
The FTC workshop produced no consensus as to the competitive ramifications of slotting allowances or the need for guidelines. With few exceptions, panelists concluded that more study is necessary.54 In the view of many panelists, mostly advocates of the Efficiency School, absent the use of slotting allowances by dominant suppliers to exclude competitors, payments of such fees generally should pose no anti-competitive concerns. Advocates of the Market Power School, however, continue to call for aggressive FTC action and scrutiny of slotting practices. For now, the issuance of industry guidelines does not appear imminent.
In a June 27, 2000, letter to the FTC, the president of the American Antitrust Institute stated, “[W]e believe the most important next step would be a thoughtful and detailed public report reflecting the workshop record and current levels of staff understanding, including staff recommendations.”55 Recognizing the need for hard and reliable facts concerning the use of slotting allowances, the letter encouraged the FTC to use compulsory process directed at the largest suppliers and supermarket chains to acquire information. The letter stated that the FTC “should announce the issuance of orders to file ‘special reports’ to these industry members under Section 6(b) of the FTC Act in aid of a further slotting allowance study.”56
Whether the FTC will resort to compulsory process to acquire the empirical data to study further the competitive aspects of slotting allowances is unclear. Advocates on both sides of the debate recognize the need for further evidence regarding the competitive impact of slotting allowances. What is clear, however, is that the lines of debate are now more clearly defined between those in the Market Power and Efficiency schools of thought. All that is needed is the empirical evidence to assist in revealing which argument is the more compelling.
q
1 Federal Trade Commission Workshop on Slotting Allowances and Other Grocery Marketing Practices, May 31 – June 1, 2000, Washington, D.C.
2 McCormick & Co., Inc. , FTC File No. 961-0050 (complaint and agreement containing consent order), < http://www.ftc.gov/os/2000/03/mccormickcmp.htm >.
3 15 U.S.C. §§ 13-13b, 21a (1999).
4 See FTC Practice Rules, 16 C.F.R. §§ 1.5 and 1.6 (2000).
5 Slotting fees appeared in the 1970’s and had their origins in a bidding war between cigarette companies for end-cap display space. Nicholas A. Pyle, vice president, Independent Bakers Association, Statement Before the Federal Trade Commission Hearing on Global and Innovation-Based Competition, at 1-2 (November 8, 1995).
6 Discussing the range of conduct that has been described as slotting allowances, Willard K. Tom, the FTC deputy director of the Bureau of Competition, stated that “[s]ome of it [is] clearly unlawful, some clearly lawful, and a great deal of it in the gray area in between, the legality of which can be determined only in light of all the surrounding facts and circumstances.” “Slotting Allowances and the Antitrust Laws,” Testimony of the Federal Trade Commission before the House Committee on the Judiciary, at 1 (October 20, 1999), 1999 WL 959651 (F.T.C.).
7 Id. at 4. See also Alan H. Silberman, “Preliminary Observations Concerning the Potential for ‘Slotting Allowance’ Guidelines,” (presented at the Federal Trade Commission Workshop on Slotting Allowances and Other Grocery Marketing Practices (May 31-June 1, 2000)).
8 See, e.g. , Letter and Attachments from FTC Bureau Director William Bear to Senator Christopher S. Bond, Senate Committee on Small Business, Hearings on “Slotting: Fair for Small Business and Consumers?,” U.S. Senate, 106th Cong., 1st Sess., Sept. 14, 1999 (S.H. 106-359), at 459.
9 The FTC Staff Report on the Hearings on Global and Innovation-Based Competition reported, “although the FTC heard general complaints about slotting allowances, no small manufacturer to date has provided evidence that suggests the possibility of harm to consumers, although this agency remains open to receiving such evidence.” Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace, at Ch. 5 (FTC May 1996) (Vol. 1).
10 “Extensive investigation into slotting allowances has been conducted recently by the Senate Committee on Small Business, the House Judiciary Committee, the U.S. Department of Agriculture, the General Accounting Office, and [the FTC].” Robert A. Skitol & Kathleen S. O’Neill, “Petition to the Federal Trade Commission on Behalf of the Independent Bakers Association, the Tortilla Industry Association and the National Association of Chewing Gum Manufacturers for the Issuance and Enforcement of Guidelines on Slotting Allowances in the Grocery Industry,” at 2 (April 14, 2000).
11 Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 U.S.C. §18a (2000).
12 “FTC Testifies Before House Judiciary Committee on Commission’s Antitrust Enforcement Activities,” FTC News Release (April 12, 2000), 2000 WL 376096 (F.T.C.).
13 Daniel Savrin, “Outline of Points on ‘Gatekeeper’ Issues For FTC Slotting Allowance Workshop,” (May 31, 2000) (remarks premised, in part, on an article co-written with John J. Curtin, Jr., and Daniel L. Goldberg, entitled “The EC’s Rejection of the Kesko/Tuko Merger: Leading the Way to the Application of a “Gatekeeper” Analysis of Retailer Market Power Under U.S. Antitrust Laws,” 40 B. C. Law. R. 537 (March 1999).
14 “Slotting Allowances and the Antitrust Laws,” Testimony of the Federal Trade Commission before the House Committee on the Judiciary (October 20, 1999), 1999 WL 959651 (F.T.C.), at 3. See also Christopher J. MacAvoy, “Enforcement Policy Regarding Slotting Allowances”(presented at Federal Trade Commission Workshop on Slotting Allowances and Other Grocery Marketing Practices (May 31 – June 1, 2000)).
15 See Robert J. Aalberts & L. Lynn Judd, “Slotting in the Retail Grocery Business: Does it Violate the Public Policy Goal of Protecting Businesses Against Price Discrimination?,” 40 DePaul L. Rev. 397 (Winter 1991).
16 Savrin, supra note 14.
17 See id.
18 Steven C. Salop, “Presentation to the FTC Slotting Fee Workshop.” May 31, 2000, See supra Note 16.
19 Federal Trade Commission, supra note 15.
20 See Atlantic Coast Vess Beverages, Inc. v. Farm Fresh Inc. , Civ. Action 3:93CV284 (E.D. Va. 1993); Hygrade Milk & Cream Co. v. Tropicana Prods., Inc. , 1996-1 Trade Cas. (CCH) ¶71,438 (S.D.N.Y. 1996); R.J. Reynolds Tobacco Co. v. Philip Morris, Inc. , 60 F. Supp. 2d 502 (M.D.N.C. 1999); Conwood Co. v. United States Tobacco Co. , Civil Action No. 5:98-CV-108-R (U.S.D.C. W. Ky), Judgment Entered March 29, 2000.
21 See supra note 3.
22 Section 2(a) of the Robinson-Patman Act provides in relevant part: “It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale within the United States or any Territory thereof or the District of Columbia or any insular possession or other place under the jurisdiction of the United States, and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them.” 15 U.S.C. § 13(a) (1997). 23 See supra note 3 (complaint), at 1. See also “World’s Largest Manufacturer of Spice and Seasoning Products Agrees to Settle Price Discount Discrimination Charges,” FTC News Release (March 8, 2000), 2000 WL 262576 (F.T.C.).
24 Id . S ee also Skitol & O’Neill, supra note 11.
25 Id. at 3.
26 Section 2(a) of the Clayton Act, as amended by the Robinson-Patman Act, recognizes different levels of competition at which injury may occur: the primary line, consisting of the sellers’ competitors; the secondary line, which involves the sellers’ customers; and the tertiary level, which consists of those who purchase from seller’s customers. 3 Julian O. Von Kalinowski, Antitrust Laws and Trade Regulation (MB) § 38.01 (2000). See also Brooke Group Ltd. v. Brown & Williamson Tobacco Corp ., 509 U.S. 209 (1993).
27 Id. For an example of secondary line discrimination, see FTC v. Morton Salt Co. , 334 U.S. 37 (1948) (salt manufacturer that provided discounts to retailers and wholesalers violated Robinson-Patman Act because not all buyers were able to obtain the discounts and those who could were able to resell salt at lower prices than their competitors).
28 Statement of Chairman Robert Pitofsky and Commissioners Sheila F. Anthony and Mozelle W. Thompson, McCormick & Co., Inc., FTC File No. 961-0050 (March 2000), < http://www.ftc.gov/os/2000/03/mccormickrpslamwtstatement.htm >.
29 See supra note 3. Three defenses to a price discrimination claim under §2(a) the Robinson-Patman Act are: 1) cost justification; 2) changed conditions; or 3) meeting competition. 15 U.S.C. §§ 13(a) and 13(b) (1997).
30 The gravamen of the FTC’s complaint in McCormick addressed discounts and promotional payments “typically. . . for all or a substantial part of the existing McCormick product line and typically were not incentives to accept new McCormick products.” See supra note 3 (complaint, at 3). As such, the targeted conduct in McCormick , although regarded as similar to slotting allowances, is distinguishable from the more commonly accepted definition of slotting allowances as defined herein.
31 Skitol & O’Neill, supra note 11.
32 The IBA is a trade association of over 400 small to medium-sized wholesale bakers and allied industry trades. Id. at 1.
33 The TIA is a trade association of over 175 companies connected to the tortilla industry of which 77 are tortilla producers representing approximately 75% of all tortilla products sold. Id.
34 The NACGM is a trade association of 20 companies connected to the chewing gum industry of which nine are domestic chewing gum manufacturers including some of the largest consumer products companies in the United States. Id.
35 Id.
36 Aalberts & Judd, supra note 16.
37 Efficiency School proponents challenge the claim that slotting allowances are on the increase. See MacAvoy, supra note 15, at 3.
38 Id. at 3.
39 Skitol & O’Neill, supra note 11, at 2-3.
40 Id. at 4.
41 Id.
42 Id.
43 Id.
44 Id.
45 Proposed guidelines 8-9 address downstream concerns of price and other discriminations that adversely affect competition between favored and disfavored retailers in violation of either Section 2(a) or Section 2(d) of the Robinson-Patman Act, 15 U.S.C. Section 13 (1997).
46 Proposed guidelines 2-7 address upstream concerns of anti-competitive exclusion of competition at the supplier level in violation of Section 5 of the FTC Act, 15 U.S.C. § 45 (1997). See Grand Union Co. v. FTC , 300 F.2d 92, 98-99 (2d Cir. 1962) (FTC Act gives FTC power to stop every trade practice that restrains competition or might lead to the restraint of competition if not stopped).
47 Skitol & O’Neill, supra note 11, at 5.
48 MacAvoy, supra note 15.
49 Id. at 7.
50 Id. See also supra note 21.
51 Id. at 7 ( citing Guides for Advertising Allowances and Other Merchandising Payments and Services, 16 C.F.R. §240.9, example 5 n. 1).
52 Id. at 2 (citing Nicholas A. Pyle, vice president, Independent Bakers Association, Statement Before the Federal Trade Commission Hearing on Global and Innovation-Based Competition, at 1-2 (November 8, 1995)).
53 Id. at 1-2.
54 Letter to Robert Pitofsky, chairman, Federal Trade Commission, from Albert A. Foer, president of the American Antitrust Institute (June 27, 2000).
55 Id.
56 Id. Section 46(b) of the FTC Act grants the Commission power to “require. . . persons, partnerships, and corporations. . . to file with the Commission in such form as the Commission may prescribe annual or special, or both annual and special, reports or answers in writing to specific questions, furnishing to the Commission such information as it may require as to the organization, business, conduct, practices, management, and relation to other corporations, partnerships, and individuals of the respective persons, partnerships, and corporations filing such reports or answers in writing. 15 U.S.C. §46(b) (1997
. Edward C. LaRose is a shareholder and Patrick J. Poff is an associate at Trenam, Kemker, Scharf, Barkin, Frye, O’Neill & Mullis, P.A., Tampa.
This column is submitted on behalf of the Business Law Section, Hal K. Litchford, chair, and Steven Fender, editor.
