[Senate Hearing 106-]
[From the U.S. Government Publishing Office]


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                   SLOTTING FEES: ARE FAMILY FARMERS
                      BATTLING TO STAY ON THE FARM
                       AND IN THE GROCERY STORE?

                              ----------                              


                      THURSDAY, SEPTEMBER 14, 2000

                              United States Senate,
                               Committee on Small Business,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 1:10 p.m., in 
room 628, Dirksen Senate Office Building, the Honorable 
Christopher S. Bond (Chairman of the Committee) presiding.
    Present: Senators Bond, Burns and Kerry.

    OPENING STATEMENT OF THE HONORABLE CHRISTOPHER S. BOND, 
  CHAIRMAN, COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES 
                     SENATOR FROM MISSOURI

    Chairman Bond. Good afternoon. The hearing of the Small 
Business Committee will come to order.
    I have to apologize. For those of you who are familiar with 
the way the Senate works you will realize that Murphy was an 
optimist when he propounded Murphy's Law. We have just had a 
vote that started a few minutes ago. That is why I am late. 
Several other of my colleagues are tied up in votes. We also 
have Floor debates and other activities going on, but I thought 
it was important that we get started on this extremely 
significant hearing. I want to thank everybody who has come 
today, witnesses and those who came just to learn more about 
it.
    One year ago today the Small Business Committee held its 
first hearing on the use of slotting allowances by the retail 
industry and the impact that that has on small manufacturers. 
That hearing came about because of complaints expressed to my 
Ranking Member, Senator Kerry, and me from small manufacturers. 
I am pleased that we have worked on this problem in a 
bipartisan manner.
    Since that first hearing, the Committee continued 
investigating this practice and, at the Committee's request, 
several Government agencies initiated efforts to take a closer 
look at slotting allowances and the impact of these fees on 
competition.
    This afternoon the Committee will continue reviewing what 
we have learned about this issue within the last year, what 
remains to be examined, and the steps Congress and Federal 
agencies should now take, among other things, to gain a better 
understanding of slotting fees.
    Additionally, this hearing will address produce farmers 
being compelled to pay slotting allowances and similar fees. 
Many small produce farmers and the associations representing 
them contacted the Committee to express their grave concern 
about the type of fees contributing to the downfall of 
America's small family farms.
    As we will hear today, small farmers receive only a small 
fraction of the price consumers pay for produce. When farmers 
are also required to pay up-front fees or provide free 
merchandise to retailers to stock their produce, it becomes 
significantly more difficult for farmers to make a profit and 
continue to farm. We will hear today about these types of 
retail practices and what they mean for small farmers and 
consumers.
    The Small Business Committee began looking at the issue of 
slotting in response to numerous complaints, as I said, 
received from small businesses about what appears to be a 
fundamentally unfair and perhaps unlawful retail practice which 
has continued to be concealed not only from the eyes of 
Congress and the agencies but from consumers and the public at 
large.
    There are many definitions about what a slotting fee is, 
but most agree that slotting fees generally take the form of 
up-front payments of cash or product from a manufacturer to a 
retailer in exchange for the retailer stocking the 
manufacturer's products. Through the Committee's investigation 
hearing last year, we learned that large-chain retailers 
routinely demand substantial up-front slotting payments from 
manufacturers to get products on the shelf or to keep them on 
the shelf. We are talking about the most expensive real estate 
in America.
    Chain retailers often exclude the products of small 
businesses simply because they cannot afford the excessive 
payments. Retailers frequently ignore the quality of a 
manufacturer's product when determining who gets on and who 
stays on the shelf. Whether a product is available to shoppers 
may depend solely on how much the manufacturer is willing to 
pay the retailer.
    During its investigation the Committee has heard countless 
theories and anecdotes about what these fees are, how retailers 
request the fees from manufacturers, how they are treated for 
tax purposes and how these fees harm consumers through 
increased prices and decreased consumer choice and innovation. 
In order to make informed policy decisions about this issue 
Congress needs to get the full picture of what is occurring in 
the marketplace. To truly know when these fees are acting as an 
anti-competitive force, Congress and relevant Federal agencies 
must be able to compile the facts about how much retailers 
collect, how the fees are negotiated, and for what the fees are 
used. Acquiring this data, however, has been almost close to 
impossible.
    It seems that these fees are the ``dirty little secret'' in 
retailing. Often nothing is in writing between the manufacturer 
and the retailer, and the amount of money paid in slotting fees 
is usually known only to supermarkets, their brokers and 
distributors.
    In addition, most small manufacturers have expressed 
considerable fear of retribution from chain retailers for valid 
reasons and we have heard too many instances where someone 
complaining about slotting fees has been totally excluded from 
the market. Anybody who complains about the fees publicly, even 
anonymously, if they are discovered, gets dealt with.
    Following the hearing last year this Committee requested 
the GAO to conduct a study on the use of slotting fees and 
other related fees in the retail grocery industry. We asked the 
GAO to collect the basic information on the types of fees being 
charged, the amounts, how manufacturers and retailers account 
for the fees, whether the fees are the same for everyone, the 
manner in which retailers demand such fees and the existence of 
the fees in other retail environments. Unfortunately, the GAO, 
despite its best efforts, could not satisfy this request.
    Now we think the Small Business Committee has been very 
patient and we worked with both the retail industry and food 
manufacturers for the last year. We tried to get the industry 
to disclose data on slotting fees voluntarily. Unfortunately, 
these efforts have been futile.
    Committee staff has expressed that frustration by drafting 
possible language to require disclosure on an annual basis of 
these fees. Unfortunately, the industry representatives were 
unable to appear today to answer questions about it to justify 
the process and we are going to be asking them some questions 
about it and asking them why we should not take steps to assure 
that these fees are disclosed to competitors and to consumers.
    The Federal Trade Commission has been focusing on slotting 
fees. They held a workshop in May to address the legal issues 
surrounding the practice and we appreciate the FTC's work. The 
FTC has told us they cannot address the workshop findings until 
a final report has been considered by the Commission. 
Therefore, the staff is not participating today. We appreciate 
their cooperation and interest and I have undertaken an 
initiative to include in the FTC's budget $900,000 in the 
Commerce, Justice, State appropriations bill to examine the 
anti-competitive effects of slotting fees and possible 
remedies. The Committee intends to follow-up with the FTC to 
make sure that the Federal Government gets a full and complete 
picture and deals with any abuses they find.
    One disturbing issue that arose in the workshop was the 
phenomenon that retailers charge up-front fees for small fruit 
and vegetable growers just to get their products on the shelf. 
The Committee had heard from other farmers about these unsavory 
practices.
    At the hearing last year, representatives of the industry 
said the reason they have to charge fees is to mitigate the 
risk of putting new products on the market. Well, when you are 
talking about a product like this, a tomato, or like this, an 
orange, there is not a lot of risk. When I go into the 
supermarket to buy citrus fruit or a tomato, I am going to buy 
the best looking, best quality I see on the shelf.
    You do not need a slotting fee to convince somebody that 
they need to buy tomatoes. That is usually on my shopping list 
when I go to the grocery store. In any event, these are not new 
products, and accordingly, the Committee decided it was 
appropriate to hear about why fees are requested from the 
produce industry and what they mean for the small farmer.
    [The prepared statement of Senator Bond follows:]

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    Chairman Bond. Our first panel, and I invite them to come 
forward, are witnesses representing almost 90 percent of the 
companies and farmers in this country who supply fresh fruits 
and vegetables. They will address that issue.
    The second panel includes the Administrator of Economic 
Research Service of the Department of Agriculture. The GAO will 
testify on the second panel about their unsuccessful efforts. 
And rounding out the second panel will be a distinguished 
academic, Professor Gregory Gundlach, who will speak on the 
status of research on slotting allowances and the evolving 
theories on the effect this practice has on consumers and 
competition, and why it is important for the Federal Government 
to receive data on slotting fees.
    We begin the hearing by welcoming Thomas Stenzel, president 
of United Fresh Fruit and Vegetable Association; David L. 
Moore, president of the Western Growers Association; and 
Michael Stuart, president of the Florida Fruit & Vegetable 
Association.
    Welcome, gentlemen. We look forward to your testimony. We 
will begin with Mr. Stenzel.

STATEMENT OF THOMAS E. STENZEL, PRESIDENT AND CEO, UNITED FRESH 
     FRUIT AND VEGETABLE ASSOCIATION, ALEXANDRIA, VIRGINIA

    Mr. Stenzel. Good afternoon, Mr. Chairman. Thank you very 
much for having us at this hearing.
    United Fresh Fruit and Vegetable Association is a not-for-
profit trade association representing the producers, 
distributors and marketers of fresh produce in the United 
States, working together with many our colleagues around the 
country representing regional associations and also working 
with our retail and food service customers. Our members range 
from the smallest family businesses to the largest 
multinational produce growers and marketers.
    I am pleased to testify today on an important issue to 
consumers and to our industry and congratulate the Committee 
for its attention to this issue. Our industry is committed to 
providing Americans with a wholesome and abundant supply of 
fresh fruits and vegetables at the lowest possible cost, and 
that goal will be paramount in my testimony.
    Food retailing, distribution, processing and production are 
experiencing today greater change and consolidation than at 
anytime in history. Companies are responding to marketplace 
forces to seek greater efficiencies that better serve the 
ultimate consumer. Yet, at the same time pressures to compete 
in this environment are sometimes leading buyers and sellers of 
produce to become adversaries rather than partners and often to 
the detriment of consumers.
    Now our industry strongly believes in a free market in 
which produce suppliers and food retailers share the common 
goal of serving the consumer. The Perishable Agricultural 
Commodities Act assures fair trading standards for fresh 
produce in the United States. And we are ever vigilant in 
seeing that the Department of Agriculture enforces this 
extremely effective law. Yet, congressional oversight is needed 
in today's rapidly changing marketplace. The Federal Trade 
Commission, the Department of Justice, and the U.S. Department 
of Agriculture all have an obligation to understand the 
changing business dynamics in the food delivery system and to 
ensure that marketplace trade practices do not become 
marketplace abuses of power.
    In recent years, a number of trade practices more familiar 
in the dry grocery area have become familiar to produce 
companies. Beginning within the last decade and the growth of 
packaged salads in the produce department, we have often seen 
requests for slotting fees and similar payments in order to do 
business.
    Now perhaps we were naive not to anticipate this, but many 
produce growers simply had no experience with packaged foods 
and were taken aback. It just somehow did not seem fair to have 
to buy shelf space rather than simply offer your best price and 
the best quality and let the chips fall where they may.
    We are not so naive today, and our larger challenge is the 
seemingly growing appetite for side deals, slotting fees, 
rebates, allowances, promotional fees, and all sorts of charges 
ranging from warehouse construction to store remodeling that 
are not contained in contracts, do not appear on invoices, and 
are otherwise unaccounted for in transactions.
    As this Committee and the Federal agencies involved 
evaluate the topic of slotting fees, I urge you to look with 
broad perspective at the impact of all of these types of off-
invoice fees and not be constrained by a more narrow definition 
of slotting.
    Our industry's concern about slotting fees and these off-
invoice payments is based on several factors. First, we believe 
that consumer choice and access to produce will be reduced. Let 
me emphasize that I do not just refer to the up-front slotting 
fees. Today, produce companies are being asked by some 
retailers, not all, to pay numerous off-invoice fees unrelated 
to the actual product costs. These rebates and allowances are 
sometimes tied to promotions or advertising which can serve 
consumers and growers alike. But in many cases they are more 
likely to be unrelated to any particular incentives or 
performance. Because of its charter, this Committee will 
naturally be concerned that small- to medium-sized growers are 
particularly vulnerable to these demands, but even the very 
largest produce companies are concerned about these practices.
    Certainly we are concerned about fairness to our industry, 
but in some cases these fees paid in advance can leave a 
retailer with very little incentive to move more produce volume 
if their profit is tied to buying the produce rather than 
selling it to you as a consumer. That raises serious questions 
about public health as well, as government authorities tell us 
the simple step of eating at least five servings of fruits and 
vegetables a day is critical in preventing cancer, heart 
disease and other chronic diseases. The soaring cost to public 
health of artificially high-priced fresh fruits and vegetables 
should be a serious national concern.
    Let me address the issue of transparency in how these 
trading practices work. Mr. Chairman, you are to be commended 
for helping to bring these issues out of the closet. The bright 
lights of this hearing room are having their effect. I am 
pleased to say that through your efforts, the reviews by the 
Federal Trade Commission are having some beneficial effects in 
the industry. We hear from our members that perhaps there is 
some dampening of the most egregious abuses that we have heard 
reported.
    To that point, transparency and knowledge of industry 
practices will help everyone in produce marketing whether they 
are a grower or a retailer. In this mysterious world of off-
invoice fees, suspicion grows and trust cannot flourish. 
Competitors battle ghosts rather than respond to true economic 
incentives. Many times we have found retail buyers who ask for 
fees simply because they are afraid their competitor is and 
they do not know what is being done anymore than the growers 
do.
    Our organization does not believe this is simply a battle 
between produce buyers and sellers, but is rather a wake-up 
call for the entire fresh food production chain to better 
understand the cost and the values of delivering produce to 
American consumers. Basic business economics will prevail in an 
environment in which these transactions are not cloaked in 
mystery, but are negotiated openly, displayed on invoices, with 
specific performance requirements.
    Finally, let me mention a slightly different concern. 
Traditional antitrust concerns have focused on regulating 
manufacturers' behavior to ensure fair competition, rather than 
focusing on the powerful buying groups. Frankly, we are 
concerned today that produce growers may be at greater risk 
than their customers who demand some of these payments. There 
is great dissension within the retail supermarket industry 
today. Many independent grocers feel that they may not be 
offered the same deals as some other chains get and they are 
madder than heck and say they are not going to take it anymore 
either.
    Under the Robinson-Patman Act, sellers of products are 
required to offer the same terms to all competitive customers. 
When one retailer demands a special up-front deal to do 
business, a grower is placed in a difficult position. What from 
one side looks like a demanded concession may look like 
``special terms'' to competing customers in a given market. As 
an observer of the stresses in food retailing today I see a 
real risk that grocers who imagine they are not getting the 
same deal as other retailers may be more likely to take action 
against the growers under these antitrust laws.
    In addition, as produce suppliers begin to adapt to the 
marketplace size of their retail customers, we again face the 
risk of litigation if we even discuss slotting practices among 
suppliers. Let me say that my association and our industry 
fully comply with antitrust laws regarding pricing. But we also 
believe that many of the demands currently made in the 
marketplace should not be considered part of price 
negotiations, as they are off-invoice matters unrelated to the 
sale of any lot of produce. In these cases, we believe Congress 
and the regulatory agencies should specifically recognize and 
protect the ability of produce suppliers to discuss such 
practices openly, without regard to antitrust concerns about 
price setting.
    I would call your attention to one exhibit here today, the 
example on the chart to my right of a request for a warehouse 
stocking charge. In this case produce suppliers fear even 
talking about whether they would agree to pay such a demand. 
And yet, this is clearly a case in which we believe that 
suppliers should be able to simply look at that demand; say it 
does not make sense; we do not want to pay it. Under antitrust 
laws we have great fear about retribution in terms of price 
setting from suppliers discussing whether to pay these fees.
    [The chart follows:]

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    In conclusion, today many growers are concerned with what 
they see in the marketplace. We recognize that many of the 
changes are going to require new ways of doing business, and 
that is true both for produce growers and our retail customers. 
We believe in effective free market solutions for both buyers 
and sellers to serve the ultimate consumer. But to find those 
solutions we think the changing nature of our food system must 
be addressed by all parties openly and constructively.
    We appreciate the Committee's commitment to this process. 
Thank you, Mr. Chairman.
    [The prepared statement of Mr. Stenzel follows:]

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    Chairman Bond. Thank you very much, Mr. Stenzel.
    Mr. Moore.

     STATEMENT OF DAVID MOORE, PRESIDENT, WESTERN GROWERS 
             ASSOCIATION, NEWPORT BEACH, CALIFORNIA

    Mr. Moore. Good afternoon, Mr. Chairman. My name is David 
Moore and I am a farmer and shipper of fresh produce in 
Bakersfield, California. I also serve as president of the 
Western Growers Association whose 3,500 members grow, pack and 
ship fresh fruits, vegetables and nuts in Arizona and 
California.
    WGA appreciates the opportunity to testify before the 
Senate Committee on Small Business regarding the impacts of 
slotting fees and retail consolidation in the fresh produce 
industry. Today, small, medium and large farmers are battling 
like never before to remain economically viable. The 
proliferation of slotting fees and other anti-competitive 
business practices by the large supermarkets is a very real 
threat to family farmers. Congress and the Administration must 
take action to address this issue.
    As retail consolidation continues, growers are seeing the 
use of slotting fees and other anti-competitive business 
practices expand. This is strong evidence which indicates that 
retail consolidation has gone too far.
    It is important to note that retail consolidation in the 
fresh produce industry is producing anti-competitive practices 
which go beyond the use of traditional slotting fees. Over the 
past few years our growers have confronted the following 
practices or fees imposed by retailers: pay-to-play, pay-to-
stay, these fees are appropriately named; rejection without 
reasonable cause of perishable commodities and violations of 
the Perishable Agricultural Commodities Act; computer/
technology-related fee charges; off-invoice demands; 
advertising or promotional allowances; slotting fees; interview 
fees; category management fees; warehouse construction/new 
store opening fees; and indemnification and hold harmless 
agreements.
    As an example, one retailer in California known as Ralphs/
Food 4 Less Warehouse Stores demanded of grower/shipper 
suppliers a ``new distributing facility opening fee.'' This 
effectively required monetary payment either in free product or 
direct payment to help underwrite the cost of construction of a 
new warehouse that was constructed to benefit the efficiency of 
the retailer. There is an all too subtle message that a refusal 
to pay-to-play or refusal to pay-to-stay can be the difference 
between the ability to sell or not sell to a particular 
retailer. I know of no other industry that is required to 
provide working capital for a customer's new distribution 
facility.
    Another example, multiple large retailers have demanded 
food safety audits of grower/shipper farming operations by a 
third party auditor. The recommendation requires the 
utilization of a specific auditor recommended by the retailer 
and also the dissemination of one's information on a web site 
which incurs significant expenses for the grower/shipper. This 
demand allows for no reimbursement for the cost of this extra 
expense of validating practices that may have already been 
documented by the grower/shipper's own internal farming and 
good agricultural practices.
    In another example, a prominent member has articulated that 
his business was ``encouraged'' by a dominant retailer to 
contribute $30,000 under the guise of a promotional allowance 
for a small ad for the commodity he was selling. The shipper 
was not assured that additional product would be purchased or 
that any long-term relationship would be maintained or that any 
priority for that shipper would be provided in supplying 
product to the retailer.
    Most recently, our grower/shippers have been encouraged by 
one major retailer to prepare for participation in a new e-
commerce venture for selling and buying perishable commodities. 
While these technological advancements which facilitate the 
communication, transmission of an entire transaction via 
computer will be beneficial to all in the distribution chain, 
in this case the fee assessed for each individual transaction, 
rather than being cost-shared by all parties involved, will be 
a grower/shipper obligation exclusively.
    Finally, a retailer recently assessed a fee to help 
``support'' the opening of a new warehouse facility. I am told 
that a supplier was assessed $2,000 per stock keeping unit 
which, depending on the number of produce items you may sell, 
can be tens of thousands of dollars that are unilaterally being 
deducted from the remittance by the retailer. Clearly, a 
unilateral institution of fees by the retailer constitutes a 
direct violation of the Perishable Agricultural Commodities Act 
(PACA).
    Another disturbing practice our members are experiencing is 
the rejection, without reasonable cause of perishable 
commodities. Large retailers are rejecting produce and are 
arbitrarily refusing to comply with the terms of the contracts 
without giving any reason or opportunity for inspection. They 
just do not want it. This also is a flagrant violation of the 
PACA, and is a prime example of the dark side of excess retail 
consolidation in our industry.
    These are just a few examples of the many types of off-
invoice demands and other arrangements which have not 
traditionally been a part of the produce industry. In short, 
the balance of power between supplier and retailer has shifted 
dramatically in favor of the large chain supermarkets over the 
growers. The high degree of retail consolidation is providing 
the large retailers with the market muscle needed to squeeze 
small growers through anti-competitive practices.
    Historically, the consumer would benefit from a surplus of 
a given fruit or vegetable commodity through lower prices. 
Today, however, declines in prices paid to growers are not 
being passed on to the consumer.
    WGA maintains a web site (www.wga.com) which reports the 
price spread between the price paid to the grower and retail 
price charged to consumers. We have seen price spreads of 400 
percent to 1000 percent and even higher for commodities such as 
iceberg lettuce, naval oranges, cauliflower. And if you will 
notice the chart over here, we handle probably 24 different 
items we have at all times on our web site but in the interest 
of time and clarity we just brought these three examples here. 
But you can see the spreads.
    [The chart follows:]

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    I might just highlight the fact that we have had a 
disastrous year in the naval orange business because of 
overproduction and other things, which is our fault, no one 
else's but the price has not declined. It is a higher price 
this year than last year when the retailers were paying a much 
higher price to the shippers.
    In many instances, wholesale prices have dropped without 
any corresponding decrease in the retail price. This is strong 
evidence that consumers are being adversely impacted when large 
retailers have the market power to keep prices high when 
wholesale prices paid to growers are declining. It is important 
to note that the price spreads of 400 percent to 1000 percent 
between shipper and retailer do not include any additional 
payments by the growers to retailers in the form of slotting 
fees, rebates, promotional allowances or other off-invoice 
fees.
    Unchecked retail consolidation is also adversely impacting 
family farmers. The overriding trend is that growers are seeing 
strong downward pressure on wholesale prices and operating 
margins, while facing slotting fees and other new off-invoice 
payments. In essence, the small farmer is being squeezed by 
retailers who are getting larger and larger through 
consolidation, becoming totally dominant in their market.
    The downward price pressure is felt most acutely by the 
smallest growers. Should this unhealthy trend continue, it will 
be difficult for many U.S. fruit and vegetable growers to 
maintain economic viability in markets dominated by large 
retail chain stores.
    WGA believes that the adverse impacts of the unchecked 
retail consolidation on both growers and consumers demands 
serious and urgent attention by the Federal Government. To 
date, we have not seen an adequate response from the Federal 
Government on this urgent matter. WGA urges the appropriate 
Federal agencies to vigilantly enforce Federal antitrust laws 
to maintain healthy competition and prevent anti-competitive 
practices in our industry.
    If the use of slotting fees and other off-invoice payments 
falls into a gray area of antitrust law, then Congress should 
amend the law to provide regulators with guidance in the area. 
The FTC should examine the feasibility of developing specific 
guidance to provide the foundation for acceptable or 
unacceptable demands by retailers.
    Possibly the best way to promote vibrant and healthy 
competition in the fresh produce market is to prevent further 
retail con-
solidation in our industry. Another suggestion is to require 
the 
disclosure of slotting fees and off-invoice payments in the re-
tailer's consolidated financial statements, such as the 
company's Form 10-K.
    In closing, WGA believes that slotting fee practices and 
other anti-competitive practices are a serious problem that 
demands further congressional attention.
    I thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Moore follows:]

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    Chairman Bond. Thank you very much, Mr. Moore.
    Mr. Stuart.

  STATEMENT OF MICHAEL J. STUART, PRESIDENT, FLORIDA FRUIT & 
            VEGETABLE ASSOCIATION, ORLANDO, FLORIDA

    Mr. Stuart. Thank you very much, Mr. Chairman, and good 
afternoon. Florida Fruit & Vegetable Association is a grower 
organization that represents producers of fresh vegetables, 
citrus, tropical fruit and a variety of other commodities. Our 
members range in size from single-commodity growers of less 
than 100 acres to larger, highly diverse grower/shippers. A 
large portion of our membership is indeed family-based.
    While the subject of today's hearing is obviously slotting 
fees, I think it is important to touch briefly on what we 
believe is really the root cause of all of this, and that is 
consolidation of the retail industry. According to The Food 
Institute Report, the five largest food retailers in the United 
States accounted for a whopping 40 percent of industry-wide 
sales of $271 billion in 1998 compared to 5 years earlier when 
it took the top 20 companies to reach the same percentage.
    As supermarket chains in the United States become fewer and 
larger, these retail giants enjoy a considerable bargaining 
advantage over their suppliers. This is especially alarming for 
fresh fruit and vegetable growers, many of whom are, in fact, 
small- to medium-sized family businesses. As buying power 
concentrates within the retail grocery industry, fresh produce 
growers have fewer customers to whom they can sell their 
products. The net result is continued pressure to reduce prices 
paid to growers.
    Unfortunately, consumers rarely see the benefit of these 
lower prices at the supermarket. For the past several years, 
the Florida Department of Agriculture and Consumer Services has 
conducted weekly surveys of average farm and food retail prices 
and major metropolitan areas around the State. The data 
generated by these surveys often show a wide disparity and a 
general lack of relationship between farm and retail prices for 
selected fruits and vegetables. When this happens, consumers 
get no relief at the marketplace and growers see no increased 
sales of their products.
    In our opinion, it is not likely that U.S. consumers will 
ever benefit from the continued consolidation of food retailers 
in this country if consumers' experience in the United Kingdom 
is any indication. A 1998 study by the Office of Fair Trading 
in Great Britain, a country now dominated by four grocery 
retail chains, suggests that British retailers are increasingly 
able to retain the greater profits from their increased 
bargaining power rather than passing them onto consumers.
    A November 17, 1998 article in Britain's International 
Express estimated that the average family in Britain pays over 
1,000 pounds more a year for food than those on the European 
continent.
    That brings us to the issue of slotting fees which is 
obviously the subject of today's hearing. In addition to these 
heightened pricing pressures, fruit and vegetable growers and 
shippers are increasingly being asked to provide payments such 
as up-front fees, allowances or rebates to retailers, 
ostensibly to support the marketing costs of the growers' 
crops. In reality, however, growers tell us that these pay-to-
play or pay-to-stay payments rarely result in any visible 
benefits and may only serve to boost the profit margins for 
retailers. Many of these requests for payments come in the form 
of per package rebates that have no relation to product 
performance.
    One request by a large retailer, it has been mentioned here 
a couple of times today, involved a per package contribution in 
order to fund the construction of its new produce distribution 
facility. So in addition to growers having to finance their own 
operations, they are also being asked to make direct payments 
to pay for capital improvements for the customers.
    I think we all realize that slotting fees have been a 
mainstay in the dry goods section of retail supermarkets for 
many years. We would argue, however, that slotting fees have 
absolutely no place in the produce department of a supermarket. 
The highly perishable and seasonal nature of our industry makes 
that completely impractical. Because fruits and vegetables are 
priced-based on supply and demand forces, these are costs that 
cannot be passed along in the marketplace. The bottom line is 
that growers cannot recover the costs of these fees. 
Ultimately, the cost of this pay-to-play practice comes from 
growers' profit margins, which in today's environment are very 
slim and in some cases nonexistent.
    In addition to slotting fees consolidation has resulted in 
other trade practices affecting growers. In recent years, 
retail buyers have put increasing pressure on growers to agree 
to terms outside regulations under the Perishable Agricultural 
Commodities Act. The net impact of this for a grower is not 
only the loss of the use of his money, but also the potential 
loss of his rights under the trust provisions of the law. In 
order to keep business, growers also report that they more 
frequently have to accept take-it-or-leave-it price adjustments 
on product after delivery, even though there are no defects 
that would warrant such a reduction.
    Again, these are just but a few of the marketplace issues 
and trading practices that growers are facing in the 
marketplace. Believe me when I tell you that the scope and 
variety of these fees are only limited by the creativity of 
those requesting them.
    Again, Mr. Chairman, we greatly appreciate your time, the 
Committee's time, and your staff 's time in investigating this 
issue and we look forward to your questions.
    [The prepared statement of Mr. Stuart follows:]

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    Chairman Bond. Thank you very much, gentlemen.
    In both your written and oral statements, several of you 
touched on the problem with getting farmers to come forward and 
testify even anonymously about the charging of slotting fees. 
Why are your members so reluctant to talk publicly about the 
issue?
    Mr. Stenzel.
    Mr. Stenzel. It is a very difficult issue, Mr. Chairman. 
Clearly, these are buyers and sellers in the marketplace. When 
our members have a relationship with a particular retail 
customer the last thing they want to do is call that customer 
out, if you will, and talk about what is an extremely 
controversial subject. I think it is very clear to everyone in 
the room and certainly to the Committee that the retail 
industry is not here to defend these practices. I think that is 
part of the problem, that this has been that ``dirty little 
secret'' that you talked about in your introduction.
    The more we can do to bring this area out into the light, 
let us talk about these fees and if they can be justified, if 
they help the consumer, then fine. But let us have it discussed 
and transparent and not cloak it in the hidden area between 
just that business relationship where one party is in such a 
weaker position.
    Chairman Bond. We found in our hearing a year ago that out 
of some 80-plus people we talked to only 6 of them agreed to 
testify, 3 of those backed out. Two of them actually came with 
hoods on and disguised voices. Frankly, we had to go to great 
lengths to get them. This year we found that the fears were 
even greater. Mr. Moore, how does it look from your standpoint?
    Mr. Moore. Yes, we have had some cases where people have 
challenged the retailer--not only do they lose the business, 
they will never be able to do anymore business with that 
retailer. They have a way of going out and warning the others, 
``Are you going to do business with that . . .'' and I will use 
the term, ``. . . SOB?'' We have actually had people cut out of 
the market--not only the one that he is maybe addressing, 
having a problem with, or has challenged some of their 
practices, but as a result of their complaints, they have been 
driven out of business.
    Chairman Bond. Mr. Stuart, I might add another question 
here. During the investigation the Committee heard arguments 
that fees charged to growers whether variable or fixed really 
are passed along to consumers in the form of lower prices and 
that they do benefit growers. Have you any information on 
whether price decreases have been associated with fees paid by 
growers and do your members see any benefit for them in these 
up-front fees?
    Mr. Stuart. Mr. Chairman, quite the opposite. If I had to 
list all of the calls I get on a weekly or a monthly basis from 
my members, this particular issue ranks head and shoulders 
above any other in terms of an issue that brings more--the most 
emotion to the table in terms of marketplace practices. The 
reason they are calling is because they see no value in the 
marketplace. They see, as these charts exemplify, over the last 
few years the returns back to the grower, back to the farm 
being reduced, and becoming tighter to the point where you have 
got a lot of red ink on the balance sheet, yet they see this 
disparity between the farm price and the retail price seem to 
grow on an annual basis.
    So no, I do not see that there is any benefit whatsoever 
back to the grower at this point in time. I see no evidence 
whatsoever that there is any benefit to the consumer, certainly 
not if you look at some of these markups and see what the 
retailers are charging for some of these products in various 
cities around the country.
    Chairman Bond. Mr. Moore, you testified that besides being 
president of the Western Growers, you are also a produce 
farmer. Have you experienced personally any of these demands 
for fees?
    Mr. Moore. Yes, I have, Mr. Chairman, and a lot of time if 
it is not directly, it will be because sometimes I am forced to 
send my product through another larger shipping organization. 
It gets passed through to growers so naturally those fees have 
to be paid by someone. So I am affected on the products that I 
grow.
    Chairman Bond. Are any of you finding that these fees are 
charged only in connection with exotic produce such as star 
fruit, or are they charged across the board for the basics that 
we all get in the produce department?
    Mr. Moore. I will use some examples. We truly understand 
why the retailers--are renting space. If they have a product 
come in, they do not know if it is going to move. A few years 
ago we had a product called broccoli flower. Well, when it 
first hit the market, they did not know if it was going to move 
or not. We understand why you might have to do something to 
encourage the retailer to have that space used for that. Items 
such as that or when these, what we call value-added products, 
the lettuce mixes and all that, when they first started they 
were not moving out rapidly. So we understand why you have to 
do something to get your product on the shelf.
    But again, the perfect example you made when this hearing 
started, what is new about a cantaloupe, an orange, a potato, 
or a head of lettuce? I mean that is the part that bothers me. 
These are pretty standard and we know that they are going to 
move and why isn't the 400 percent to 800 percent markup enough 
without having to go to these other measures?
    Chairman Bond. Mr. Stenzel, BATF has prohibited the payment 
of slotting fees in relation to marketing of alcohol on the 
grounds that the fees do not promote competition or benefit 
consumers. Now we understand there are special policy 
considerations surrounding the sale of alcohol, giving BATF the 
authority but is there any reason why the similar rationale 
should not apply in produce?
    Mr. Stenzel. Mr. Chairman, I think one of the most 
important things that this Committee has been able to do with 
your leadership thus far is to work with the Federal Trade 
Commission to really get the Bureau of Competition energized. 
We salute what you have done with adding the $900,000 in their 
budget for this particular issue. They have got to look at 
that. They have got to look seriously at what type of 
regulation might be appropriate in this whole area of slotting 
fees for perishable products where they are clearly not 
appropriate.
    I think it is important that the FTC looks at guidance to 
the industry. That may be certainly an outcome of the hearings, 
the 2-day hearings that the FTC held earlier. I think they have 
got to look at transparency. Again, I am going to come back to 
that as I think the light of day shines an awfully big 
spotlight, and that may be our ultimate best solution.
    Chairman Bond. Do any of you know of any instance where 
there is disclosure to any of the ultimate consumers of your 
produce? Do consumers have any idea about the payment of fees 
going on to get that produce on the market?
    Mr. Stuart. No evidence of that whatsoever that I have 
seen.
    Mr. Moore. None whatsoever.
    Chairman Bond. Mr. Stenzel.
    Mr. Stenzel. No, and in fact, Mr. Chairman, we do not find 
it in terms of disclosure and financial accounting within the 
retail supermarket industry. I think that is one of the 
concerns, as economic theory might hold that some of these 
payments, particularly if they are variable payments or volume-
based would be passed on to the consumer. But that is making 
the supposition that they are used to reduce the cost of goods 
sold.
    Clearly, in many of these cases these payments are 
accounted for and there is no relationship to reducing the cost 
of goods sold to the consumer. So not only are they not 
disclosed to the consumer generally, they are not disclosed in 
accounting particularly at the retail level.
    Chairman Bond. If they are not disclosed, that is something 
our friends at the IRS might be interested in. That is another 
problem. In the slotting hearing in 1999, we heard instances of 
special payments which included things like hiring babysitters 
and buying cars that probably did not show up in anybody's 1099 
or their 1040.
    We have been joined by my colleague from Montana, Senator 
Burns. Would you have any questions? Is there anything that you 
would like to put in at this point?

   OPENING STATEMENT OF THE HONORABLE CONRAD BURNS, A UNITED 
                  STATES SENATOR FROM MONTANA

    Senator Burns. Thank you, Mr. Chairman, and thanks for this 
hearing. I did not know you started at 1 o'clock. I thought it 
was 1:30 and here I come along, I am consequently a little late 
and I want to apologize for that.
    These slotting fees and selling shelf space, I understand 
that Safeway is not buying any domestic lamb now, they only 
want New Zealand Lamb and things like that, strike the fear of 
the heart of all of us who represent the agricultural 
community. We do not know how to break this practice to be 
honest with you.
    Things are not good on the farm. We are selling wheat now 
for less than we did before World War II. We are not getting 
along very well out there, but yet our cost of pickups and 
equipment and everything else keeps going up and we are really 
in a bind. And we do not see one son of a gun in this country 
who gives a damn, not one, not a packer or a processor or 
purveyor or a grocery store trying to keep our people, 
producers, in business. Not one.
    I think we are at the end of things. I have said what has 
been wrong with agriculture for a long time, we cannot get 
enough of the consumer dollar back to the farmer or ranch. But 
as long as this country has its belly full, consumers will not, 
they are not going to care. Do you realize right now if I could 
gather up enough money to invest in an oil well on a 
speculative basis or a gas well, do you know how long it would 
take to put together a drilling crew? Forty-five days.
    Our ability to look for, discover and lift petroleum from 
this earth, that infrastructure has been decimated because all 
of those roughneckers went to work somewhere else. The same 
thing is going to happen in agriculture. It will happen because 
we cannot take these low prices. And we have got very few 
people to replace now. We have got a lot of people who think 
they can farm but they will find out how hard it is, you know. 
They do not pass along the consumer dollar and it is a bad 
situation.
    We have had a lot of mergers at the processing level. That 
means that in livestock you have got three packers killing 85 
percent of the cattle. We do not take it far enough as far as 
antitrust and who holds the key, who has got their hand around 
the sack. I am here to tell you that we have a crisis in 
American agriculture right now. It is a crisis. And this 
slotting business and this selling of shelf space is killing 
us. You can have the best product in the world and it won't get 
sold. I just brought this along because we had a little lunch 
today.
    How come you started at 1 o'clock anyway?
    Chairman Bond. The staff, they did not want me to stay 
there for that blueberry cobbler.
    Senator Burns. I brought you some jam.
    Chairman Bond. I wanted the cobbler.
    Senator Burns. I will go back and get you the cobbler.
    Chairman Bond. That is a deal.
    Senator Burns. But this is what we are talking about. This 
is the thing, what we are talking about. I can have a mediocre 
product, which might not be worth anything but if I have a big 
checkbook, I can get shelf space, not because of the product, 
because of the checkbook. And that worries me, that really 
worries me. So as far as questions go, I do not have any. I 
want to put my statement in the Record.
    Chairman Bond. Without objection.
    [The prepared statement of Senator Burns follows:]

    [GRAPHIC] [TIFF OMITTED] T7960.019
    
    Senator Burns. And I think as we see this thing unfold and 
take a look at it next year, I think there are several of us 
that will have a lot of ideas about how we will get more 
dollars back to the man on the land because he is hurting.
    I went to a funeral of an old cowboy friend of mine. He was 
100 percent cowboy, 76 years old. He went out, stepped on his 
horse in the latter part of August, and the old horse kind of 
got a cold back. He bucked a little bit, and threw him off. My 
good friend's head hit a fence post and now he is in the 
ground. But he went in the ground happy and I think in 
agriculture he is probably in the best place right now. I 
really do.
    But, we have got some real problems and we are going to 
have to come up with some people who care. And I have not seen 
those people surface yet.
    Thank you, Mr. Chairman.
    Chairman Bond. Thank you very much, Senator Burns. 
Obviously, the Senator from Montana is one who does.
    Gentlemen, we appreciate very much your testimony. We are 
delighted to have you here. We will leave the Record open for 
further questions and if any of the Members who are tied up in 
other meetings have questions, we will submit those for the 
Record and ask you at your earliest convenience to respond. If 
any of you have any further comments based on what goes on here 
today, the Record will be open for 2 weeks. Anything else you 
want to add, Senator Burns?
    Senator Burns. No.
    Chairman Bond. Thank you again, gentlemen.
    Mr. Moore. Thank you, Chairman.
    Mr. Stenzel. Thank you, Mr. Chairman.
    Chairman Bond. Our second panel is comprised of Lawrence 
Dyckman, Director, Food and Agriculture Issues, Resources, 
Community, and Economic Development Division of the U.S. 
General Accounting Office; accompanied by Andrea Brown, 
Assistant Director, Food and Agriculture Issues, Resources, 
Community, and Economic Development Division of the U.S. 
General Accounting Office; Susan Offutt, Administrator of the 
Economic Research Service of the U.S. Department of Agriculture 
in Washington; and Professor Gregory Gundlach, College of 
Business Administration, University of Notre Dame in Notre 
Dame, Indiana. Thank you very much for joining us.
    Mr. Dyckman.

     STATEMENT OF LAWRENCE J. DYCKMAN, DIRECTOR, FOOD AND 
    AGRICULTURE ISSUES, RESOURCES, COMMUNITY, AND ECONOMIC 
     DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING OFFICE, 
   WASHINGTON, D.C.; ACCOMPANIED BY ANDREA BROWN, ASSISTANT 
 DIRECTOR, FOOD AND AGRICULTURE ISSUES, RESOURCES, COMMUNITY, 
  AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING 
                    OFFICE, WASHINGTON, D.C.

    Mr. Dyckman. Good afternoon, Mr. Chairman. With me is 
Andrea Brown, Assistant Director, who has been responsible for 
our attempt to work on slotting fees. Again, I want to thank 
you for the opportunity to be here today to discuss our plans 
to study the use of slotting fees in the grocery industry.
    Slotting fees are generally payments from grocery 
manufacturers to retailers to introduce new products. As you 
are well aware, there is much anecdotal information about the 
use of slotting fees and its impact on small business and 
consumers but very little hard evidence is available. You, 
therefore, asked us to conduct a study illustrating the use of 
slotting fees by individual companies for various grocery 
items. In making this request, you recognized that we would 
have to rely on the voluntary cooperation of the grocery 
industry. It has not been a successful effort on our part.
    In short, despite repeated attempts over the last 8 months, 
we have been unsuccessful in gaining the cooperation needed 
from the industry to conduct this study. Industry officials 
expressed concern about providing us or any outside group 
information that they consider sensitive and proprietary and 
thus critical to their business success.
    In your letter of October 20, 1999, you requested that we 
study the grocery industry's use of slotting fees. Your letter 
also stated that the Food Marketing Institute (FMI) and the 
Grocery Manufacturers of America (GMA), the two primary 
associations representing the industry, but not present today, 
had assured you of their cooperation in our study.
    Our overall plan was to conduct case studies of slotting 
fee practices in the industry for various supermarket items at 
several food manufacturing companies and grocery store chains. 
The associations were to work with us to identify companies 
willing to speak with us and to provide documentation to us.
    However, companies are not required to provide us access to 
their internal documents or discuss these trade practices with 
us. Once the companies were identified, however, we planned to 
visit them to discuss the extent of their use of slotting fees 
and obtain documentation on the dollar amounts of slotting fees 
on several food categories, accounting practices for these 
fees, and related company policies and procedures.
    We planned several strategies to safeguard the company data 
we would be receiving. First, we planned to break the link 
between the information and the source, and not attribute 
information in our report to any one company or individual. 
Second, we planned to safeguard this information. Third, we 
explained to the industry associations that we are not subject 
to the Freedom of Information Act and that we do not disclose 
to the public any of our records containing trade secrets and 
commercial or financial information.
    We also obtained a pledge of confidentiality from you, Mr. 
Chairman, to safeguard specific company information from 
disclosure to your Committee, its staff and any other Members.
    In separate meetings in January 2000, we met with leaders 
of the FMI and GMA to discuss our study approach. The 
associations told us that they do not compile detailed 
information on slotting fees because of its sensitive nature, 
and that we would have to obtain slotting fee information from 
individual member firms.
    Over a period of several months we sought from FMI grocery 
companies that would be willing to give us detailed information 
on slotting fees. FMI stated that several members they 
contacted would not even want speak to us. However, the 
association did identify two mid-size grocery chains that might 
be willing to meet with us. Both of these grocery chains 
eventually did meet with us, and we did discuss slotting fees 
in general terms but neither provided documentation nor 
specific information about the use of and accounting for 
slotting fees in their businesses.
    GMA, unfortunately, was even less successful in helping us 
gain access to members and information. On our own we discussed 
slotting fees with a mid-size grocery store chain and three 
food manufacturers. Again, none of these companies were willing 
to provide us with the type of documentation or the specific 
information we were seeking.
    Mr. Chairman, this concludes my prepared statement. We 
would be happy to answer any questions after the witnesses 
finish.
    [The prepared statement of Mr. Dyckman follows:]

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    Chairman Bond. Thank you very much, Mr. Dyckman.
    Ms. Offutt.

STATEMENT OF SUSAN E. OFFUTT, ADMINISTRATOR, ECONOMIC RESEARCH 
   SERVICE, U.S. DEPARTMENT OF AGRICULTURE, WASHINGTON, D.C.

    Ms. Offutt. Good afternoon, Mr. Chairman. I am pleased to 
be here this afternoon to discuss the preliminary findings of 
our ongoing study, fresh fruit and vegetable markets, retail 
consolidation and trade practices. It focuses on recent 
structural and marketing changes in the produce industry.
    Just last week the Economic Research Service published the 
first in a series of reports associated with this project, 
``Understanding the Dynamics of Produce Markets: Consumption 
and Consolidation Grow.''
    Today I will talk about the preliminary results of industry 
interviews on trade practices. The final report is to be 
published at the end of the year. A third report on retailer 
market power will be published this coming spring.
    The produce marketing industry has evolved considerably 
since the 1980s. These changes are partly the result of shifts 
in consumer preferences for produce and partly of the 
reorganization of the structure of the industry itself. 
Americans have become more health conscious and as a result are 
eating more fresh fruits and vegetables than ever. At the same 
time, consumers demand variety and convenience.
    Retailers have responded to consumers by expanding the 
variety of products offered. Stores now offer year-round 
availability of many fruits and vegetables, pre-cut produce and 
more packaged and branded products.
    The first chart which appears to my left shows that the 
number of fresh produce items carried by retailers doubled in 
10 years, from 173 in 1987 to 345 in 1997.
    [The chart follows:]

    [GRAPHIC] [TIFF OMITTED] T7960.024
    
    The second chart which is to my right shows that during the 
same period the share of branded produce increased from 7 
percent to 19 percent of total sales while the share of fresh 
cut produce and packaged salads rose from 1 percent to 15 
percent of total sales. Accommodating these changes in consumer 
preferences has, therefore, led to an overall increase in the 
demand for shelf space in the grocery store produce section.
    [The chart follows:]
    [GRAPHIC] [TIFF OMITTED] T7960.025
    
    Since rapid retail consolidation began about 5 years ago, 
the nature of transactions and coordination between produce 
shippers and retail buyers has evolved. Consolidation in the 
retail industry has occurred as growth in sales has slowed due 
to stable food prices. There have been reductions in household 
spending for food consumed at home as people eat out more. In 
addition, retailers have faced increased competition from the 
non-traditional sector, such as Costco and Wal-Mart. The 
retailers' inability to increase prices added to the higher 
costs of providing greater variety, additional services, as 
well as new store formats have encouraged grocery retailers to 
offset costs by seeking efficiency gains through consolidation.
    To take advantage of the potential efficiency gains, the 
fewer, larger retailers have been changing the way they do 
business, moving from spot cash purchases in wholesale or 
terminal markets to greater reliance on long-term contractual 
agreements and strategic alliances. The buying and selling of 
produce has consequently become more complex. In today's 
transactions, price may be just one component of a more 
complicated exchange that may include fees and services, along 
with the sale of produce.
    Of particular interest today is the incidence of fixed and 
variable fees or what we call trade allowances. A fixed fee is 
a payment that does not vary with the volume of sales. Slotting 
fees are defined as fixed, up-front payments to acquire shelf 
space for the introduction of new products. They are but one 
example of these fixed fees. Variable fees are assessed on a 
per unit basis and so over a season vary with the volume sold. 
Advertising fees, rebates and volume incentives are often 
structured as variable fees.
    When a trade allowance is a fixed fee paid by each and 
every shipper, a small firm's average cost of operation is 
greater relative to a large shipper. A small shipper's 
competitive position may be eroded, and the imposition of the 
fixed fee may act as an effective barrier to entry. In 
contrast, the variable fee affects shippers equally by lowering 
the effective unit price. In a competitive market, the retailer 
passes along the lower price to the consumer, in the form of 
overall lower retail prices or sales prices.
    The shipper benefits when consumers buy more at lower 
prices. Our interviews showed that shippers recognize the 
distinction between fixed and variable fees and, in fact, 
shippers are more likely to complain about a fixed fee, such as 
a slotting allowance. However, it was the case that not all 
fees and services were viewed as detrimental to the interests 
of shippers. Variable fees, such as performance-based volume 
incentives and promotional fees, may help product movement and 
may provide competitive advantage but shippers may question 
whether these fees actually increase demand for their product, 
either because of limited consumer response to the price 
changes or to a lack of accountability regarding the retailer's 
performance.
    Based on the information obtained in our interviews, we 
find that most shippers and retailers reported trade 
allowances, that include fixed and variable fees, and services 
had increased in incidence and magnitude over the last 5 years. 
The predominant type of fees charged in bulk produce sales were 
variable fees which included volume incentives, promotional 
allowances and other per unit rebates. Fixed fees, which would 
include slotting fees are also more likely to be associated 
with sales of fresh-cut and value-added items as compared to 
the bulk produce.
    Our analysis required information on the terms of exchange 
between produce shippers and retailers. When these exchanges 
occur in spot transactions in terminal markets, prices are easy 
to observe. Indeed, the USDA collects and publishes just such 
data on prices. However, when exchange takes the form of direct 
sales, or a proprietary agreement between a supplier and a 
retailer, its terms, that is prices, trade allowances, services 
required, are not so easily observable.
    As the produce business has moved increasingly to direct 
sales, we have had to adjust in the way we conducted this study 
to turn to a limited number of time-intensive, detailed 
personal interviews with fresh fruit and vegetable shippers and 
national and regional retailers. The main disadvantage of this 
approach is the lack of uniformity in response, with respect to 
the details on the terms of exchange, on exactly how much 
people will tell us about a fee, how often it is charged and 
its size.
    There are also concerns when we are limited in the number 
of interviews we can do about how well the respondents actually 
represent industry norms.
    Let me close by noting that our study focuses so far just 
on the terms of exchange between shippers and retailers. We did 
not examine the upstream relationship between growers and 
shippers. While some growers are also shippers, many are not, 
and our future work will seek to consider how growers 
experience the effects of the increased incidence and magnitude 
of these trade allowances, of the fixed and variable fees. 
Growers and shippers may benefit or suffer equally when 
retailers offer incentives or require fees, but if there is a 
lack of competition in the market between growers and shippers, 
the opportunities for passing the fees on to growers certainly 
exists.
    Thank you very much. I would be pleased to answer any 
questions at the end of the presentations.
    [The prepared statement of Ms. Offutt follows:]

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    Chairman Bond. Thank you very much.
    Professor Gundlach.

     STATEMENT OF GREGORY T. GUNDLACH, Ph.D., PROFESSOR OF 
  MARKETING, MENDOZA COLLEGE OF BUSINESS, UNIVERSITY OF NOTRE 
                   DAME, NOTRE DAME, INDIANA

    Mr. Gundlach. Thank you, Mr. Chairman and Members of the 
Committee. In summarizing my more lengthy statement I will 
concentrate on four main points.
    Chairman Bond. I should have pointed out earlier as is 
standard practice, we make the full statements of all the 
witnesses part of the Record. And I apologize for not having 
done that. Thank you for summarizing.
    Mr. Gundlach. Thank you. My first point regards the 
widening conceptual domain of slotting. As noted by others 
today, although originally defining supplier payments to obtain 
a slot in a wholesaler's warehouse, the term's meaning has 
expanded in practice. This expansion has led to varying 
interpretations and some confusion.
    While some confine the term to its original meaning, others 
use it to refer to an assortment of trade-based payments that 
range across a product's entire distribution life cycle and to 
apply to both new as well as existing products. Opinions also 
differ as to what constitutes slotting based on the nature of 
payment terms that are involved. Some narrowly view payments 
that are unconditional, fixed in nature, handled off-invoice 
and paid up-front to be slotting fees. Others view slotting 
more broadly to encompass other payment terms.
    Opinions also differ as to the characterization of slotting 
fees as either motivated by retailers and imposed on suppliers 
or motivated by suppliers and offered to retailers. Finally, 
though attention toward slotting has focused on its application 
in the marketing of food products, slotting is known to exist 
in other industries and also on the Internet.
    My second point relates to the status of research and 
challenges faced by those studying slotting. Though examined by 
academics, members of industry and policymakers, our knowledge 
of this practice is still in the early stages of development. 
My examination of published studies suggests that research on 
slotting has largely been devoted to exploratory work and the 
development of theory. The empirical research that has been 
conducted has been mainly descriptive, reporting on the form 
and occurrence of slotting. To my knowledge, only a few studies 
have conducted empirical tests of theory against information 
and data acquired in the field.
    Beyond acknowledged variation in terminology, 
interpretation and practice, those studying slotting face 
considerable challenges. As pointed out in Chairman Bond's 
opening remarks, most difficult is overcoming the apprehension 
of some participants to cooperate in discussions or grant 
access to information and data. Further contributing to this 
challenge is that many slotting arrangements are verbally 
negotiated and often go undocumented.
    My third point addresses theory and emerging insights for 
the consequences of slotting. In this regard, research that has 
been conducted provides some understanding of their effects on 
competition and consumers. The pro-competitive benefits of 
slotting are generally explained in two ways depending on how 
the payments are characterized.
    Slotting arrangements thought to be motivated by retailers 
and imposed on upstream suppliers are explained mainly in 
relation to the proliferation of new products and their high 
failure rate. Slotting is theorized to improve the efficiency 
of introducing and distributing these products.
    Slotting arrangements thought to be motivated by suppliers 
and offered to retailers to assist them in marketing the 
supplier's products are explained mainly in relation to the 
rising importance and increasing effectiveness of trade 
promotion and in-store marketing. Slotting is theorized to 
improve distribution efficiency, facilitate stronger inter-
brand competition and to address free-riding concerns that 
suppliers have for their marketing efforts.
    Theories of anti-competitive harm from slotting focus 
mainly on how they might be used by retailers and suppliers to 
distort the competitive process and result in harmful effects 
for consumers. For retailers, attention focuses on the ability 
of a dominant retailer with bargaining power over its suppliers 
to discriminate and charge fees that are unrelated to or in 
excess of their associated costs. When practiced in this way, 
concerns focus on the creation of barriers to entry and the 
potential for increased supplier concentration, lower rates and 
quality of innovation, reduced variety and choice, and less 
consumer information that may result.
    Additional concern centers on the prospect that the 
dominant 
retailer may also face limited competition in its downstream 
consumer markets. Under such circumstances the concern is that 
having charged an unreasonable fee the retailer may exercise 
its market power, keeping the surplus rather than passing it 
onto consumers in the form of lower prices or applying it in 
other beneficial ways. Where this occurs consumers can end up 
paying higher prices and/or receiving fewer benefits than they 
would but for the slotting.
    For suppliers, attention focuses on the ability of a 
dominant supplier to condition its payments to retailers on the 
right to exclude, limit or otherwise marginalize rival 
competitors. Concern centers on the prospect that excluded or 
disadvantaged suppliers may no longer be in a position to 
constrain the exercise of market power on the part of the 
powerful supplier. Some forms of slotting payments may be 
conditioned on the right to exclude rivals or to simply limit 
or disadvantage their ability to compete. Where these rights 
materially raise rivals' costs, they can marginalize existing 
rivals or deter entry by potential competitors. Costs are 
raised given the added burden of overcoming the imposed 
competitive limitation or disadvantage.
    In the absence of sufficient offsetting benefits or where 
such benefits could be achieved in some less exclusionary or 
restrictive way, slotting arrangements of the kind described 
can diminish competition and result in harm to consumers. 
Consumers are harmed where the arrangement enables the powerful 
supplier to create, preserve or enhance market power.
    My fourth and final point addresses recommendations for 
future research. Let me first applaud this Committee's efforts 
to appropriate funding for examining slotting practices. Future 
research that is conducted should first acknowledge the 
increasing array of trade arrangements and practices that have 
come to fall under the rubric of slotting. Future research 
should also emphasize a deeper conceptual and more empirical 
understanding of slotting.
    Data gathered in future studies should in particular 
include disaggregate or transaction level data that enables 
researchers to more fully understand the nature of slotting 
arrangements and how they are conducted. Future research should 
also focus on the continued development of theory for 
understanding slotting. Specific efforts should be devoted to 
slotting that is motivated by retailers and imposed on 
suppliers. Though considerable anecdotal evidence characterizes 
slotting in this way, we continue to be challenged to fully 
understand these arrangements and their effects.
    Finally, research should be directed toward understanding 
slotting in other industries and in particular its emergence in 
electronic commerce. Though important efforts currently focus 
on slotting in the marketing of food products, much could be 
learned through examining its application in other settings.
    Thank you, Mr. Chairman, and Members of the Committee.
    [The prepared statement of Mr. Gundlach follows:]

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    Chairman Bond. Thank you very much, Professor Gundlach.
    Let me ask Mr. Dyckman. The GAO has in the past 
successfully obtained confidential information from other 
industries; has it not?
    Mr. Dyckman. Yes, on a case-by-case basis we have had some 
success, for example, in the airline industry and then in the 
defense industry. Frequently it depends on whether or not the 
contractor or the private firm has some interest in cooperating 
with us but we have had some success stories; that is correct.
    Chairman Bond. And have the confidentiality agreements 
worked well? Have you had any problems with information that 
you have been turned over, proprietary information leaking out?
    Mr. Dyckman. Not to my knowledge, sir.
    Chairman Bond. How does the cooperation you have 
experienced in that area compare with, I would use the word 
cooperation lightly, but the relationship you had in these 
industries?
    Mr. Dyckman. As you know, Sir, we do not have the 
information that you desire. We went to the associations. We 
made a good faith effort. We explained to them and they knew 
quite well that we did not have authority but we made certain 
assurances to them. You went out of your way to write us a 
letter giving a pledge of confidentiality.
    They told us they contacted some of their members. One of 
the associations e-mailed 55 of their members or so. They did 
not encourage their members to cooperate with us. So I think 
without encouragement from the associations it would have been 
very difficult, and we anticipated that quite frankly. I have 
worked for GAO for 31 years and this is the first time I have 
had to report to a committee that I have been unsuccessful in 
trying to carry out the work. So we do not feel fulfilled.
    As you said in your opening statement we gave it our best 
efforts, but without the cooperation of the industry we could 
not carry this out.
    Chairman Bond. Thank you very much, Mr. Dyckman. Ms. 
Offutt, it is clear from your testimony that payments, up-front 
fees have been increasing. Is this practice increasing over 
recent years?
    Ms. Offutt. Yes.
    Chairman Bond. You mentioned something that struck me. You 
mentioned in the competitive marketplace, in the real 
competitive world--we all like to think there may be a real 
competitive world out there--that these prices would result in 
lower prices that the consumer would pay because obviously 
there would be competition. Do you have any evidence that these 
payments have, in fact, lowered fees, the ultimate price that 
consumers pay at retail?
    Ms. Offutt. We did not look directly at evidence that would 
have suggested that, for instance, a fee paid for an 
advertising campaign, to advertise a sale, actually resulted in 
lower supermarket prices or actually induced people to buy 
more. We did not ask for that kind of transaction data from the 
retailers.
    Chairman Bond. You suggest, in your written testimony, that 
the study did not review how the increased incidence and 
magnitude of fees effects growers. Based on what we have heard 
here today can we expect you all to pursue this question and 
look to the impact it may be having on growers?
    Ms. Offutt. Yes.
    Chairman Bond. Did you review any individual markets to see 
the competitive impact generally?
    Ms. Offutt. In the third stage of the study we are going to 
look more directly at the question of whether or not the 
practices are having anti-competitive effects. The study that 
we are completing now that I spoke about this afternoon is what 
was referred to as a more descriptive approach. What are the 
fees? How are they incurred?
    But it does not actually allow us to draw a judgment about 
their harmful or beneficial effect. It just gives us the basis 
for going on to ask more.
    Chairman Bond. We need that basis and it seems to me that 
we have outlined a pretty clear area for inquiry here because I 
think certainly the testimony we have had today, the testimony 
that was presented to the FTC indicates there are potentially 
some very serious problems. Did the economic research service 
run into any of the problems that the GAO encountered in 
finding--you said you talked only about shippers or retailers 
willing to talk about the practices and about the fees?
    Ms. Offutt. Yes, we did. We had on both sides shippers and 
retailers, people who were not interested in speaking with us 
at all. Some were more forthcoming about the nature and the 
size of fees but I think it is fair to say overall the 
retailers were less forthcoming than shippers were in answering 
our questions. And really we got very little of the kind of 
detailed transactions data that you have to have to make these 
determinations of benefit and harm.
    Chairman Bond. As I stated at a previous hearing, in one of 
my prior lives I was an antitrust attorney working on the 
Robinson-Patman Act and related matters. I know how much fun it 
is to compile that kind of information. Nevertheless, it seems 
to me that that could be critically important and I would hope 
that the Economic Research Service would pursue the information 
and the impact that this has on growers as well as those down 
the line and ultimately the consumers. Are the consumers 
getting any better deal, or are they simply losing choices that 
should be available to them?
    Professor Gundlach, while we are speaking about that, you 
talked about some of the considerations. Based on your review 
what kind of antitrust laws or consumer protection laws might 
be called into play here? Talk about having additional laws. Do 
you think, No. 1, are there adequate laws and what would they 
be and what, based on your experience, might be needed from 
here?
    Mr. Gundlach. Mr. Chairman, I hesitate to make a comment 
regarding the nature of laws that might apply to the specific 
practices that we are talking about. Though I do have a legal 
background, my expertise is more in the behavioral aspects of 
the fees and how they might have implications for competition. 
So I respectfully would not like to answer that question, if I 
may not.
    Chairman Bond. OK. I will throw out a few, in addition to 
the Robinson-Patman Act, sections I and II of the Sherman Act, 
section V of the FTC Act, the Clayton Act. It sounds like there 
are some good weapons out there but based on your study with 
the growth of these slotting practices what would you say the 
future holds for the small grower in this instance or, more 
broadly, the small manufacturer who is seeking access to retail 
shelves?
    Mr. Gundlach. If I can take a step backwards, I think that 
slotting is really symptomatic of the confluence of three 
distinct forces. One of those forces has been spoken of today 
and that is the shift of power that has occurred in many of our 
distribution channels into retailers' hands. The second force 
is the proliferation of new products and the third force is the 
increasing importance of trade promotion. All of those are 
coming together in terms of their effect on slotting.
    In terms of what the future holds, at the present rate of 
progress slotting will make it very difficult for small, 
independent and those suppliers without resources, overcome 
some of the barriers that these forces have brought forth. 
Particularly that these fees will provide high-entry barriers 
for smaller firms.
    Chairman Bond. And what is your analysis of the impact that 
those fees themselves may have and the results of those fees in 
limiting access of smaller manufacturers have on the choices 
available to the ultimate consumer? When the consumer goes into 
the marketplace, does she have fewer choices? When I go into 
the marketplace, am I cut out, likely to be cut out of having 
an opportunity to buy a better quality product at a lower 
price?
    Mr. Gundlach. To the extent that they do create barriers to 
entry for firms that would offer higher-quality products--more 
innovative products in the marketplace, I do think they create 
challenges of choice. These challengers are not only in terms 
of the options, but in the process of choice that consumers 
have. While smaller suppliers may be able to find access to 
consumer markets through other forms of distribution, these 
challenges will raise the costs to consumers of having to seek 
out these other forms of distribution to secure the options and 
variety that they desire.
    Chairman Bond. Thank you very much, Professor. We have been 
joined by my colleague and Ranking Member, Senator of 
Massachusetts, Senator Kerry. Welcome.

   OPENING STATEMENT OF THE HONORABLE JOHN F. KERRY, RANKING 
   MEMBER, COMMITTEE ON SMALL BUSINESS, AND A UNITED STATES 
                   SENATOR FROM MASSACHUSETTS

    Senator Kerry. Mr. Chairman, thank you very much. I 
apologize to you and to all the panelists for not being able to 
be here sooner. I personally started the ball rolling on the 
issue of slotting fees over a year ago, and I wanted to 
participate in the entire hearing. But today has been one of 
those exceptionally conflicted days around here and I apologize 
for that. On the other hand my able staff has been here 
throughout and I look forward to reviewing the Record when it 
becomes available.
    The practice of charging slotting fees, in my judgment, is 
highly questionable. The industry's conduct and its 
unwillingness to cooperate fully with the efforts to understand 
the use of slotting fees has effectively invited Congress to 
put the practice under a microscope in order to determine to 
what extent it does effect small businesses and consumers. I 
want to thank you, Mr. Chairman, for your significant and 
genuine interest in this and for your significant collaboration 
in it. I think that your own experience as an AG and your 
experience as a Governor have prompted you to be automatically 
tuned in to what this means. In a free-market system, which we 
pride ourselves on having, this practice does not seem right, 
nor does it smack, at least on the surface, and I emphasize on 
the surface, nor does it smack of normal free-market practices 
to know that somebody could have a really rather extraordinary 
product, but be very small and not have the power to be able to 
get their product to consumers. Even though it could 
conceivably cost significantly less and be a better product.
    Now, conceivably, just as a cost of doing business, like 
franchising costs, it might, conceivably under some readily 
interpretable, clear fairly arrived at and accessible system, 
be a cost that people who manufacture something need to factor 
into their cost of goods and ultimately pass onto the consumer. 
But, that does not appear to be what we are seeing here. 
Neither accessible, nor rational, nor clear, and most 
importantly, instances that we have had reported to us by 
individual small retailers which appear to be on many occasions 
spontaneously arrived at, perhaps in some cases even without 
the knowledge of upper management or of corporate headquarters. 
Though that does not appear to be true in cases involving 
chains. But, there are instances where we have seen a form of 
creative entrepreneurial effort engaged in by people who happen 
to control the access to those shelves.
    So, there is a lot going on here. And frankly, as I said 
earlier, it invites an even greater level of scrutiny and much 
more suspicion that we are having trouble getting answers. 
There have been a number of retailers that I have talked to 
privately, and I have heard all kinds of horror stories, which 
I could repeat, and some of them have been repeated, but they 
will not go public. And the reason they will not go public is 
pretty clear. I mean the capacity for being blackballed and for 
suffering economic injury as a consequence, particularly in a 
world where they do not quite know how far Congress is really 
going to go here? What is the sustainability of Senator Bond 
and Senator Kerry and the Small Business Committee's interest 
in this? How far will this go? So if we go public a year from 
now, their interest may weigh in and they get burned. I 
understand that.
    And so it is important for us to be very clear about the 
sustainability of this effort and our efforts to try and 
understand it. I have not talked to the Chairman about this 
yet, but maybe this is something that is more perfectly suited 
to the Permanent Subcommittee on Investigations, which might be 
able to be of greater assistance to the GAO and/or the FTC in 
their efforts to pursue it.
    I do not know the answers to these questions. I did not 
come here with a predetermined outcome, but in the absence of 
our ability to be able to create a rationale and an 
understanding of this, and in the face of increasing reports 
from people who testify as they have today and on other 
occasions about an uncooperative industry, we need to 
understand it better.
    So my message today, I am not going to ask questions of the 
panel because I do not like coming in late and being 
repetitive, but as I said I will review this record carefully.
    I first raised the issue because a businessman in the 
Midwest told me how his business had suffered time and again 
because he was hit with onerous fees to sell his product 
instead of another brand. Rather than both brands competing 
fairly, even when there was shelf space for both and even when 
his brand was selling well--making money for the business and 
he was filling repetitive orders based on consumer demand--he 
was forced to pay fees to get his product on the shelves. And 
that sparked my interest because it just did not seem right. It 
did not seem fair. It did not seem consistent with the concept 
of this Committee's commitment to help small businesses thrive.
    So, Mr. Chairman, I thank you for your energy and effort. 
And I hope, clearly, that the FTC and the GAO will be able to 
complete their task. For those out there who are fighting this 
practice, our message to you really is come and talk to us. 
Help us to understand. We have proven our ability, to maintain 
anonymity. We have proven our ability, I believe, to maintain 
even our interest and we will do so as we go down the road. 
Thank you, Mr. Chairman.
    [The prepared statement and attachment of Senator Kerry 
follow:]

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    Chairman Bond. Thank you very much, Senator Kerry. Thank 
you for your initiative and support for this effort and for the 
authority that you bring to our efforts.
    A couple points you mentioned, we have been able to gather 
information from many aggrieved parties by slotting. If you 
will contact this Committee, we can assure you of 
confidentiality in hopes of learning more.
    Second, under transparency I would only reiterate what the 
Senator from Massachusetts said. One of the first things you 
want to know about this process is if it is justified, if it is 
reasonable, if it is necessary and economically beneficial, why 
in the dickens is it kept so secret? That, more than anything 
else, makes us suspicious. If you have got a good 
justification, why don't you lay it out? If it is the best 
thing since sliced bread, why isn't somebody willing to talk 
about it? That is why the lack of transparency as discovered by 
the GAO and by our continuing efforts makes it highly 
suspicious.
    Third, you mentioned the Permanent Subcommittee. I had an 
opportunity to talk with Senator Collins of Maine about this 
today. She had been approached by a number of produce farmers 
from Maine and I think that this may be a good area for us to 
refer to the Government Affairs Committee for their work and 
assistance on this as well so they can continue to help us.
    But I want to thank all of our witnesses for taking time 
out of a busy schedule to attend today. I know we have a number 
of produce farmers in the audience who are here and taking time 
out. If you choose to do so, would you hold up your hands so we 
can see who is here? Thank you all very much. We will only take 
pictures of the backs of your heads. We appreciate very much 
your coming. It has been an informative hearing.
    There is clear evidence of a very disturbing impact on 
small produce farmers from these fees. The use of fees raises 
numerous issues, not the least of which is why the fees may be 
necessary. It is unfortunate that the industry representative 
did not appear today. We will be asking them to explain why 
they chose not to and why if the process is such a good one, 
they are not willing to defend it.
    We again note there has been much work done on slotting 
allowances, including increased attention by the FTC. We would 
urge our friends at the FTC to give careful consideration to 
analysis of this practice and determine the competitive or 
anti-competitive effects. We, as I said, intend to follow up 
with the FTC and we have urged, at this point have included in 
the Senate mark on the 
Commerce, Justice, State, and the Judiciary Committee's 
Appropriations bill $900,000 for them to do further work in 
this area. We intend to follow up with them to assure that that 
additional money, if we can get it to them, will be used to 
collect the data, establish guidelines and take such other 
necessary steps.
    I would urge the ERS to continue and expand upon its work 
as well. Professor Gundlach, we will look forward to hearing 
from you, and your continuing analysis. Finally, for anyone who 
does have information, we would ask that you forward it to the 
Small Business Committee.
    I thank all witnesses and those who are here in the 
audience today for joining us. We obviously are going to 
continue to be revisiting this as long as this practice remains 
widespread, and particularly if it remains hidden from view, we 
are going to continue to do our best to see that it is brought 
out in the open. Thank you very much. The hearing is adjourned.
    [Whereupon, at 2:40 p.m. the Committee was adjourned.]

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