Slotting Fees: Effort to Study the Use of These Payments in the Grocery
Industry (Testimony, 09/14/2000, GAO/T-RCED-00-295).

Pursuant to a congressional request, GAO discussed its effort to study
the use of slotting fees in the grocery industry, focusing on GAO's: (1)
planned approach and methodology; and (2) reasons for not being able to
perform the study.

GAO noted that: (1) the 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; (2) the
industry associations were to work with GAO to identify companies
willing to speak with and provide documentation to GAO; (3) companies
are not required to provide GAO access to their internal documents or
discuss these trade practices; (4) once the companies were identified,
GAO planned to visit them to discuss the extent of their use of slotting
fees; (5) GAO also planned to obtain documentation on and analyze the:
(a) dollar amounts of slotting fees on several food categories; (b)
accounting practices for these fees; and (c) related company policies
and procedures; (6) after completing the audit work, GAO planned to
issue a report to the Senate Committee on Small Business describing what
had been learned about slotting fees; (7) GAO's methodology was designed
to produce an informational report that would not contain any
conclusions or recommendations; (8) GAO did not design the study to
address the controversial issues surrounding slotting fees, such as the
impact of slotting fees on competition, small businesses, and consumers;
(9) trade associations told GAO that they do not compile detailed
information about slotting fees because of its sensitive nature and GAO
would have to obtain slotting fee information from individual
manufacturing and retail companies; (10) GAO explained that individual
companies have no obligation to provide access to their records; (11)
thus, GAO would have to rely solely on voluntary cooperation; (12) at
those initial meetings, each association said it would inquire among its
members and put GAO in contact with those that would be willing to work
with it; (13) over a period of several months, GAO sought from Food
Marketing Institute (FMI) grocery companies that would be willing to
provide detailed information on slotting fees; (14) FMI stated that
several of the members they contacted did not want to speak with GAO;
(15) however, the association did identify two mid-size grocery chains
that met with GAO and discussed slotting fees in general terms; (16)
they explained that there are real costs and risks associated with
putting new products on their shelves and thus charging slotting fees is
a necessary business practice; and (17) however, neither provided
documentation nor specific information about the use of and accounting
for slotting fees in their businesses.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-00-295
     TITLE:  Slotting Fees: Effort to Study the Use of These Payments
	     in the Grocery Industry
      DATE:  09/14/2000
   SUBJECT:  Food industry
	     Fees
	     Voluntary compliance
	     Proprietary data
	     Retail facilities

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GAO/T-RCED-00-295

SLOTTING FEES Effort to Study the Use of These Payments in the Grocery
Industry

Statement of Lawrence J. Dyckman, Director, Food and Agriculture Issues
Resources, Community, and Economic Development Division

United States General Accounting Office

GAO Testimony Before the Committee on Small Business, U. S. Senate

For Release on Delivery 1: 00 p. m., EDT Thursday September 14, 2000

GAO/ T- RCED- 00- 295

GAO/ T- RCED- 00- 295 Grocery Industry Slotting Fees 1 Mr. Chairman and
Members of the Committee:

Thank you for the opportunity to be here today to discuss our effort to
study the use of slotting fees in the grocery industry. In the grocery
industry, slotting fees- sometimes called slotting allowancesï¿½are generally
payments from grocery manufacturers to retailers to introduce new products
on the retailers' shelves. As you are aware, there is a lot of anecdotal
information about the use of slotting fees by the industry and its impact on
small businesses and consumers, but 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 to collect this information.

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.

My testimony today will focus on our efforts to conduct this study for you.
In particular, we will highlight (1) our planned approach and methodology
and (2) the reasons we were unable to perform the study.

Background

The term “slotting” originally referred to slots or spaces for
pallets in warehouses that had to be created when products were added to the
line of products stocked by the grocery chain. The most common slotting fees
are payments from food manufacturers to grocery chains for new products,
called new product introduction fees. Other payments that are also referred
to as slotting fees may include payments for premium product placements,
such as on eye- level shelves or special displays; fees to have products
remain on shelves- called pay- to- stay fees; or fees paid if a product
fails.

GAO/ T- RCED- 00- 295 Grocery Industry Slotting Fees 2 Some argue that
slotting fees are a normal economic response to the costs of putting an

expanding number of grocery products on retailers' shelves. They believe the
fees are justified to cover the costs of introducing a product and to remove
the item that previously occupied space in the warehouse and on the store
shelf. Others contend that slotting fees reflect the grocery chains' market
power, stifle innovation, squeeze out smaller manufacturers, and,
ultimately, raise prices to consumers.

Our Planned Approach to Studying the Use of Slotting Fees

In your letter of October 20, 1999, you requested that we study the grocery
industry's use of slotting fees. We agreed with your staff that the overall
objectives of our work would be to (1) describe the types of slotting fees
being used, (2) document the amounts manufacturers pay for the various types
of slotting fees, (3) determine how manufacturers and retailers account for
the payment and receipt of these fees, and (4) describe the policies and
procedures of grocery manufacturers and retailers regarding slotting fees.
Your letter further stated that the Food Marketing Institute (FMI) 1 and the
Grocery Manufacturers of America (GMA), 2 the two primary associations
representing the industry, had assured you of their cooperation in our
study. At meetings on January 5 and 20, 2000, we discussed with your staff
the fact that GAO does not have legal authority to access this private-
sector information, and we would thus depend on cooperation from grocery
manufacturers and retailers to complete this review.

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 industry associations were to work
with us to identify companies willing to speak with and provide
documentation to us. We would have preferred a more systematic approach for
selecting companies in our study. However, companies are not required to
provide us access to their internal documents or discuss these trade 1 The
Food Marketing Institute is an association representing food retailers and
wholesalers. 2 The Grocery Manufacturers of America is an association of
food, beverage, and consumer product companies.

GAO/ T- RCED- 00- 295 Grocery Industry Slotting Fees 3 practices with us.
Once the companies were identified, we planned to visit them to

discuss the extent of their use of slotting fees. We also planned to obtain
documentation on and analyze the (1) dollar amounts of slotting fees on
several food categories, (2) accounting practices for these fees, and (3)
related company policies and procedures.

After completing our audit work, we planned to issue a report to the
Committee describing what we had learned about slotting fees. Our
methodology was designed to produce an informational report that would not
contain any conclusions or recommendations. We did not design our study to
address the controversial issues surrounding slotting fees, such as the
impact of slotting fees on competition, small businesses, and consumers.

From the Committee's hearing last year we knew that confidentiality would be
required to enhance industry's cooperation. Therefore, we planned several
strategies to safeguard the company data we would be receiving and
analyzing. First, we planned to break the link between the information and
the source. For example, we would prepare workpapers that were written
summaries of meetings and documents from various sources so the information
would no longer be tied to a specific company. We have employed this
practice on numerous studies before. Also, we would not attribute
information in the report to any one company or individual.

Second, we planned to safeguard the information, as required by the company.
For example, we would place company data in a locked secure cabinet or safe.
Furthermore, we train our staff members in handling and safeguarding
government classified, business- sensitive, proprietary, and other types of
nonpublic documents.

Third, we explained to the industry associations our policies and procedures
on disclosing information. Specifically, we informed them that we are not
subject to the Freedom of Information Act. Furthermore, we told them that
when members of the

GAO/ T- RCED- 00- 295 Grocery Industry Slotting Fees 4 public request
records obtained from a federal agency or nonfederal organization in

connection with our work, we refer the public to the agency or organization
that originated the record. 3 We also do not disclose to the public any of
our records containing trade secrets and commercial or financial information
obtained from a person that is privileged and confidential. 4

While GAO is not subject to the Freedom of Information Act, Members of
Congress can request our workpapers. Therefore, we obtained a pledge of
confidentiality from you, Mr. Chairman, to safeguard specific company
information from disclosure to your Committee and its staff. In your letter
dated May 16, 2000, you pledged that:

“ Neither the Committee nor the Committee staff will seek from GAO
information that might identify any particular manufacturer or retail outlet
or any information that would allow a knowledgeable person to identify a
particular manufacturer or retail outlet.”

In addition, you stated that if any other Member of Congress requests such
information, you will inform them of your agreement not to request such
information and will encourage the Member to withdraw the request.

Detailed Information on Slotting Fees Was Not Made Available

In separate meetings in January 2000, we met with leaders of FMI and GMA to
discuss our study. The trade associations told us that they do not compile
detailed information about slotting fees because of its sensitive nature and
we would have to obtain slotting fee information from individual
manufacturing and retail companies. We explained that individual companies
have no obligation to provide us access to their records. Thus, we would
have to rely solely on voluntary cooperation. At those initial meetings,
each association said it would inquire among its members and put us in
contact with those that would be willing to work with us.

3 See 4 C. F. R. Section 81.5( a) (1999).

GAO/ T- RCED- 00- 295 Grocery Industry Slotting Fees 5 Over a period of
several months, we sought from FMI grocery companies that would be

willing to work with us and provide us detailed information on slotting
fees. FMI stated that several of the members they contacted did not want to
speak with 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 met with us and discussed slotting fees in general terms. They
explained that there are real costs and risks associated with putting new
products on their shelves and thus charging slotting fees is a necessary
business practice. However, neither provided documentation nor specific
information about the use of and accounting for slotting fees in their
businesses.

GMA was even less successful in helping us gain access to the information we
needed. To enhance the probability of their members participating in our
study, the association suggested that we obtain from you, Mr. Chairman, the
pledge of confidentiality letter. Although we provided GMA with your pledge
of confidentiality, the association was unable to identify any of its
members willing to cooperate with us or even meet with us. We also provided
a copy of your letter to FMI, but this did not result in any additional
companies willing to participate in our study.

Without the assistance of FMI or GMA, we discussed slotting fees with a mid-
size grocery store chain and a meat products manufacturer as well as a small
ethnic foods manufacturer and a small snack foods manufacturer. None of
these companies was willing to provide us documentation or specific
information about their use of slotting fees.

---- This concludes my prepared statement. I would be pleased to answer any
questions you or Members of the Committee have.

4 See 4 C. F. R. Section 81.6( e).

GAO/ T- RCED- 00- 295 Grocery Industry Slotting Fees 6

Contact and Acknowledgement

For future contacts regarding this testimony, please contact Lawrence J.
Dyckman on (202) 512- 5138. Individuals making key contributions to this
testimony included Andrea Brown and Thomas Cook.

(150166)

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