Slotting allowances and the emerging antitrust enforcement debate.

• Jurisdiction: United States
• Author: LaRose, Edward C.
• Date: 01 November 2000

Advocates on both sides of the debate recognize the need for further evidence regarding the competitive impact of slotting allowances.

Retailers and their suppliers face increased antitrust scrutiny of their slotting allowance and other product management practices by the Federal Trade Commission. This spring, the FTC sponsored a workshop that capped its study of the antitrust implications of slotting allowances in the grocery industry.(1) Narrowly defined, a "slotting allowance" is a one-time, lump-sum payment to a retailer by a supplier in exchange for which the retailer allocates retail space for the supplier's products, often new products. The FTC's study appears to have been prompted by Congressional concern that dominant suppliers and retailers use slotting allowances and associated product management practices to diminish the competitive threat posed by their smaller rivals. This concern coincides with the FTC's recent McCormick(2) proceeding that may signal new vigor in the FTC's enforcement of the Robinson-Patman Act.(3) The FTC study and workshop also coincided with a pending request by several trade associations for the issuance of FTC industry guidelines on slotting allowances.(4)

In the aftermath of the FTC study and workshop, the promulgation of industry guidelines appears unlikely due to the present lack of sufficient empirical data concerning the competitive impact of slotting allowances and associated practices. The FTC's workshop, however, provided an analytical framework for future antitrust scrutiny of these practices in retail industries. Two distinct schools of thought have emerged from the recent slotting allowance debate: the "Market Power School" and the "Efficiency School." Students of the Market Power School generally view slotting allowances as an anticompetitive tool used by dominant suppliers to preclude smaller competitors from bringing new products to market; those in the Efficiency School see slotting allowances as an effective way to promote product innovation and to allocate risks and retail start-up costs between the retailers and suppliers.

Background

Slotting allowances have been common in the grocery industry for at least 30 years(5) and their use is believed to be growing in other retail contexts such as auto parts, compact discs, and greeting cards. The term "slotting allowance" has been used, albeit imprecisely, to cover a wide range of practices between suppliers and retailers relating to product or category management.(6) These include payments by suppliers to retailers:

1) For a product to be carried in the store;

2) For a fixed amount of shelf space;

3) For preferential display space;

4) For the right to be the exclusive, or nearly exclusive, supplier of a product;

5) To control what other products will be allowed on shelves;

6) To control the amount of time a product will remain on the shelves; and

7) To keep an existing item on the shelf in the face of competition--"pay-to-stay" fees.(7)

Antitrust enforcement agencies have long recognized the potential for abuse in the use of slotting allowances.(8) Historically, however, antitrust enforcers have not targeted these practices in any systematic way in deference to what has been recognized as the pro-competitive aspects of such practices.(9) Recently, however, the FTC has initiated in-depth investigations into the potential anti-competitive impact of slotting allowances and related category management practices.(10)

In part, these investigations stem from the recent "merger wave" and "product explosion" in the grocery industry. Overall, merger transactions reported under Hart-ScottRodino(11) have more than tripled from fiscal year 1991 to fiscal year 1999; fiscal year 2000 filings are expected to surpass the record set in fiscal year 1998 by more than 15 percent.(12) The grocery industry has not escaped this "merger wave." In 1996, the top five U.S. grocery retailers accounted for about 20 percent of the overall market--in 1999, the top five U.S. grocery retailers accounted for 60 percent of the market while the top 20 retailers accounted for almost 78 percent of the market.(13)

This "merger wave" has even greater significance in light of the "product explosion." Twenty to 30 years ago, grocery retailers struggled to find a sufficient variety of products to fill their shelves; these same retailers now find it difficult to choose between the seemingly limitless number of available products. Today, the average supermarket stocks approximately 30,000 items, but fully 100,000 grocery products are available from suppliers. Another 10,000 to 25,000 new products emerge each year.(14) As a result, some believe that slotting allowances are becoming less a device used by suppliers to promote the introduction of new products, and more a device used by suppliers to keep their products on the shelf and for retailers to determine which products to stock.(15)

Those in the Market Power School, accordingly, see retailers as "gatekeepers" who can "exercise market power to determine the extent of a producer's access to the retail marketplace and the terms on which such access will be made available--that role potentially affords large retailers significant leverage over producers and suppliers."(16) Some Market Power School proponents anticipate that further consolidation in the grocery industry will increase the retailer's "gatekeeper" function and will increase the possibility that larger retailers will constrain and control the product supply market while at the same time extracting larger slotting allowances that are unrelated to risk allocation or start-up costs.(17) In a $350 billion retail grocery industry, slotting allowances now account for roughly $9 billion each year.(18)

The FTC has expressed concern that increasing market concentration by retailers poses the "potential for practices such as slotting allowances to have anti-consumer rather than pro-consumer effects."(19) In addition to a handful of significant cases involving the use of slotting allowances,(20) the FTC's market power concerns on the supplier side of the retail equation were recently articulated in the FTC's enforcement action against McCormick & Company, Inc., an action that some claim has, at least for the moment, breathed new life into the FTC's Robinson-Patman Act enforcement activities.(21)

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