|
I welcome this occasion to discuss with you a subject that has been of some interest to me for several years: the proliferation of "slotting fees" and related arrangements in the grocery industry and elsewhere around the consumer goods sector. Permit me at the outset to describe some experience underlying my comments. On about seven or eight separate occasions over the past five years a manufacturing client of my firm -- and indeed a different client each time -- has asked my advice on "what is the law" and "what can be done" about slotting fees of various sorts that the client was being forced to pay just to get onto retail shelves or in some cases to get decent space or to stay in the stores. On each such occasion the client has told me about heavy- handed demands for payments of many kinds and about how injurious all of this was to its business. On each such occasion I've reviewed with the client various possible grounds for attacking these kinds of payments under one or another part of the Robinson- Patman Act, under Section 5 of the FTC Act, and even under state- law provisions that provide causes of action broader than available under federal law. Notwithstanding my eminently sage and even creative advice on each of those occasions, no client opted to have me proceed with any action on the situation. All clients quickly rejected my suggestion of a lawyer's letter to the retailers involved; the last thing any of these clients wanted was to be identified as a complainant. All clients also rejected the suggestion that I be authorized to write or even talk to anyone at the FTC on their behalf with a view to urging an investigation, even when I've offered to do so without the client's identity being disclosed. All clients expressed considerable fear that any investigation would be traced to them, that somehow or another the retailers subject to investigation would surmise the clients' identity and would retaliate in some terrible manner. In short, I've encountered what has seemed to me a remarkable degree of apprehension amounting to real intimidation with regard to this subject. The bottom line is that, despite my longrunning series of encounters of the sort just described, today is my first opportunity to discuss this practice with representatives of this agency. I am here carrying no client's water and offer only personal observations with best efforts at an unbiased contribution to your review of this subject. The term "slotting fee" encompasses such a diverse range of payments and related arrangements occurring in such a diverse range of market contexts that all of us need to be extremely careful about generalizations in this area. Some of the payments are just "entry fees" -- flat payments for a new product's access to retail shelves, x-thousands of dollars per store location without regard to purchase volumes, wholesale prices or promotional support of any kind. Other arrangements entail ongoing payments, monthly or yearly; some of them include negotiated commitments on the retailer's part for such things as particularly favorable shelf location and other forms of special attention. Some retailers attempt to be even-handed, extracting these payments in some roughly equivalent manner from all suppliers; others appear to have no reservations about different policies applied to different suppliers in the same product category -- indeed often making more onerous demands on smaller suppliers than on larger rivals. Some manufacturers make at least a semblance of an effort to offer these payments (or purported "alternatives") on proportionally equal terms (under an expansive definition of that concept) to all competing retailers with which they deal; most don't have the slightest interest in offering anything of this sort to retailers not powerful enough to demand their due. Some manufacturers at least make a stab at papering their reliance on "meeting competition" from other manufacturers that a given retailer says are also paying the demanded tribute; some manufacturers don't even bother going through those motions. Looking at this from a "market structure" perspective, some payments are made in circumstances where both the relevant downstream retail market and the relevant upstream manufacturing markets are reasonably competitive, inviting an assumption that the payments are consistent with "efficient" distribution and appropriate cost-shifting, all being part of a healthy competitive process. Other payments, however, are occurring in circumstances where both the downstream and upstream markets are quite concentrated and oligopolistic, inviting an alternative premise that there is monopsony power at work on the retailer side and perhaps also market power enhancement on the seller side as well. The payments may in fact be unrelated to and far in excess of associated costs or any other "efficiency" rationale, and the net impact may well be anticompetitive: entry-barrier-raising, concentration-increasing, imposing disproportionate costs on smaller manufacturing rivals and exacerbating the plight of smaller retailers, with adverse consumer welfare effects. I've now delineated a disparate picture of the world of slotting fees, a world in which there is a wide spectrum from situations at one end where the practice may be entirely benign and not deserving of this agency's attention all the way to the other end where the practice could be markedly injurious to the competitive process and a proper target for enforcement action. Surely this agency should be cautious about even dipping its institutional toe in this water, hesitating to intervene in complex relationships between retailers and suppliers within rapidly changing distribution systems. Let me nonetheless respectfully suggest some toe-dipping at or near the end of the spectrum where there is cause for real concern. To be more specific, let me outline a scenario for you. Assume a fairly concentrated regional grocery market with two giants controlling between them 60 or 70% of all supermarket sales and the rest of the market divided among small players. One of the products being distributed comes from an upstream manufacturing market with two giants controlling between them 60 or 70% of some nationally advertised product, the rest divided among several smaller firms. The two dominant retail chains demand from all suppliers three different kinds of payments, albeit often waived in the course of negotiations with the leading suppliers but never waived in the case of the smaller competing suppliers: a hefty entry fee for every new version of the supplier's product; hefty additional monthly payments for premium eye-level space on the shelves; and hefty additional payments in connection with retailer support for any consumer couponing program. Also assume that each of these fees markedly exceeds reasonably allocable retailer costs associated with the product handling activities involved. The net competitive impact of these kinds of practices in this market setting may not be clear. One would want to know more facts like, for example, whether or not the fees ever get translated into lower consumer prices on the products involved, whether there is any material diversion of sales from smaller retailers and indeed any trend of increasing concentration in an affected geographic area as retailers fail and go out of business, and whether there is a parallel concentration trend at the manufacturing level as smaller suppliers find it increasingly difficult to get effective retail penetration at competitive prices. Given systematic practices of the kind I've described within market structures both upstream and downstream of the kind I've described, these factual inquiries should be made because there is reason to suspect the conclusion will be that there is a materially anticompetitive longterm impact. Effects could include increasing concentration at both levels; higher costs of new product introduction and thus also higher costs of product innovation; and of course ultimately higher consumer prices and less consumer choice. Assuming a conclusion that there are such effects, the next obvious question is whether the described payments can be challenged under existing statutory authority of this agency. I would suggest the answer is yes in the following respects:
Having now outlined some factual and legal grounds for a challenge to some slotting fees in some market contexts, let me now offer two reasons why investment of Commission resources in this area may be warranted. First, from all apparent indications, slotting fees have become widespread in the grocery industry, amounts being demanded by powerful chains keep ratcheting up, and the practice is spreading to various other consumer-goods industries. For reasons I've already briefly outlined, the practice presents significant potential for anticompetitive impact in some markets. Absent any hint of this agency's concern with this practice, there is every reason to believe the practice will continue growing and spreading eventually throughout the consumer-goods sector, including into markets where the impact will in fact be anticompetitive. Second, it has become equally apparent that a lot of the people involved with this practice -- payors and receivers alike -- believe (rightly or wrongly) that it is of highly questionable legality, but that belief is no constraint on what people do. People throughout the affected markets are now convinced that adversely affected parties will never institute private suits and equally convinced that the FTC has no appetite for intervention. In short, the consensus is that, while the practice seems illegal, there is no risk in its continuation and proliferation. The result in many quarters is cynicism about and even contempt for the laws that purport to regulate conduct of this sort. The complete neglect of enforcement in this area thereby undermines incentives for voluntary compliance with these laws. And it entirely undercuts the ability of the private bar to counsel appropriately in this area, that is, our ability to encourage lawful and discourage unlawful conduct of this ilk. So, in this environment, what more specifically should the Commission do? My suggestion for starters is a serious study of the practice in several selected regional grocery markets and as applied to several selected product categories. The study could elicit detailed information on slotting fee policies of the leading chains in the regions of interest, followed by interviews with personnel from both the retailer and supplier firms involved. Such a study might ultimately generate one or more enforcement actions, but its main purpose would be broader. The end result would be a public report with analysis of apparent competitive effects and an information base useful in the follow-up development of agency enforcement guidelines in this area. Promulgation of those guidelines would be a critical second step of the program, and it seems to me reasonable to defer enforcement initiatives until after guidelines are issued. The guidelines should be flexible, indeed I would say exceptionally permissive, making it clear the Commission has no intention to regulate in depth or otherwise meddle in the complex give-and-take relations and financial arrangements between retailers and their suppliers generally. At the same time, the guidelines would make it clear that there are limits to the kinds and sizes of discriminatory payments that power buyers may extract from their suppliers, and that this agency will use the laws available to it when disregard of those limits threatens the competitive process. Permit me to close with a reminder to all attendees at this hearing that 1996 will soon be upon us, and 1996 is the year of the 60th birthday of the Robinson-Patman Act. It was this agency's chain-store study in the 1930s that led directly to the enactment of this legislation. What better way to commemorate the event than with the announcement of a new chain-store study, this time focused on slotting fees? Indeed the Commission at this sixty-year milestone point might well want to take a hard look at whether this particular Depression-era legislation in its present form is an appropriate part of 21st Century antitrust policy. There are some obvious reasons to believe it is in fact not appropriate as it is now written and as its convoluted text has been construed by the courts over the course of six decades. The Act inhibits selective price discounting in situations where such a practice would enhance competition and serve consumer interests. At the same time, it does not appear to have inhibited pervasive and markedly anticompetitive exercises of monopsony power by dominant retailers, one of the fundamental objectives of this legislation at its inception. That is an objective of continuing importance to our economy today and tomorrow. It warrants this agency's fresh review. |