Monday, January 19, 2004

Slotting fees and the supermarket strike The current, long-running California grocery strike, has causes that hinge not on employee pay and benefits, but rather on slotting fees. That's the position of economic reporter Edmond Jacoby in a compelling piece in the North Country Times ("Hidden payments may shape grocery strike outcome", 1/1/2004). In the first place, slotting fees, those fees demanded by supermarket chains of the their suppliers, he argues, are the way in which the three big grocery chains being struck have been able to hold out against the unions. Safeway, Kroger's and Albertsons, the parent companies of the supermarkets being struck, have had to absorb losses of up to a billion dollars. But Jacoby sees that the underlying driver in the strike is not just the greedy takebacks (or needed concessions) that the opponents in this strike are claiming. He claims that it is the slotting fees themselves, which have "become as addictive to the supermarkets as a drug." After all, slotting and related promotional fees are generally thought to represent the whole margin of profits for the three supermarket chains, who really just break even on regular operations. He points out that the FTC has determined that slotting fees make up as much as $9 billion in revenue for industry. Jacoby estimates that these three biggest chains account for well over half of that sum. The slotting fees end up eventually being paid for by the consumer in higher prices. But one major competitor does not charge slotting fees -- Wal-Mart. Wal-Mart insists on very low prices and passes much of that savings on to the customer, without slotting fees. Wal-Mart is famously stringy toward its unorganized employees, but that's not the major factor in their low prices, though that's what the supermarkets are pretending. Jacoby argues that the traditional retail model; with its slotting fees, "skews its wholesale purchasing decisions because those purchases are driven by the slotting fees, not by consumer demand for the products." The result is a culture in which the customers is less important than the supplier, a myopia that Wal-Mart can exploit effectively. In other words, Wal-Mart is winning not primarily because of low salaries and health expenses, but because of abstention from the slotting fees, which make for bad shelf space decisions. Like a crack addict, the big chains are unwilling to give up the slotting fees and compete directly with Wal-Mart. Instead of changing the way they do business, the big chains want to reduce their costs by their work force with low-cost, low-benefit employees. That way, they can continue to lose business to Wal-Mart, without as rapid an effect on their profit margins. Jacoby sees it as a stopgap, postponing the inevitable, rather than a real solution to the supermarket chains' problems. Jacoby sees the Big Three chains either becoming more like Wal-Mart, or perishing. And many stores will perish not because of overpaid employees, but "as the result of the inflexibility of existing businesses in adapting to a new set of economic realities." The three chains are looking in the wrong place to protect themselves from the disruption of the Wal-Mart approach. 8:27:15 PM

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