The great tortilla war
Slotting fees enable oligopolies, since they are the best way to clear shelf space for the big and the drive the small out of business. This can be illustrated even in the niche market of making tortillas. The tortilla industry has a low cost of entry. The materials (flour, water, oil) are inexpensive, and the manufacturing process is simple. Differentiation between products is pretty marginal. And brand identities and loyalties are not particularly strong.
Though tortillas may seem like a small industry, they've actually grown to represent about a third of the US bread market, with around $5 billion in sales. But this rapid growth has not been profitable for the over 250 tortilla makers in the US.
One company dominates the US tortilla market, the Mexican company Gruma. The company. That company sells tortillas through the labels Buena Comida, Guerrero, and Mission, so on many supermarket shelves there appears to be real competition when there is not. It also makes a variety of store brands as well as supplying Taco Bell nationally. It has moved up to 50% of the supermarket sales, and makes over $2 billion a year.
Behind Gruma's ascendancy is slotting fees, according to a lawsuit that was filed by 17 smaller US tortilla makers. The allegations that unfair trade practices, including buying shelf space and paying supermarket chains to exclude competitors.
Unfortunately for the plaintiffs, the suit was dismissed before going to trial a few weeks ago by a US District Court in Texas. According to an article the Forth Worth Star-Telegram, ("Tortilla Lawsuit Dismissed", 1/7/2004), the judge said "the rival tortilla makers could have used the same tactics -- slotting fees and other financial incentives that have become accepted marketing practices for placement of goods in supermarkets." In other words, that slotting fees, no matter how much companies can use them to crush all competition, are legal.
As the article notes, "If the Gruma suit had succeeded, it could have had ramifications in supermarket retailing beyond the $5.2 billion tortilla market. The widespread use of slotting fees charged by chains for positioning products has become controversial, with some lawmakers demanding a ban on the practice." The decision is a blow to antitrust efforts. It also is a missed opportunity to pry into the secretive world of supermarket slotting fees. The plaintiffs plan to appeal.
