Produce MArketting and Retail Buying Practices
Paul M. Patterson and Tİmothy J. Richards
Review of Agricultural Economics - Volume 22, Number 1 - Pages 160-171

Summury:

As the growers and shippers of fresh fruits and vegetables claim, retail produce buyers are beginning to use some business practices including slotting fees, pay-to-stay, promotional allowances, lease-back agreements, failure fees etc.. which threatens them. Retailers use these methods to raise both economic and legal issues. AT the stake is the economic viability of small shippers who play by the rules, and the ability of US consumers to obtain the best quality produce at the lowest possible price.
In this paper, it is reviewed the potential impact of these business practices on stake-holders in the US fruit and vegetable marketing system. Particular attention is given to the relationship between produce shippers or suppliers and retail buyers.

Allowances: Payments for Services Rendered, or Extortion?

Retailers support slotting fees and argue that such payments are consistent because every year producers bring thousands of new, largely untested products to a highly competitive, risky environment.
It is very likely of the new product to fail. In 1997, 95% of 28.000 new products didn’t meet sales targets. Retailers were the ones to shoulder the costs and aggregating over all products in a store, and all stores in a chain, these costs can be significant.
Retailers also incur costs in screening which lead new products to enter the market. The ones who agree to pay slotting fees are the ones who trust their goods most and at least giving a guarantee for their goods. (Otherwise they wouldn’t accept such payment). That reduces screening costs and allowances become an efficient way to allocate new products.
These allowances not only help to decide which products make it to store shelves, but also the number of products. Consumers want to find a variety of products at each store. Storing these products increase the costs for retailers. As a result, there is some equilibrium price between consumers’ willingness to pay and both suppliers’ cost that equates the supply and demand of new products. In a competitive retail industry, this price will be an efficient market outcome.
Because people are constrained in the amount of calories they can consume, new food products do not increase the total demand immediately. New products should take the place of old products in order to meet targets since shelf space is an increasingly scarce resource. So retailers and many economists also offer a compelling argument that allowances simply allocate the economic surplus, or “rents” due to any asset or resource that is fixed in supply. By offering a wide variety of products, convenient locations, good hours, a clean store, and helpful staff, a successful supermarket’s shelves will add considerable value to a product.
Slotting fees may be seen as the result of competitive bargaining between retailers and suppliers. The problem arises when this bargaining is not truly competitive, or if the result of the agreement itself helps to destroy the competitiveness of future agreements.

Anti-Competitive Arguments

The anti-competitive arguments are gathered into 2 groups. The first one is the consumer and supplier groups who see these practices resulting from a retail-grocery cartel, and the second one is the rival suppliers who view the allowances as a monopolization of certain markets by sellers. By demanding payments from supplies, retailers are creating anti-competitive practices among suppliers. There are many ways in which these practices can be interpreted as anti-competitive.


First; shipper who are particularly small, independent ones, argue that these payments create barriers to entering a product market, thereby creating a monopoly power for larger sellers. This is reasonable because many fees are levied on a per-store basis, so accessing to a major chain market can be well expensive.
A second, more important case can be made for the anti-competitive effects of allowances between suppliers. One supplier can prevent another one to enter the market which at the end harms not only rival suppliers, but also consumers as well through higher prices and, perhaps, fewer new products.
Third, allowances may decrease the rate of innovation which is most damaging to consumer’s interests. If suppliers must pay to introduce new products, allowances become another cost of development that must be covered by suppliers. Unless they can, that will lead fewer new products in the market for consumers to choose.
The fourth anti-competitive effect, therefore, is the retailer-cartel argument. Thanx to the allowances, the average net margin went to 3.1% from 1.8% in 1998, so without allowances, supermarkets, on average, would have lost 1.3% on sales. New products continually prove their worth relative to other new products. At the same time the proliferation of new products gives retailers the ability to be more selective in deciding what products make it to their shelves.
Suppliers often claim that they pay different fees to different retailers. This is a form of price discrimination. By price discriminating, retailers are able to extract the maximum possible profit from all of their suppliers.
While many of the arguments retailers use in support of their use of allowances may have some validity for traditional grocery products, the fresh produce market is fundamentally different. Because of the absence of brand power, and the fact that most shippers are small in relation to industry, they do not have the power to set prices as most grocery manufacturers do.
There are 2 strategies to fight against slotting fees. One somewhat obvious solution to the problem is for suppliers refuse to pay them. While collectively this may be an optimal solution, it is not a stable equilibrium, as it throws the suppliers into the classic prisoner’s dilemma game. Second, some form of enforcement but it is also difficult. Another strategy to fight is to increase consumer advertising and promotional efforts. But if the producer is small, due to lack of brand power in the produce sector makes this strategy useless.

Review of Existing Legislation

The laws that are mostly likely to be applied in any legal challenge on slotting allowances will depend on the identity of the plaintiffs and defendants. It is possible that growers and shippers could question the actions of competing, larger shippers under existing antitrust legislation but such a case is the least likely to occur under existing rules.
A grower or shipper intent on challenging the legality of slotting allowances demanded by a retailer would most likely pursue his case through the statutory authority provided by the Robinson-Patman Act, which is broadly intended to arrest the discriminatory pricing practices of buyers and sellers.
Although a shipper would risk loosing a potential buyer, he or she could also challenge a retailer’s demand for slotting allowances under Perishable Agricultural Commodities Pact (PACA). Any handler who buys and sells more than 2.000 pounds of fruits or vegetables is required to be licensed under PACA, including wholesale and retail buyer. Violators of PACA regulations may be required to pay damages to the injured party and may face debarment and other penalties.
An alternative and more likely line of legal action buy a shipper, in particular a small shipper, would be directed toward other, large shippers. These actions could be supported by applications of various arguments under either Sherman Act or the Robinson-Patman Act.
One, the plaintiff would claim that the slotting allowances offered by a competitor blocks his or her access to an “essential facility”.
Two, the plaintiff could argue the promotional allowances are a form of predatory promotion which are illegal in Sherman Act.
Finally a shipper could challenge the actions of a large shipper basing on the Robinson-Patman Act that promotional discrimination is per se illegal.
While shippers could challenge the actions of their competitors or retailers, these actions are costly, they generally have a low probability of success, and may even be politically untenable. For these reasons, some suggest that the most prudent complaint would be the FTC since FTC is expected to prevent “unfair methods of competition.”

Changes in Retail Industry: Will the Problem Solve Itself?

In particular, three trends may render current retail practices obsolete: the increased market share of supercenters, the adoption of efficient consumer response (ECR), and the emergence of retail contracting. Although each of these dev elopement is likely to show its own influence on retail practices, they are not independent of each other.
As the number of supercenters increases, the competence will increase that growers or shippers will be much satisfied.
ECR is a retail paradigm that includes efficient promotion, efficient assortment, efficient product information and efficient replenishment. Detailed knowledge on consumers’ buying behavior will let supermarkets determine which products are selling, how much to order and what price to set.
Finally, contracting between retailers and suppliers in on the rise. With the contracts both supplier and retailer will have a certainty over the amount of profit they are likely to make. Contracts are designed to promote successful long-term relationship between retailers and suppliers.
These trends have some disadvantages too. ECR methods require a significant investment. Also contracting may disadvantageous for smaller suppliers which can not compete with the larger ones.

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