Safeway Inc. (SWY), The Kroger Co. (KR), Whole Foods Market, Inc. (WFM): Grocery Stores Are Bending the Rules, but It May Not Matter in the End

Page 1 of 2

Source: Infrogmation, via Wikimedia Commons.

In 2009 David Moore, then president of the Western Growers Associated, testified before Congress about how grocery stores were making it extremely difficult for small farmers to earn a living. Moore, who runs a farm in California, said it cost him as much as $1,000 every week to have his packaged almonds displayed in supermarkets. He then had to watch the stores sell the almonds for more than three times what it cost him to grow.

Yesterday, for those of us who aren’t industry insiders, we were introduced to the hidden profit machine for many grocery chains: slotting fees. In essence, these are fees food companies (or small farmers) pay to grocery stores to get new products placed on grocery store shelves.

Safeway Inc. (NYSE:SWY)

If a food company wanted to introduce new food products nationwide across several grocery chains, it’s estimated that it would cost as much as $2.5 million per product. With costs that high, the question must be asked: Is this an ethical model for selecting what new products get shelf space?

The argument for slotting fees
A 2011 paper (pdf), written by professors from Penn State and NYU, reviews the key argument justifying the use of slotting fees. Proponents, the paper states, argue that “slotting fees are thought to promote efficiency by … screening the risks and rewards associated with new products, thereby leading to more efficient shelf space allocation.”

There’s no way that all the new products that flood the market every year can be carried in every grocery store. Therefore, one way to narrow the playing field — and turn a nice profit in doing so — is to charge food producers to introduce new products into the market.

But slotting fees aren’t only a way to kill two birds with one stone. There are real risks associated with introducing new products in a store, the grocery industry claims. If a new product fails, there are real costs associated for the individual stores.

Industry insiders point to the fact that “riskier” products usually have higher slotting fees as evidence that this is more than just a way to extract more money. For instance, products that have to be refrigerated, thereby incurring more overhead costs associated with extra energy needed to keep the products cooled, usually have significantly higher slotting fees than those that don’t need refrigeration.

The argument against
But as David Moore’s experience shows, the practice can also make it impossible for smaller players to enter the market. Lacking the deep pockets of the nation’s largest players, these growers simply can’t pony up thousands of dollars to get their products on shelves.

This, according to opponents of the practice, leads to an anti-competitive environment in which the best products don’t necessarily rise to the top — just the ones that come from well-funded companies.

As Sen. Conrad Burns of Montana put it during the 2009 hearings: “I may have a product that’s worth nothing, but if I’ve got a big checkbook I can get shelf space.” Surely, that’s not a model we want to use to figure out what food makes it onto our plates.

The main problem, as I see it …
I don’t doubt that there are serious risks associated with stocking new products on a store’s shelves. The grocery business can be brutal, with razor-thin margins that rely on a heavy volume of product sales. At times, there’s a real economic argument that can be made for the use slotting fees.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!