Robert Skitol Assesses the FTC Staff Report on Slotting Allowances and Other Marketing Practices in the Grocery Industry

Feb 26 2001
Commentaries

Appeared as the AAI Column in the February 26, 2001 FTC:WATCH

SLOTTING FEE BARONS: WATCH YOUR STEP

By Robert A. Skitol

Five years ago, in their report on "Competition Policy in the New High Tech, Global Marketplace," the FTC staff dismissed the entire slotting fee controversy with three paragraphs concluding there was no evidence suggesting even "the possibility of harm to consumers." Grocery manufacturers and retailers alike thereupon took their gloves off, escalating the use of these fees to exclude rivals and cement their dominant market positions. The small business community and its Congressional supporters, led by Senator Bond and his Small Business Committee, also took their gloves off; the FTC staff went back to school and last week released a 72-page report on their findings and recommendations from last year's slotting allowance workshop. While carefully avoiding definitive judgments, the report brings both thoughtful analysis and fresh thinking to this divisive topic.

My bias as a partisan and advocate of slotting fee guidelines is hereby disclosed. To my disappointment, the report recommends against a guidelines initiative. The fact is, however, that the report itself provides a substantial measure of the guidance that guidelines petitioners sought on circumstances under which slotting fees can be anticompetitive and warrant enforcement action. Most importantly, the report embraces a theory of "exclusion" and of anticompetitive purchase of "exclusionary rights" that Professor Salop has been marketing to the antitrust world for almost 20 years and that has now found a fine home in this context: payments by a dominant manufacturer in return for shelf space control that excludes smaller rivals or raises their costs can suppress competition and raise consumer prices; absent proof of off-setting procompetitive efficiencies, the payments can then be found unlawful under both the Sherman and FTC Acts.

Key insights into how the staff would apply that theory can be found on page 39. First, the report notes, "a likelihood of competitive harm may be established from an analysis of market structure and of the market participants' abilities and incentives to behave anticompetitively following the exclusionary conduct"; it also, however, "might be inferred from evidence that a competitor's constraining influence on the market has been diminished," thereupon citing Commissioner Swindle's separate opinion in Toys-R-Us. Second, the report notes, "harm to competition from exclusionary conduct may take a variety of forms," including "product variety and consumer choice," thereupon citing Commissioner Leary's just-released article on "The Significance of Variety in Antitrust Analysis," 68 Antitrust L.J. 1007 (2001). As Commissioner Leary notes in that article, "for many consumers variety may be a more significant issue than price" (id. at 1020). The slotting fee problem presents that issue in sharp relief, for it is about diminishing choices on grocery shelves.

On the other hand, the report fails to address in any meaningful way "discrimination" issues under various parts of the Robinson-Patman Act, claiming they "were not the focus of the workshop" (footnote 9). A throw-away line suggests "[t]he Commission should remain aware of the ways in which differential payment of slotting allowances and other access fees could result in discrimination among a firm's trading partners" (p. 67). This is a curious undertreatment of a potentially powerful weapon against anticompetitive slotting fee practices. See AAI Column, "FTC's McCormick Case a Paradigm Shift?," FTC: Watch, March 13, 2000 at 2; see also §9, Note 1 of the Fred Meyer Guidelines (discriminary purchase of shelf or display space reachable under §2(d) of the Robinson-Patman Act). Footnote 9 also disclaims any interest in shelf space access payments "amounting to commercial bribery" that, the staff say, "could raise considerations outside of antitrust law." Such payments, however, have been found subject to per se prohibition under Section 2(c) of the Robinson-Patman Act, which remains part of today's antitrust law. Atlantic Coast Vess Beverages, Inc. v. Farm Fresh, Inc., Civ. Action 3:93CV284 (E.D. Va. 1993).

While missing that boat, the report brings new attention to a practice that has become a close cousin to slotting fees in its competitive ramifications: supermarkets' use of leading suppliers as "category captains" with effective control over shelf allocations in their product categories. While recognizing efficiencies in this practice, the report identifies significant potential for adverse effects: the chosen supplier can get access to confidential data on category rivals, bias the shelf allocation plan to rivals' detriment, and facilitate collusion both among suppliers and among retailers. This analysis could have contributed to the Justice Department's investigation, closed without action three years ago, into Frito Lay's control of salty snack space in stores across the country. AAI's Advisory Board Member Robert Steiner has pioneered research in this area; the practice can be expected to spread as grocery manufacturing continues to consolidate, and it thus warrants closer commission enforcement scrutiny.

Retailer marker power as a factor in the proliferation of slotting fee demands is addressed a bit gingerly. The report recognizes, as did the Commission in its Toys-R-Us decision, that buyer power short of economists' definition of "monopsony" power can generate anticompetitive market outcomes. Some workshop participants criticized the Commission's supermarket merger enforcement program for inadequate attention to this point, as has AAI on several occasions. The report gently embraces the point in its recommendations that future reviews of supermarket mergers focus on "possible creation or enhancement of retail market power, exercisable upstream against suppliers, as well as [on] the more familiar seller power exercisable downstream against consumers"; and that the agency "exercise care in framing and implementing" divestitures orders so they "do not inadvertently create upstream problems of their own" (pp. 71-72).

Now for the part that will bring nightmares to grocery manufacturing and supermarket barons throughout the land: the staff recommends employment of the Commission's compulsory process authority for "research projects" to learn more about actual uses of slotting allowances and other kinds of shelf-access payments. AAI has long urged this course, believing that neither suppliers nor chains that profit from these practices would ever voluntarily disclose information critical to a full understanding of marketplace effects. The industry completely stonewalled GAO in its efforts to get at the facts in response to a request from the Senate Small Business Committee. Chairman Bond thereupon saw to it that $900,000 was added to the FTC's budget for this year earmarked for a deeper slotting fee inquiry. The Commission thus now has the mandate as well as resources to invoke its subpoena and "special report" powers for an in-depth investigation.

The staff have produced a valuable report that outlines eminently reasonable next steps for both investigation and policy direction. Its analysis of competing efficiency and exclusion dimensions to slotting fees and related marketing practices should aid not only the Commission in its enforcement responsibilities but courts in their adjudications of private suits in this area as well. Finally, it is the latest example of the great utility of an administrative innovation of the Pitofsky regime - - the "workshop" approach to new competitive issues. The agency heard from a diverse range of knowledgeable people, listened well, and learned a great deal about problems confronting the grocery industry. Now it is up to the Commissioners to act on the staff's recommendations.