Oligopoly Control Of Food Production And Retailing Keep Prices Higher Than They Should Be

Leonard Lopate on WNYC had a interesting segment this week on what are called "slotting fees". I had never heard the term before but it refers to the fee a food maker would pay to get their product into a store, especially the large supermarket chains. For these large chains, food makers may pay anywhere from $50,000 to $75,000 just to get their product into about 500 stores for just a few weeks. And, once you have established your product in a store via the slotting fee, you will also pay a "placement" fee that allows you to stay on the shelves. These placements fees  are normally paid via free or discounted products rather than cash. So that 2-for-1 sale you may see in the aisle of your supermarket is quite possibly the result of the "placement" fee that the producer was required to pay the grocery chain. In addition, there are premiums for prominent placements in the grocery store such as the "end caps" (the displays at the end of each aisle) and the "waterfront property" surrounding each checkout aisle. Product placement near the checkout aisle can cost the producer anywhere from $3 to $5 PER INCH for each checkout area.

Now, some might call this bribery or at least a pay-to-play system, not much different from the payola scandal surrounding the music industry in the 1950s and 1960s. Back then, none of these fees existed in the grocery business. The practice began in the 1970s as a way for these large supermarket chains to make sure that the food producer had enough capital to actually be a reliable supplier as well as to help defray the grocery's marketing costs. Of course, with deregulation in the 1980s, the system really began to take off.

Initially, the large producers objected to these fees but soon learned to embrace them as they realized they provided a high barrier for smaller competition to enter their market. In addition, to the high cost of entry into the large grocery chains, smaller producers face another huge obstacle even after they have paid their placement fee to get on the shelf. An incredible system known as "category captains" allows the largest producer in a particular food category to lay out the display case for that product for all the other producers. An example given by one of the guests on Lopate's show was a small ice cream producer who had paid his placement fee but discovered that his product was always found behind the hinge in the ice cream display.

The whole system of slotting fees, placement fees, and category captains are now just vehicles for the larger producers to make it incredibly hard for any smaller competitor to enter the market. And, although you may go to a supermarket and think to yourself that there are so many choices, the reality is that most of the brands in any particular food group are owned by a small handful of companies. These oligopolies control so many of the products you see on your supermarket shelf. The condiment section where you buy mustard, ketchup, and mayo is dominated by Hunts and Heinz. General Mills, Post, Quaker, and Kellogg own around 85% of the cereal market. In the ice cream cabinet, Unilever and Nestle own 12 out of the top 15 brands.

The control of a huge market segment by just a handful of companies has been shown to actually increase prices as the firms really have no incentive to compete with other. It encourages price-fixing within the oligopoly in order to prevent a price war, simply because it is easier to get three or four companies to agree to price fix than getting one hundred to do so. In addition, their huge economies of scale allow them to temporarily reduce prices to drive a smaller, upstart competitor out of business, and then restore prices to their original level. In the food producing business, these additional slotting and placement fees as well as the category captains process make it even more difficult for smaller producers to actually compete.

In the late 1990s and early 2000s, the Senate looked into these fees and ordered the FTC to investigate. It created a bizarre scenario where some producers had to testify behind a screen and with disguised voices because of the fear of retaliation not only from the supermarket chains but possibly also from the market leaders in their food sectors. Needless to say, the FTC decided that the issue needed further study, probably under pressure from both the large supermarket chains and food producers, and nothing came of the investigation. Please listen to Lopate's whole segment on this system is it is a fascinating look into what is essentially bribery that drives much of American capitalism today.

As far as consumers are concerned, these cost of these fees to producers are probably passed along in the price of the product. So, not only are consumers getting shafted by higher prices because of oligopoly control they are also paying more to cover these slotting and placement fees. However, the supermarkets argue that they would have to raise the price of these goods if they were not collecting these fees. That may well be true as these supermarkets run on unusually small margins, usually only around 1% or 2%. That is why there are so few markets in low-income and low-density markets. On the other hand, it is not like these supermarket chains are going broke either. The US supermarket business is itself an oligopoly, largely controlled by five large chains - Albertsons, Ahold-Delaize, Kroger, SuperValu, and Publix. Together, under a variety of brand names, these companies control nearly 12,000 stores across the country. All of them, with the exception of Albertsons, make annual profits in the hundreds of millions. The reason that Albertsons is an outlier is that they are carrying nearly $12 billion in debt due to an ill-fated buying spree in the mid-2000s and the $9.4 billion purchase of Safeway in 2014. The interest costs alone on that debt exceed $200 million per year.

While it therefore might be debatable that supermarkets would need to raise prices without these fees, it is certainly without doubt that the system in place right now is perfectly designed to keep small producers out of the game. That lack of competition alone contributes more to higher prices than these slotting and placement fees. And the consumer pays for those higher prices. The oligopolies win and we lose. That pretty much sums up American capitalism in the early 21st century.