SALLY HERSHIPS, HOST:
Cardiff, imagine, if you will, the potato chip section at the grocery store. Do you ever gaze up at the chips and wonder why are there so many options for kettle cooked chips? And why is the cheaper brand of tortilla chips always so hard to find?
CARDIFF GARCIA, HOST:
So I personally have not wondered that, OK, but now I'm curious, all right?
HERSHIPS: These are important questions.
GARCIA: But you might think that the shelf would be arranged solely based on the needs and the wants of consumers, like, in this case, Sally's need for low-quality tortilla chips. But in actual fact, there is a highly complex system that governs the placement of chips and of other products at the grocery store. And a lot of it is based on fees that manufacturers, the companies that make those chips, pay to store owners. And a fee structure to help determine product placement at a grocery store may sound simple. It really is not.
HERSHIPS: No, no.
GARCIA: I'm Cardiff Garcia.
HERSHIPS: And I'm Sally Herships. Today on THE INDICATOR - witnesses testifying from behind screens with disguised voices, antitrust accusations, a web of secret payments that is so complicated not even Congress could get to the bottom of it. We take you to the dark and contentious world of the grocery store.
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GARCIA: Paying for placement, getting your product in front of consumers' eyeballs - this may sound totally fine to you. After all, we know consumers respond to advertising. And being right at eye level makes it so much easier to reach for that bag of potato chips that you really want. So paying for this kind of shelf space on the shelf of a grocery store can help a brand perpetuate its success.
HERSHIPS: There are all sorts of fees that manufacturers pay grocery stores. One of the most contentious is called slotting fees. They're meant to cover the expense of the stores taking a risk on new products. Mark Baum is with the Food Marketing Institute, which represents the grocery store industry. He says slotting fees are a totally normal and even necessary part of bringing new products to the grocery store.
MARK BAUM: You have to make new room in the warehouse. You have to make a new room on the shelf. You have to be able to mark down and sell off the product that's existing on the shelf in order to make room for the new products.
GARCIA: All of that can be expensive. Not to mention, profit margins in the grocery store industry are notoriously thin, just 1%, 2% or 3%. So if you are a grocery store owner, you don't necessarily want to use your expensive retail space as a product testing ground. Instead, store owners want to pass those costs onto manufacturers.
HERSHIPS: But here's where objections start to come in. All of these product placement fees can be expensive. In 2015, Goldman Sachs says consumer goods companies paid more than $200 billion to retailers in placement fees. That space at the front by the registers where the candy bars are is so valuable manufacturers have to pay by the inch. It's referred to as beachfront property. Julia McCarthy is with the Center for Science in the Public Interest.
JULIA MCCARTHY: I like to think about it as, you know, you're a consumer just walking into the grocery store. You're not thinking about what's on the shelves. But if you did, you'd probably assume that the shelving system was set up for, like, to support your health or to make it easier for you to find pantry staples. And actually, it's not. The shelving system is set up to support fees, which are essentially rental fees that the largest food and beverage manufacturers pay to retailers to get prime locations in stores.
GARCIA: Sally, to be clear, I was never actually fooled by this - all right? - the idea that grocery stores are out there to support my health. I know it's going to be the Snickers bar waiting for me at the counter when I go to check out, OK?
HERSHIPS: I hear you. I hear you.
GARCIA: It's not going to be, like, a bowl of green apples or something like that. But health is one of Julia's concerns. So, for example, she's a little worried that these brands that make not-very-good-for-you products end up getting to put their junk food in front of consumers, so people end up buying that not-good-for-you junk food. But her other big concern is the one that got Congress' attention, which is that the system is illegal and unfair to small businesses.
HERSHIPS: Here's how she says the system works - heads up that there is some weird industry jargon ahead. Each category, like bread, milk or mayonnaise, has what is strangely called a category captain, the company which pays the most in fees. And in exchange, Julia says you get a pretty big perk.
MCCARTHY: The category captain gets to decide where on the shelves their product will go and where on the shelves their competitors' products will go cart.
HERSHIPS: Cardiff, if you're the brand that pays the most, you get to decide where your competitors' products will go. You could squash your competitor literally all the way down to the bottom shelf. Just let that sink in for a hot second.
GARCIA: Yeah. And according to Julia, there is more. If you're the company that pays the most in fees, she says you also get access to your competitors' data.
MCCARTHY: Yes. And for us, it raises real questions of antitrust, right? So if you're getting to see competitors' data, you're getting to see how they run promotions, how they price their products and where their products go. You have a real competitive advantage.
HERSHIPS: And this is where Congress steps in. The concern was that this practice was outrageous. It was anti-competitive. So in the fall of 1999, the Senate held a hearing.
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UNIDENTIFIED REPORTER: Next, a hearing on grocery store product placement fees. Earlier today...
HERSHIPS: But the government's investigators were having a hard time getting industry insiders to testify. They were afraid.
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UNIDENTIFIED PERSON #1: Committee staff talked to 79 small businesses. Some small businesses wouldn't even talk for fear of retribution. Of the 79 we talked to, every single one of them said, if we tell our story, we're going to get knocked off of the shelves where we are now.
GARCIA: The whole system of placement fees and shelving is shrouded in secrecy. Only three small business owners would testify at that Senate hearing, and two of those were from behind screens with disguised voices. I mean, listen to this.
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UNIDENTIFIED PERSON #2: Today on the grocery store shelves, we are being eliminated to the point where it is not cost effective to take our product to market.
HERSHIPS: In addition to the testimony at the Senate hearings, there were complaints in a 2016 report from the Center for Science in the Public Interest where Julia works. But most of them were anonymous and because it's so hard to find people to talk, the subject can feel murky, so it's hard to know are these fees a necessary part of doing business or are the antitrust concerns valid, that retailers are letting manufacturers pay to decide whose products should sit where on store shelves. Mark Baum, the food lobbyist, says no. Retailers and retailers alone decide where products go, and that decision is based on what consumers want.
So what about - I mean, there were multiple accounts, I guess, saying that this was happening. Were the accounts lies?
BAUM: I think, Sally, there's a misconception that big companies are buying up shelf space or buying programs or buying placement in stores. That's - I think that it's attractive to some to think that that might be the case, but that is not the case at all.
GARCIA: Well, the Federal Trade Commission believed it was the case. It believed that when it filed charges against McCormick, the spice company, in the year 2000. See, McCormick is the company you probably buy vanilla and cinnamon from, and it was accused of demanding 90% of shelf space in the spice section of grocery stores - in effect, blocking out other brands. The firm eventually settled.
HERSHIPS: Congress also believed it was the case when it held that Senate hearing. Unfortunately, it could only find one witness to testify publicly. Even the GAO, the Government Accountability Office, tried to do a study on slotting fees, and it failed. Instead, it presented an eight-page paper about the reasons it was unable to perform the study. No one would talk. But we did find someone. Christine Hoh owns a Canadian snack company called SuperSnaps. They're seaweed chips.
CHRISTINE HOH: This is something that is really not talked about in the industry, but I have had where I would speak with a major retailer who would tell me, well, your so-and-so competitor is paying this much. What can you offer me? And meaning he or she would ask additional funds to be paid.
HERSHIPS: So just to be clear...
HERSHIPS: ...Your competitor, if they pay more, they could either pick where their product goes and your product or even knock you off the shelf altogether.
GARCIA: Sally, after you spoke to Christine, you got in touch with the people at the Food Marketing Institute to see if they had any comment. What did they say?
HERSHIPS: They said they appreciated the opportunity and chose not to comment and just wanted to reiterate their points, including that slotting fees are a cost-covering mechanism.
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GARCIA: This podcast was produced by Constanza Gallardo and edited by Paddy Hirsch. Our intern is Willa Rubin and THE INDICATOR is a production of NPR.
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