Journal of Advertising History
History of Advertising Trust
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Journal of Advertising HistoryHistory of Advertising Trust | Special Issue, 2002 |
Roger A. Dickinson,
University of Texas at Arlington
Slotting allowances in their most basic form are one-time payments made
by suppliers to retailers related to the introduction of new products. They may
also be considered one of a family of related marketing practices that include
presentation fees, slotting allowances or fees, display fees, pay-to-stay fees,
and failure fees (Bloom et al. 2000,
93). Slotting allowances are a one-time event, whereas pay-to-stay fees may make
the incidence of slotting allowances substantially longer term1.
Although slotting allowances have been with us for many years, they had become
regarded as of some significance in the food industry by the mid-1980s (Bloom et
al. 2000).
A substantial segment of the marketing literature associates the
development of slotting allowances in the food sector with an increased power of
retailers (Cannon & Bloom 1991; Bloom et al. 2000; Ailawadi 2001). Bloom et al. (2000) also offer evidence that retailers and suppliers do
perceive a relationship between slotting allowances and an increased power of
retailers. However, the perceived increase in retail power may have been an
illusion. In the years preceding the development of slotting allowances,
retailers were powerful, but they were restrained in their bargaining behaviour
by the Robinson-Patman Act of 1936 (often called the Anti-A&P Act) and
related statutes. Indeed, at one time the A&P retail food giant required
suppliers to indicate in writing
that discounts offered to them had also been generally available to other
retailers.
This article may be seen as offering a case in which a lack of
understanding of the historical development of negotiation in the food industry
and the attendant evolution of the legal framework may have substantially
influenced public policy and academic studies. In essence we may have been
chasing a ghost, and at substantial costs, including opportunity costs. Our
framework for approaching slotting allowances may have distorted our perspective
of the problem. This article:
Describes slotting allowances;
Considers retail power;
Delineates some basics of the Robinson-Patman Act;
Describes a scenario in which slotting allowances could have come about;
Indicates some possible ramifications of the suggested change in
perspective.
Slotting allowances are one of the many elements in a bundle of supplier
promotional alternatives. From one perspective promotional activities are
primarily developed by suppliers on their own as a means of increasing their
profitability over some time frame. From another perspective supplier offerings
are strongly influenced by the large retailers. Ailawadi (2001) makes the
judgement that sales promotions can be just as profitable for the supplier as
for the retailer. Indeed, in some instances one can see substantial supplier
research expenditures with respect to shelf space allocation of a specific
retailer for a new product as an element in supplier promotion and used by
suppliers to achieve most of the objectives of slotting allowances in gaining
competitive advantage. Steiner (2001) recently maintained that being a channel
captain offered a supplier a method of enhancing its position and perhaps was
conducive to a variety of collusive arrangements. The number of promotional
alternatives within a supplier budget can be very large.
Retailers have basically justified slotting allowances on the basis of
the increased cost to retailers of dealing with a continuous and increasing flow
of new products from suppliers (Lariviere & Padmanabhan 1997). Suppliers
often see the allowances as ‘extorted’ by the retailer in the use of ‘raw
power’.
The negotiation of slotting allowances in the food industry between
large buyers and large sellers (small buyers and sellers may also be relevant to
slotting allowances) may be seen as a way in which an oligopsonist tries to make
the offerings of an oligopolist more favourable. In this view, slotting
allowances may be usefully compared to the practice of industrial reciprocity in
industrial purchasing2. In the traditional form
of industrial reciprocity large industrial firm A keeps track of its purchases
from other firms, e.g. firm B. If firm A perceives any residual power as a
result of its large purchases from B, it can try to ‘force’ supplier firm B
to purchase other goods/services from it, one of its divisions and so on. In
this view retailers are exercising power in an effort to neutralise the power of
the oligopolist to set price and/or other the terms of the transaction or
relationship.
The study of buyer-seller relations in many industries is made difficult
because the terms of trade are not generally available to the public. Most
buyers and sellers are reluctant to reveal the terms of relationships because of
the business considerations and because of the possible legal implications
(typically the relevant laws are not understood by the buyer or seller
(Dickinson 1967b)). Therefore, little specific is known with respect to slotting
allowance behaviour and other terms of trade. In general, retailers have been
more close-lipped about slotting allowances than suppliers (Bloom et
al. 2000).
We know that power counts in determining many dimensions of buyer-seller
relationships, constrained in certain circumstances by the law. The logic of the
situation suggests this. Further, there is an inverse association between the
margins of manufacturers and retailers (Steiner 1984).
Unfortunately with respect to discussions about retail power versus
supplier power, power in the channel is difficult to define (Dickinson &
Hollander 1996). Does power that a retailer has with respect to the consumer
translate directly into power with respect to the supplier? Is there such a
thing as a power of retailers in general or is most power reflected in
one-to-one retailer-supplier interactions? If power is an individual
buyer-seller matter between one supplier and one retailer, can these
‘individual powers’ be ‘summed’ to reach a conclusion with respect to
changes in retail power in defined merchandise classifications? Perhaps one can
take measures of profitability for defined retail-supplier classifications
(categories) and compare trends in overall profitability, or perhaps return on
investment (Farris & Ailawadi 1992; Ailawadi 2001). Of course, any one
measure of power has problems. For example, overall profitability is created by
myriad factors, some perhaps not even ascertainable.
Here we do not directly define power between retailers and suppliers,
but suggest that a change in power in favour of retailers would imply that the
retailer with increased power should be able to alter the terms of the
relationship with a supplier to be more favourable to the retailer over what
would have been the case otherwise. If one is interested in examining changes in
power from this view over time, the incidence of factors such as the supplier
experience curve is relevant. The experience curve suggests that supplier costs
over the relevant ranges of volume will always go down, and therefore, over time
(assuming that all else remains the same including retail price level), without
reductions in price paid by the retailer to the supplier, the supplier would get
a larger portion of the joint profitability than at the time the relationship
was initiated.
We make no presumption as to whether increased retail power is good or
bad. Indeed, there is a literature going back many years discussing the
positives and negatives of control by particular segments of the channel (Craig
& Gabler 1963). Arguments may be made that increases in retail power in the
food industry would be a net benefit to the consumer or a net cost to the
consumer. Further, the questions are open as to how much conflict in the channel
is desirable to develop the ‘most efficient’ channel, and as to whether or
not slotting allowances increase or decrease conflict in the channel over what
they would have been otherwise (Bloom et
al. 2000, p. 103). Indeed, major suppliers of food (and most industries)
have always preferred that retailers reply to their marketing mix with a yes or
no, and avoid entering into tough negotiations.
The Robinson-Patman (RP) Act of 1936 is highly relevant to those trying
to induce the Federal Trade Commission to regulate slotting allowances in some
way (Aalberts & Judd 1991; Skitol 2001). We now give some basics of RP so
that one can understand better the evolution of buyer-seller relations in the
food industry.
RP, an anti-trust statute, is an amendment to Section 2 of the Clayton
Act of 1914. RP makes it unlawful to discriminate in price between different
business buyers under certain conditions (Shenefield & Stelzer 1966, p. 77).
The discrimination must relate to goods of ‘like grade and quality’. The
prices are net of all discounts, rebates and so on (Shenefield & Stelzer
1966, p. 77). Under some conditions, RP also forbids discrimination with respect
to brokerage fees, promotion allowances and consideration for services
performed. In price discrimination cases, Section 2 of the Sherman Act (attempt
to monopolise) and Section 5 of the Federal Trade Commission Act (unfair methods
of competition) may be used (Howard 1983, 179).
RP is a confusing law to lawyers, Supreme Court judges, suppliers and
retail buyers (Dickinson 1967b). Bork (1978, p. 382) describes it as ‘the
misshapen progeny of intolerable draftsmanship’. It contains inherently
contradictory goals built upon poorly defined yet important terms such as
‘competition’, ‘costs’ and ‘good faith effort’ (Bork 1978, p. 64).
Howard (1983, p. 181) states that there is hardly a phrase or clause of the Act
that has gone without litigation as to its proper interpretation.
A scenario is now described that may have caused slotting allowances to
come about. There is no way to know if it is ‘true’. However, the scenario
is consistent with events and practices described in the literature and also
with perceptions of the sector and changes within it. Evidence is offered in the
next section that the enforcement of the Robinson-Patman Act changed in the late
1970s and 1980s, during which period slotting allowances in the food industry
developed.
In the 1970s there were few important ways for the power of retailers in
the food industry to be reflected. The buyers for large food retailers were
basically powerful oligopsonists. They were aware of the history of
supplier–retailer relationships in the food industry. Generally, the largest
suppliers offered a marketing mix and retailers adapted to it in one way or
another. Large retailers over time in food had become gun shy, perhaps because
RP was enacted primarily as a reaction to concessions obtained by a large
supermarket chain (i.e. A&P) that were not generally available to retail
competitors. There was no obvious, sizeable part of suppliers’ marketing mixes
that could be negotiated without substantial, perceived legal risk.
The overall enforcement environment changed. In the Carter and Reagan
administrations (some would include the latter parts of the Ford
administration), deregulation was pursued. During the administration of Ronald
Reagan, budgets for the enforcement aspects of the Federal Trade Commission were
decreased substantially (Stern 1988). New product introductions by suppliers
were increasing (Bloom et al. 2000).
Some suppliers tested their new products at the retail level as a continuing
part of their marketing programmes. Products that did not sell well were
discontinued, often at substantial cost to the retailer. Computer systems were
becoming increasingly important to the retail enterprise.
Regardless of whether retailers or suppliers initiated slotting
allowances, when retailers started to bargain for slotting allowances, the
weaker suppliers acquiesced in some form. More powerful supplier firms
considered it in terms of their options. If slotting allowances were perceived
by the suppliers to be an alternative form of sales promotion, presumably they
would be evaluated against the alternatives. Some large suppliers probably saw
slotting allowances as a way to increase retail space and as a way to squeeze
out competition3. The response of larger firms
was undoubtedly highly varied. Today, slotting allowances as a part of a total
supplier programme appear to vary with the relative strength of the
participating entities (Bloom et al. 2000).
In this new competitive environment, the less powerful suppliers would
be expected to acquiesce more readily in the incipient stages, and this may have
been an advantage to the retailer in inducing compliance by larger firms. The
acceptance by less powerful entities presumably would apply pressure on some of
the largest suppliers to adjust to the new competitive environment. Large
suppliers could be negotiated with by the use of a new tool that might be seen
to be ‘completely’ legal.
The above scenario suggests that the creation of slotting allowances
permitted the already large power of the retailer to manifest itself. Slotting
allowances as an integral part of the negotiation ‘menu’ were new to the
food industry. There were no clear indications as to whether they were legal or
illegal. Indeed, there are no clear indications as to their legality today
(Federal Trade Commission 2001). Slotting allowances were tried; many suppliers
participated. The jury is still out on how long slotting allowances will
flourish. The Report of the Federal Trade
Commission Workshop on Slotting Allowances and Other Marketing Practices in the
Grocery Industry (Federal Trade Commission 2001) maintained that there is
continuing consideration of the issue by the Federal Trade Commission.
We suggested previously that the enforcement budgets of the Federal
Trade Commission were cut substantially at the beginning of the administration
of Ronald Reagan. Substantially less money and effort were allocated to
enforcement efforts in the 1980s (Stern 1988). Here we present additional
evidence of two types. First, we offer changes that occurred in the legal
environment to which we have alluded; then we offer some research and
commentaries that the evidence for an increase in retail power does not exist.
The late 1960s and the 1970s saw a major reversal in the focus of the
Federal Trade Commission away from the enforcement of RP (Hollander &
Sheffet 1986, p. 767). From 1975 to 1982 the FTC issued only six RP complaints,
and from 1983 to 1985 none were issued (Aalberts & Judd 1991, p. 415).
Clearly the government was paying less attention to RP and related business
activities. Stern (1988) and Bhasin et al.(1989)
noted the decrease in the enforcement of RP.
As suggested earlier, Bork (1978) made vicious attacks on RP. He
maintained that it did not prevent much price discrimination but did stifle
competition, and made substantial efforts to promote the Chicago school of
anti-trust, which in many people’s view dominated anti-trust considerations
into the 1990s and is strong today (for a discussion and criticism see Hunt
& Arnett 2001). The Chicago school suggested that the overwhelming factor to
consider in anti-trust matters was consumer welfare, which was to be seen
through the prism of neoclassical economics. The focus of enforcement activities
was to be on the welfare of the consumer; the behaviour of business participants
and the economic structure – the main goals in the development of RP in the
1930s – became less important.
Interest in RP and its provisions and relevance to the food industry
increased in the 1980s. The annual research reports of the Progressive Grocer in 1987, 1988, 1989 and 1990 integrated Robinson-Patman
Act considerations into their annual survey activities. In the annual research
report of 1990 (p. 23), the RP considerations were reflected as being dwarfed by
environmental issues. In these yearly surveys there was substantial support for
RP among chain executives, wholesalers and manufacturers. There was particularly
strong support from co-op wholesalers and small retail chains.
Retail power – all retailing versus all manufacturing in elements of
the food industry – does not appear to have increased. Kelly (1991, p. 197)
suggests that slotting allowances could have been a natural marketplace reaction
to increased product innovation. Farris and Ailawadi (1992) did not find any
increase in retail power in the total sense. Ailawadi (2001) offers a summary of
several studies and concludes that the contention that the power of large
retailers has increased vis-à-vis
packaged goods manufacturers has not been empirically supported. The recent FTC
report found little evidence of the existence of (excessive) retail market power
(Federal Trade Commission 2001, p. 60).
If an increase in retail power did not induce slotting allowances, what
did? Clearly the ‘withdrawal’ of substantial legal constraints may be seen
as a strong facilitating factor that permitted the many dimensions of power to
be resolved in the marketplace, with slotting allowances being one of the
factors.
We have made a case for the proposition that, preceding the substantial
growth of slotting allowances in the 1970s and 1980s, legal environments
changed, and that these legal changes, in the context of increasingly
sophisticated and costly technology and a proliferation of new products, created
a situation in which slotting allowances could flourish. Retail power, already
large, need not have increased relative to supplier power to create this result.
In other words, this article suggests that marketing academics and economists
appear to have been chasing a ghost: a ghost of increased retail power. Many
have tried to encourage government entities to chase the ghost of increased
retail power; indeed, the FTC and other government agencies have historically
had great flexibility in pursuing or not pursuing activities under RP (Dickinson
1967a)
A key question is: in what way does this change in perspective make a
difference? Why should we care?
Perhaps the prime impact of assuming that slotting allowances are
manifestations of increased retail power is that many studies have been
organised around that assumption. Much effort has been expended to confirm the
increase; we go out of our way to look for the rise in power. Since in this view
slotting allowances are assumed to be caused by increased and inordinate power
(often presumed invidious), many further assume that the symptoms (i.e. slotting
allowances) are bad. Increased retail power leads to reduced competition,
creates higher retail prices and so on. These inferences, of course, may or may
not be ‘true’ depending on many factors. Finally, looking at slotting
allowances as derived from an obvious increase in retail power also frames the
arguments and attendant research (e.g. Bloom et al. 2000).
As suggested earlier, other lessons may be drawn from the analysis of
slotting allowances offered in this article. The laws and legal frameworks are
important for students, faculty and researchers to understand in their varied
capacities (Petty 2000). The legal environments can often be critical. Ignorance
of them can lead to less than thorough analyses. Further, the complexity of laws
such as RP does not diminish their importance or the need to study them,
although the complexity and their lack of amenability to mathematical analysis
may have been a factor in the decreased academic interest over time.
The same lesson can be drawn with respect to the study of the history of
business and its varied environments. It is difficult if not impossible to
understand slotting allowances without some understanding of the long history of
negotiation in the food industry. Indeed, further insights would probably be
offered by studying the interaction of suppliers and retailers in what might be
termed the traditional department store industries. Indeed, the FTC vigorously
pursued perceived department store violations of RP in the 1950s and 1960s.
Further, slotting allowances as defined in the article have been integral to
traditional department stores for more than 50 years, although the term
‘slotting allowances’ was not one that was commonly used.
A further inference from an examination of the history of the discussion
of slotting allowances is that obvious explanations will dominate without
extensive research, and those with vested interests will foster the explanations
that support their interests. Further, without substantial independent research,
vested industry interests, including those of small business and the legal
profession, will tend to dominate the discussion.
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R.J. & Judd, L.L. (1991) Slotting in the retail grocer business: does it
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2 (Winter), pp. 397–416.
Ailawadi,
K.L. (2001) The retail power-performance conundrum: what have we learned? Journal
of Retailing 77, 3, pp.
299–318.
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A., Dickinson, R., Hauri, C.G. & Robinson, W.A. (1989) Promotion investments
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31–36.
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P.N., Gundlach, G.T. & Cannon, J.P. (2000) Slotting allowances and fees:
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The
recent Report of the Federal Trade
Commission Workshop on Slotting Allowances and other Marketing Practices
in the Grocery Industry (Federal Trade Commission 2001, p. 29) offers
little help on the importance of this marketing practice.
This
practice that may be less than lovely is seldom emphasised in marketing
texts.
The various soft drink market agreements within the retail industry appear to achieve similar objectives (Hayes 2000).
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