By Darlene Superville
WASHINGTON -- At one time, Scott Garfield's family sold its Lee's Ice Cream in stores as far away as Saudi Arabia and South Korea. But you still can't scoop it up from grocery outlets near his Baltimore hometown.
Garfield, testifying Tuesday before the Senate Small Business Committee, blamed the situation on "slotting fees" -- payments from some manufacturers to some retailers to encourage them to take a chance on a new product or to ensure good shelf space.
A supermarket trade group, however, defended the practice, saying small businesses would be worse off if that money were not changing hands.
But Garfield and two other entrepreneurs criticized slotting fees as an unfair business practice that was contributing to their demise.
"In my opinion, I could not enter the market because of slotting fees," said Garfield, vice president of the company his late father started in 1979. "The small manufacturer cannot compete with that hurdle."
"How is it possible that there was a demand in Saudi Arabia and in South Korea for my product, but not in my own backyard?" he asked.
A businesswoman identified only as Witness B said "nothing positive" has come from her experience with the practice. The woman, whose face was covered by a hood as she was led into the hearing room, testified from behind a screen. Her voice was electronically scrambled.
Her "family's American dream is collapsing," she said, because the company started by her parents more than 40 years ago cannot afford the "exorbitant slotting fees" needed to secure space on supermarket shelves. To preserve her anonymity, no details about the business were released.
Slotting fees cost grocery manufacturers at least $9 billion yearly, and are usually negotiated in private without public disclosure of their terms, said Gregory Gundlach, a marketing professor at the University of Notre Dame.
Gundlach said the practice was spreading to other industries, including computer software, compact discs, books, apparel and tobacco.
John Motley, a senior vice president at the Food Marketing Institute, which represents retail food stores, said there would be no issue if shelf space were unlimited. "But ... we have too many choices," he said.
A typical supermarket stocks 30,000 items out of the more than 100,000 available. Another 15,000 to 20,000 products are introduced each year, and 80 percent of new items fail, Motley said.
Slotting fees help offset the costs of handling new products, such as warehousing, stocking and altering electronic scanning files, he said.
Motley also disagreed that the fees hurt smaller businesses. Without them, he said, smaller retailers and suppliers would likely lose to bigger, better-financed companies that can afford to advertise and promote their products.
"The offering of such allowances tells the retailer that the supplier stands behind the product and is willing to share in the risk of failure," Motley said.
But Sen. Christopher Bond, D-Mo., the committee chairman, said the fees prevent some small businesses from ever getting their products into some markets.
"Retail shelf space is some of the most expensive real estate that money can buy," he said. "With no markets, you've got no business."
Bond also urged businesses to complain to the Federal Trade Commission.
Motley said the FTC has reviewed the practice on several occasions and has not concluded that slotting fees are anti-competitive or should be ended.
Like Bond, Massachusetts Sen. John Kerry, the panel's senior Democrat, seemed skeptical. A former small business owner himself, he said there is a "legitimate question" about whether slotting fees fit the country's standard of free and open competition.
"At best such a practice would seem ... suspicious," Kerry said. "Why does a business have to pay a fee to reserve space on a shelf?"
WASHINGTON -- At one time, Scott Garfield's family sold its Lee's Ice Cream in stores as far away as Saudi Arabia and South Korea. But you still can't scoop it up from grocery outlets near his Baltimore hometown.
Garfield, testifying Tuesday before the Senate Small Business Committee, blamed the situation on "slotting fees" -- payments from some manufacturers to some retailers to encourage them to take a chance on a new product or to ensure good shelf space.
A supermarket trade group, however, defended the practice, saying small businesses would be worse off if that money were not changing hands.
But Garfield and two other entrepreneurs criticized slotting fees as an unfair business practice that was contributing to their demise.
"In my opinion, I could not enter the market because of slotting fees," said Garfield, vice president of the company his late father started in 1979. "The small manufacturer cannot compete with that hurdle."
"How is it possible that there was a demand in Saudi Arabia and in South Korea for my product, but not in my own backyard?" he asked.
A businesswoman identified only as Witness B said "nothing positive" has come from her experience with the practice. The woman, whose face was covered by a hood as she was led into the hearing room, testified from behind a screen. Her voice was electronically scrambled.
Her "family's American dream is collapsing," she said, because the company started by her parents more than 40 years ago cannot afford the "exorbitant slotting fees" needed to secure space on supermarket shelves. To preserve her anonymity, no details about the business were released.
Slotting fees cost grocery manufacturers at least $9 billion yearly, and are usually negotiated in private without public disclosure of their terms, said Gregory Gundlach, a marketing professor at the University of Notre Dame.
Gundlach said the practice was spreading to other industries, including computer software, compact discs, books, apparel and tobacco.
John Motley, a senior vice president at the Food Marketing Institute, which represents retail food stores, said there would be no issue if shelf space were unlimited. "But ... we have too many choices," he said.
A typical supermarket stocks 30,000 items out of the more than 100,000 available. Another 15,000 to 20,000 products are introduced each year, and 80 percent of new items fail, Motley said.
Slotting fees help offset the costs of handling new products, such as warehousing, stocking and altering electronic scanning files, he said.
Motley also disagreed that the fees hurt smaller businesses. Without them, he said, smaller retailers and suppliers would likely lose to bigger, better-financed companies that can afford to advertise and promote their products.
"The offering of such allowances tells the retailer that the supplier stands behind the product and is willing to share in the risk of failure," Motley said.
But Sen. Christopher Bond, D-Mo., the committee chairman, said the fees prevent some small businesses from ever getting their products into some markets.
"Retail shelf space is some of the most expensive real estate that money can buy," he said. "With no markets, you've got no business."
Bond also urged businesses to complain to the Federal Trade Commission.
Motley said the FTC has reviewed the practice on several occasions and has not concluded that slotting fees are anti-competitive or should be ended.
Like Bond, Massachusetts Sen. John Kerry, the panel's senior Democrat, seemed skeptical. A former small business owner himself, he said there is a "legitimate question" about whether slotting fees fit the country's standard of free and open competition.
"At best such a practice would seem ... suspicious," Kerry said. "Why does a business have to pay a fee to reserve space on a shelf?"
