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Frozen food industry goes on 'trial' as 'conventional' jury hears evidence.

Frozen Food Industry Goes on `Trial' As `Conventional' Jury Hears Evidence Cases for and against slotting fees, market diversion, and new product proliferation made by expert witnesses. Hot and heavy testimony taken from all sides of the FF equation. The verdict? You be the judge.

The often side-stepped, generally off-the-record debate over slotting allowance fees and product diverting were front and center for all to hear at the National Frozen Food Convention in Chicago. The open airing came via "Frozen Foods on Trial," which mimicked the confrontational courtroom format popularized on television by Harvard law professor Arthur Miller, who served as moderator.

An unusually frank dialogue about the industry's most vexing issues--those that sometimes pit the economic interests of one link of the frozen food chain against another--resulted. Organizers believed that such a head-to-head meeting of retailers, brokers, distributors and manufacturers would be a healthy way to tackle thorny differences. Nonetheless, they made sure that the eight-man panel included an attorney to direct witnesses away from language that might trespass into the realm of anti-trust quicksand.

The idea of slotting allowances, or entry fees paid by manufacturers to get products into retail distribution, is nothing new, Indeed, as Murray Lender of LBB Associates pointed out, "There has always been some sort of a program that was part of an introduction of your product line of mix. What has changed today is the intensity of the request. . . "

The "request" or fee many retailers are now charging has risen to such a relatively high dollar level that the decibel level of its corresponding debate comes as no surprise. While the charge may be as low as $500 per new item in some Midwestern chains, the going rate in the highly competitive New York market has exceeded $25,000, according to reports.

Retailers defend the escalating fees by citing the increased start-up costs of introductions and case resets during a period of new product proliferation that has set records over the past five years.

Other observers say that the skyrocketing increases have resulted from the explosion of leveraged buyouts in the retail sector. Such reorganized stores, they submit, require quick cash infusions to service heavy debt loads. And the fees become inflated accordingly as the word spreads through the trade. Jules Rose of Sloan's Supermarkets described the mentality like this: "Somebody down the street's getting it, so why shouldn't I?"

The New York City chain store executive summed up the reason for slotting practices as follows: "A retailer is governed by four walls, a roof and a floor that under normal circumstances is not expandable. In today's marketplace, with somewhere around 6,000 to 10,000 new items a year coming into the flow, that space comes at a premium."

Jerry Waxler of the Waxler Co., a Chicago brokerage, voiced concern that rising slotting costs will siphon money away from marketing and promotion budgets. "You've got 10 dimes to the dollar," he commented. "The consumer's going to pay for it in higher-priced merchandise."

Rose opined that slotting may actually be a money saver in the long run. "It's lot less expensive to give a slotting allowance than it is to have somebody in the field re-setting the space in 5,000, 10,000 or 20,000 stores. It's a lot less expensive than taking a full page ad in The New York Times five times a week, or to advertise on television."

But as far as Robert Zinn of Crown/BBK, Inc. was concerned, slotting fees are undermining the American free enterprise system The Southern California broker said that the founders of the frozen food industry would not have survived if new product entrance fees had been imposed on their pioneering businesses.

Adversarial Position

"We are destroying the opportunity for entrepreneurs to gain even a minimum start in this business. We are in fact adopting an adversarial position between a supplier who has the same goal as the retailer: to, in fact, maximize sales to the consumer and satisfy her needs." declared Zinn.

Jules Rose disagreed outright with that assessment. He insisted that today's sophisticated consumers will not buy products lockstep simply because they are placed before them in a supermarket frozen food case. "Food is the second most personal thing a person purchases," he stated, adding that it was "preposterous" to believe that slotting fees will keep out high-demand products which are packed by manufactures that refuse to pay allowances.

But Zinn stuck to his guns, suggesting that manufacturers were not getting a fair shake in return for the big bucks they invest to carry out expensive research, formulate new products, test market and go into rollout. "Whether it's called slotting, or high trade allowance introductions, or advertising, it makes no difference if the end result is that the consumer either can't find it or can not consistently see its presentation as she moves very quickly along the frozen food cabinet."

Gene Hoffman of Corporate Strategies International, a consulting firm, saw the conflict between supermarket operators on one side and manufactures and brokers on the other as representative of the power shift that is occurring in information-driven, post industrial societies. His line of reasoning:

From Retail to Hospitality

". . . (The trade) is getting to a point where (it) wants to be actors in the play--a part of the marketing process with a greater say. And all of these other things are part of a kind of fundamental relationship that has evolved and will continue to evolve until such time as the supermarket industry admits that it has moved into the hospitality industry where in fact is running hotels in which it rents out space to manufactured products."

Rose hitch-hiked on Hoffman's "hotel" analogy to respond to a previous point made by Zinn regarding product availability to consumers. "What if it doesn't sell," he asked. "What if all it does is occupy that room in the hotel and doesn't pay any rent because it's not selling? What happens then? The retailer only has one choice--to take the product out. . "

Zinn responded: "And I have never heard of a manufacturer object to taking out a product that didn't sell.

Rose retorted" "Well then you come to me, because I've heard a lot of manufacturers object."

He continued: "Im being deluged with items that are lying on my shelves. And it's not just frozens. . . it's in every single department in the store. So, enough already. A frozen food case, unlike grocery shelving which can be expanded, is finite. . . Who are we fooling? Six-thousand to 10,000 new items a year for the past four years. That's more than the entire item count we carried before."

Europeanization of America?

The debate ensued, with Zinn sounding an alarm that too much concentration of retail power could bring about "the Europeanization of America." He called for manufacturers and the trade to engage in more strategic planning and less tactical, day-to-day maneuvering, "I would like to prevent cartels and monopolies from gaining a foothold here as the result of European influences taking a substantial position in American retailing . . . Monopoly leads to higher prices."

Murray Lender dismissed the California broker's view, insisting that the marketplace would adjust itself to deal with changing conditions. For example, in the new product area he foresaw a slowdown of introductions as marketing departments become more selective in what they release nationally. Already noting reductions in "metooism, knock-offs and rip-offs," he said: "Perhaps it's starting to swing the other way where innovativeness will once again (get more attention) from retailers (than) slotting allowances."

James Rill, chief attorney for the American Frozen Food Institute, was also of the opinion that the market will correct itself "so long as collusion and monopoly are limited by the Federal government's anti-trust powers." And he submitted that any protectionist measures instituted would ultimately "be to the detriment, not to the advantage, of the industry."

On Product Diversion

With Winn-Dixie Stores' demands for "uniform pricing" deals from its suppliers in the news, the subject of diverting was the second major issue to be argued by the panelists.

The Jacksonville, Fla.-headquartered supermarket operator -- the nation's fifth largest -- in effect told manufacturers last fall that it no longer wanted to personally bother with the logistics of physically diverting discounted promotional items from one regional market to another. In a letter to suppliers, it said that trade allowances should be made chain-wide, not just in selected locations. Those manufacturers not complying with the retailer's wishes would run the risk of having their product lines discontinued.

The Winn-Dixie stance was soon emulated by a number of other major chains including Safeway, the Kroger Co., and Food Lion. They made it clear that any expanded deal arrangements offered one chain had better be offered to them as well.

With such developments in the background, the panel discussion on diverting frozen foods was a lively one. Quick Frozen Foods International has chosen excerpts from the dialogue to provide its readers a better understanding of the ongoing problem.

Jules Rose: "You (manufacturers) have 50% of the items in my books on deal -- deals running from 12% to more than 20%. And when the day comes that that doesn't exist, when the day comes that the deal monies are less than the cost of money to support movement, you haven't got diverting anymore because it doesn't pay to buy ahead."

Robert Zinn: "There are ways to control diverting, but we're not doing it in sufficient measure so far. Diverters must be told and forced to certify the same offering to that same retailer as I am."

Rose: "Allocation doesn't work. Every time you build a wall we find a way to knock it down...The fact is that one item might be selling a case a week, or two cases a week, or five cases a week in a limited number of stores and maintain its viability. The thing that frightens me is that 50% of the items that I now carry are two years old. But of the top 500 items in my run, 50% of them are 15 years old, which means that the real problem is that as the compounding occurs you're not able to develop items into a permanent relationship within the trade."

Zinn: "Yeah, but I'm suggesting that 75% of your profits come from the 50% of the items developed in the last five years, and not 50% of your profits from those that have been in the market for 15 years."

Rose: "It's not true...New products, because they've got these massive allowances and everything else, create the problems. But the DPP on new items that succeed is greater. However, if 70% of those new items are discontinued after two years -- and that's what the trade surveys show -- then the DPP is zero."

Zinn: "Don't you believe that the manufacturer has the right to control the in-flow of goods to any marketing segment if in fact he is concerned about that product offering being made in a market outside of his strategy?"

Attorney Rill: "The short answer is yes, it's lawful for the manufacturer, acting on his own, to restrict the territory in which the customer re-sells."

Rose: "Diverting can be eliminated in any number of ways. "It's up to the manufacturer to determine the velocity of projected sales that he expects in a given marketplace, and to make his deal cognizant of that level..."

Zinn: "You would protect the manufacturer by developing an allocation of product that would satisfy your needs and protect him from having that product migrate to another market?"

Rose: "You give me a sale. You allocate me X amount of product. All of a sudden I get a snowstorm and you did me no favor. You probably cost me 20% because that's what the difference in weather conditions in a particular market can do... There's no way to put a pre-restriction on that. But if you want to limit me to what you think I'm going to use, you could figure my velocity and make a deal level that's cognizant with that. Then it's not going to be worth re-selling the product to anyone."

R. Gordon McGovern, president and CEO of Campbell Soup: "One of the ways we control that in our company is to have regionalized sales offices work on a bonus system against quotas. If somebody diverts into an area that's fighting to meet a quota, they are immediately on the telephone to find out who did it. Next, very aggressive steps are taken within the company to challenge a person's ability to build up their quota at the expense of somebody else's quota."

Zinn: "I guess we haven't seen those aggressive steps taken by enough companies...I don't want to go back to national pricing and national deals. And yet we are now moving toward killing the goose that laid the golden egg by not establishing any restriction on the migration of product..."

Lender: "...The onus of responsibility is on the manufacturer. If people speak up in the markets where the product has been diverted -- the broker community, the competitive retailers who are not part of that program -- then I think the situation will resolve itself very easily."

Moderator Arthur Miller: "Why haven't they done that much about it? I heard Bob Zinn Complain that they haven't done enough."

Samuel I. Bailin, a consultant with the Mesa, Ariz.-based company that bears his name: "It benefits them. They wouldn't do it if it didn't. It benefits the brand marketer...who has in the last 12 to 14 years generally done better than the retailer or distributor side has done...When it no longer benefits them to do it, they will stop. This is the market force."

PHOTO : "Jurists" hearing and giving testimony that at times got unusually frank for a public,

PHOTO : "open court" session are (I-r): R. Gordon McGovern of Campbell Soup Co,; Jerry Waxler, The

PHOTO : Waxler Co.; Jules Rose, Sloan's Supermarkets; Eugene Hoffman, Corporate Strategies

PHOTO : International.

PHOTO : A lighter moment during the "Frozen Foods on Trial" proceedings which witnessed a

PHOTO : no-holds-barred cross-examination of many problems that confront today's manufacturing,

PHOTO : brokerage, distribution are retail industries. Seen (I-r) are: Murray Lender, LBB

PHOTO : Associates; the late Robert Zinn, Crown/BBK, Inc.; James Rill, AFFI counselor;

PHOTO : Samuel Bailin, Samuel I. Balin, Inc.
COPYRIGHT 1989 E.W. Williams Publications, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Title Annotation:mock trial at National Frozen Food Convention; includes related article on pressure from food manufacturers
Author:Rose, Jules; Zinn, Robert; McGovern, R. Gordon; Bailin, Samuel I.; Rill, James F.; Lender, Murray; S
Publication:Quick Frozen Foods International
Article Type:panel discussion
Date:Jan 1, 1989
Previous Article:Another frozen food success formula: targeting emerging foodservice niches.
Next Article:Under attack from rival food systems, frozens pushed to wall, McGovern warns.

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