DALLAS (FNS) -- The well of trade money from packaged-food suppliers may be drying up some -- and that means produce suppliers should expect mounting pressure on them to feed the supermarket industry's addiction to profits built on trade allowances.
That bleak scenario was presented to produce suppliers at the United Fresh Fruit and Vegetable Association's convention here by Christopher Hoyt, principal of Hoyt and Co., a consulting firm based in Stamford, Conn.
At a seminar packed with about 100 attendees, Hoyt said that packaged-food suppliers are having some success at reducing the amount of money they plow back into trade allowances, but at the same time supermarket chains are accelerating their efforts to squeeze trade money out of the produce industry instead.
Hoyt warned that supermarket buyers will try to lure produce suppliers into a fee trap from which they won't be able to escape, a trap he referred to as the "roach motel," by demanding escalating amounts of money and playing competing suppliers off of each other.
"This is what happens to addiction. No amount will satisfy," he said. "It's the cocaine deal."
Among the expanding rooms in this "roach motel" are slotting fees, advertising fees, display fees and other charges grouped under the label of allowances. Hoyt said the buyers are pressuring their supplier "partners" to pay by pitting them against their competition or refusing to do business with them if they won't shell out the cash.
"If Dole pays, then Del Monte has to follow. Retailers manipulate the system to get larger and larger fees," he said.
"Everything I am telling you is going to get worse," he added. "Ripe for the picking is the perishables department, which now does over 50% of the total supermarket sales and almost 57% of its profits.
Hoyt made his remarks at a seminar apparently attended only by suppliers, at least judging from the lack of response when, at the beginning of his presentation, Hoyt asked how many in the audience were retailers.
In addition, a companion seminar originally scheduled by Alexandria, Va.-based United to allow retailers to respond to Hoyt's points was cancelled, because the trade group could find no retailers willing to speak about trade allowances.
While they may not be interested in talking about it, Hoyt said retailers are very interested in grabbing trade promotion dollars, and produce suppliers will be squeezed more in the future as chains seek to make up some recent reductions in promotion trade spending by large packaged-goods manufacturers.
Large packaged-good manufacturers reduced the amount of money they have been spending on trade promotion because they ascertained they were not getting a good return on investment, Hoyt said.
"Suppliers believe that only 50% of the $30 billion ever gets passed on to consumers. The rest contribute up to 50% of chain profits and 70% of wholesaler profits," he said.
So now, "The indications are that supermarkets have already built the roach motel for produce, and are now in the process of baiting suppliers to enter."
He said retailers are moving seasoned grocery buyers with sharp negotiating skills over to produce. They are routinely charging slotting allowances on packaged salads and other Universal Product Coded produce items, he claimed. And buyers are urging all produce suppliers to use UPC codes, which Hoyt called "the equivalent of suicide for the small, local supplier without the strength to pay." UPCs, he said, enable retailers to use scan data to track sales of specific items and then use the data to put pressure on specific suppliers.
He suggested produce suppliers use some of the same tactics that have worked, albeit not always very successfully, for some packaged-food suppliers. Those tactics include building business through other channels of distribution besides supermarkets; establishing co-marketing relationships with supermarkets in which suppliers specifically develop promotion and merchandising plans jointly with the buyers; and changing promotion contracts to pay for performance only.
"We have to draw the line in the sand now, before the door of the roach motel swings even wider," Hoyt said.
After the speech, one producer at the seminar confirmed that the trade-promotion fee problem was escalating rapidly, with about one-third of his grocery customers demanding fees. The supplier asked not to be identified, for fear of supermarket manager reprisals.
Despite ubiquitous talk about the need for deeper partnerships between retailers and produce suppliers, supermarkets mostly concerned with "putting money in their pockets," Hoyt claimed. "The word 'partnership' is hokey. We are talking about a massive problem here."
For example, Hoyt claimed that research showed in the New York metropolitan area that slotting fees have jumped from $127,600 in 1995 to $166,100 in 1996, he said.
Overall trade-promotion budgets as a percentage of advertising jumped from 34% in 1981 to 54% in 1996, according to market research. Despite that, more than 57% of supermarket-chain executives have said they are unhappy with supplier trade deals, Hoyt said. "Don't give them any," he counselled produce suppliers. "They will be miserable anyway."
But the tide may be turning lately in dry grocery, Hoyt said. He cited a survey by Stamford, Conn.-based ACNielsen, that indicated spending came down from 58% of advertising dollars to 54% in 1996.
He said slotting fees and similar charges had initially been created to help compel manufacturers to bear some of the expense for new product risks, and to discourage "me-too items." But, he said, the whole concept has gotten out of control, and the slotting allowances are now unrelated to costs and prohibitively expensive for small companies. He also said retailers are not held accountable for them.
He said supermarkets have become dependent on slotting fees to make up for the almost flat profits they've experienced between 1992 and 1997 and to compensate for their loss of competitiveness in certain areas to wholesale clubs and large mass merchandisers.
They are using trade promotion dollars to reduce costs and increase profits, he said, rather than to bolster consumer spending and thus effectively compete against alternative formats. "It makes supermarkets a financial institution. They are not consumer organization."
"There is nothing illegal about this," he added. "There is no one in the great white fortress of Washington that is helping the supplier."