Thursday, February 12, 2004
Fair and Balanced grocery strike coverage
Jacoby agrees with conventional wisdom insofar as it says that the root cause of the California grocery strike was a desire on the part of the three chains to lower overhead in order to be competitive with Wal-Mart. But he doesn't locate the source of the competitive imbalance in the higher wages and benefits paid to the unionized grocery workers. Instead, according to Jacoby, the California grocers aren't able to compete because their practice of demanding slotting fees from suppliers drives up the wholesale prices they pay for goods.
The key passages from Jacoby's article:
Slotting fees are payments demanded by large supermarket chains to guarantee space on store shelves. Big manufacturers pay surprisingly high fees to guarantee prime space, eye-level and so-called end-cap display, to ensure that their products will be the most visible and most available to consumers.If Jacoby is right, then Wal-Mart isn't the bad guy here. Instead, what's going on is that the grocers have an inefficient business model and, rather than addressing the real problem -- that is, rather than fixing the bad decisions made by executives -- they're trying to shift the burden onto the backs of the workers.
In fact, the FTC concluded, slotting fees represent as much as $9 billion annually for the supermarket industry as a whole. Only the big chains have the clout to successfully demand such fees, but the three chains involved in the strike are three of the nation's four largest ---- they control about half the retail grocery business in America ---- and they are likely to account for more than half the slotting fees manufacturers pay out every year: $4.5 billion-plus.
The trouble is, that $9 billion or more comes from somewhere. Consumers pay it as part of the price of the products they buy, because the manufacturers just add it in to the price they charge the grocers. Why go to all that trouble? Because the grocers get the fees upfront, and pay it back in elevated wholesale prices over time ---- it's an interest free loan, and in the end it's the consumer who makes the payments.
And Wal-Mart, which has become the nation's largest grocer and is poised to launch grocery superstores in California this year, rejects the fees, telling its suppliers that they earn shelf space with rock-bottom wholesale prices.
The principal cost-of-doing-business difference between the two large-scale retail models ---- Wal-Mart and traditional supermarkets ---- is that one accepts slotting fees and higher wholesale prices while the other does not.
The traditional retail model skews its wholesale purchasing decisions because those purchases are driven by the slotting fees, not by consumer demand for the products. The Wal-Mart retail model allows consumer demand to drive wholesale purchasing.
If the three chains are unwilling to wean themselves from slotting fees when confronted by an intruding competitor with a comparative advantage ---- lower wholesale costs ---- that applies to the most aggressively advertised market-leading products on their shelves, then they must find another formula for deriving a profit from the operation of their stores.
The formula they appear to have chosen is to reduce employee costs ---- not just by shifting some of the cost of health insurance to the current employees, but by replacing them over time with employees who earn much less and who receive far more meager benefits.