Re-Slotting

Slotting fees will get a new spot on manufacturers’ ledger sheets, but will still end up in retailers’ pockets.

The Financial Accounting Standards Board (FASB) in April approved rules about how manufacturers report “any consideration” to resellers, including slotting fees. The rules, to be enforced by the Securities and Exchange Commission, become “generally accepted accounting practice” as of first-quarter 2002. Payments to retailers will appear as a subtraction from revenues, or as a specific service from retailers, rather than being lumped in with marketing expenses.

The model presumes that “any time a vendor gives consideration to a reseller, that’s an adjustment of sales price to the retailer,” says FASB practice fellow Doug Reynolds. That means manufacturers must subtract these price cuts from revenues. If manufacturers get “an identifiable benefit” from retailers — such as co-op advertising — they can claim the expenditure as a business expense. But a retailer’s service must be “sufficiently separable” from its purchase of products, and manufacturers must estimate the fair value of that service. If payments exceed fair value, the difference must be claimed as a price reduction.

In addition, the service has to be something manufacturers could have bought elsewhere, such as advertising. “That kills most slotting-fee arrangements, because the only reason [manufacturers] are paying is because retailers are selling the product,” Reynolds says. “If the only reason you’re giving consideration is because the retailer buys your products, in essence that’s a price adjustment to the product sold.”

To begin, manufacturers will have to restate revenues as far back as 10 years. A similar FASB rule that requires coupons and rebates to be subtracted from revenues also goes into effect in first-quarter 2002. (FASB started looking at coupons and rebates in 1999 at the SEC’s request, then broadened its scope to all consideration last year.)

The Grocery Manufacturers of America, Washington, DC, doesn’t like the new rule. “It’s a pain, and it’ll give a snapshot of competitors’ slotting fees and coupons,” says general counsel Jim Skiles. “Plus, it’s a reduction in revenues, and no one likes that.”

In the first year, when manufacturers restate past performance, competitors might assume all shifted funds are slotting fees. That’s the most light ever shed on the hush-hush fees.

It won’t be a big deal, contends Jack Ryder, president of Cannondale Associates, a Wilton, CT-based trade marketing consultancy. “I don’t think much money will shift. Slotting fees are not that great compared to total marketing budgets, and bigger companies don’t pay slotting fees anyway. My guess is that most manufacturers won’t see much restatement.”

It also won’t stop retailers from charging fees. “It’s just a cost of doing business,” Ryder says. “It’s also a good governor on manufacturers” by keeping new-product proliferation in check.

Restating won’t reveal a specific dollar figure on slotting fees because of other factors, including coupons, being subtracted from revenues at the same time, Reynolds says. Nor will it break out payment by retailer. Besides, most companies spend “in the single digits” as a percent of sales, he adds.

Retailers are not affected by the new rules. FASB’s Emerging Issues Task Force considered addressing them, but hasn’t because “the need didn’t seem as great,” Reynolds says. FASB may look at retailer accounting in the future. If it rewrites rules on consideration, slotting fees could end up in one of four places on retailers’ balance sheets: as a reduction in cost of goods purchased, as a contribution to fund operating expenses, as revenue, or as “other income,” which includes interest. The first seems most logical, Reynolds says.

The Federal Trade Commission has continued to study slotting fees since issuing a February report based on a 2000 workshop, but isn’t expected to make any big moves when the new FASB rules take effect. There is no working relationship between the FTC and Norwalk, CT-based FASB, a nonprofit group whose accounting-firm members set objective guidelines for U.S. companies. Subscriptions from corporate accountants help fund the board.

JUST WATCHING

The FTC opted in February not to issue slotting-allowance guidelines. Here’s what it decided to do instead:

• Carefully review exclusive-dealing contracts to determine whether they threaten competition.

• Examine slotting allowances and pay-to-stay fees, with particular attention to circumstances that could have exclusionary effects.

• Revisit price-discrimination issues in the context of appropriate investigations.

• Focus any inquiries into category captains primarily on situations that may involve anti-competitive exclusion or tacit or explicit collusion.

• Ensure that supermarket merger policy continues to take account of the potential exercise of retail market power in an anti-competitive manner against suppliers.

Source: Federal Trade Commission