It’s no easy task getting a bottle of Morehouse mustard onto a shelf.

For David Latter Sr., chairman of Morehouse Foods Inc. in the City of Industry, it involves far more than just shipping it to a market. It also can mean paying thousands of dollars or giving away cases of food to the store.

It’s part of a routine but relatively obscure grocery industry practice that requires food manufacturers to pay stores so-called slotting fees. But it’s also a practice that’s come under scrutiny and criticism.

“They are just stealing money,” said Latter, who balked recently when one northern California supermarket demanded up to $40,000 to stock his product. “They have gotten away from what they are intended to be, which is selling groceries.”

Slotting fees, referring to both upfront fees paid to get products on the shelves and ongoing fees to stay in stores, have become commonplace since they were instituted in the 1980s to cover marketing and other costs. They have since spread to more products, from greeting cards to over-the-counter drugs.

But Latter and other small manufacturers argue that steep payments for shelf placement, mostly hidden from public view, make it difficult to compete with larger, wealthier companies.

Now, a state Senate committee is considering legislation that would at least lift the veil on the practice. The bill, sponsored by Sen. Liz Figueroa, D-Fremont, would penalize stores $10,000 if they fail to disclose the amount of slotting fees they demand.

“We are not stopping the practice. We are just saying that it has to be transparent. It will put an end to the backroom deals,” said Figueroa, who serves as chairwoman of the Senate Business, Professions and Economic Development Committee.

Widespread practice


The Federal Trade Commission estimates that retailers collect $9 billion in the fees annually. “There is really quite a broad array of different fees,” said Gregory Gundlach, a professor of marketing at the University of North Florida who testified before Figueroa’s committee. “That is really the challenge of the legislation to define the fees in a broad way to capture all that is going on.”

It’s also a practice retailers hotly defend, given the revenue involved.

Auday Arabo, president of the California Independent Grocers and Convenience Stores, said that simply requiring fees to be disclosed isn’t going to level the playing field for small companies. Instead, he said, it will just be an accounting nightmare for stores.

“The precedent that it sets is pretty dangerous,” said Arabo. “You make these deals with whoever you like to carry, and now you are going to have to open up your books and show anyone.”

An Albertsons Inc. spokeswoman declined comment on the slotting fee legislation. Calls to Safeway Inc., Kroger Co. and the industry group California Grocers Association were not returned.

Figueroa said that accounting difficulties don’t justify stopping the bill. “It is just like a bootlegger saying all of a sudden I have to be an accountant,” she said. “That is laughable.”

Efforts to regulate slotting fees in the past have been frustrated by secrecy in the industry. In 2000, the U.S. General Accountability Office failed to complete a study because the grocery industry failed to cooperate.

Court rulings


Three years ago, a U.S. appeals court ruled that United States Tobacco Co. arranged with retailers, using slotting fees and other monopolistic practices, to block Conwood Co.’s smokeless tobacco products from consumers.

United States Tobacco was ordered to pay Conwood $1.05 billion in the largest private antitrust case ever and the U.S. Supreme Court declined to hear it on appeal.

But last year a U.S. District Court in Texas dismissed a case by Salinas-based El Aguila Food Products Inc. against Gruma Corp., owner of Mission Foods, that claimed Gruma paid high fees to limit its competition. El Aguila didn’t demonstrate that Gruma exercised monopoly power, the judge ruled.

Figueroa stressed that her disclosure bill won’t put an end to slotting fees, and she doesn’t anticipate introducing a bill that attempts to do so. “The intent is to make it more open, and in that sense, any kind of abuses will become better known and vetted,” she said.

The outlook for Figueroa’s bill is uncertain. “It was an issue that was new to me,” said state Sen. Joe Simitian, D-Palo Alto. “I am inclined toward transparency in the process. In my view, the burden rests with opponents to make the case against the bill.”

Local food manufacturers said they would wait to see the fate of Figueroa’s bill before calling for an outright ban of slotting fees. They worried that an outright ban could lead to fees being funneled to other, permissible areas.

“It is like squeezing a balloon,” said Aaron Baum, owner of Hand to Mouth Edibles in West Los Angeles. “If you squeeze it on one side, it comes out the other.”