When considering a late-night carton of cookies-and-cream ice cream, most people aren’t thinking about how it got on the shelf. But behind each freezer door is a secondary market that determines what you have the option to buy.

“Slotting fees” (or “slotting allowances”) are fees that manufacturers pay retailers to appear on their scarce shelves. It can cost millions of dollars to launch a product in the nation’s groceries, and through that cost, these fees shape our supermarkets and diets long before we’re able to make a purchase decision ourselves.

It’s easy to think that these fees show supermarkets are “rigged” — against both consumers and smaller manufacturers that can’t afford the fees. But as the above video shows, the debate is an intense one, with strong partisans, and decent arguments, on both sides.

The case against paying for shelf space

“Backroom deals between stores and food manufacturers also shape today’s supermarket,” writes Gary Rivlin in his report for the Center for Science in the Public Interest (you can read it here). It lays out an argument that appears in other anti–slotting fee papers (like the argument touched on in Food & Water Watch’s “Grocery Goliaths”).

As Rivlin details the story of one ice cream manufacturer, Clemmy’s, the argument becomes clear: Supermarkets charge significant fees before retailers see their products on shelves. A discount fee to introduce a new ice cream might be as high as $30,000 to appear in just 350 stores. These fees exist for a wide range of products as well, from ice creams like Clemmy’s to chips and soda, not to mention the scarce space near the front of the checkouts.

To those who oppose slotting fees, the implication is clear: Retail power reduces competition and makes it harder for small businesses to compete against big buyers. These advantages for large companies are only compounded by their ability to buy up enough shelf space that they can effectively design a store’s layout. Stores also charge significant fees for seasonal features and the promotional displays that appear at the end of aisles, which may make it even harder for small businesses to compete. Even worse, CSPI and others argue, the business advantages of slotting fees have led to junk food manufacturers taking over valuable in-store real estate, leading consumers to choose less healthy options.

That antipathy toward slotting fees is shared, naturally, by many food manufacturers. Though many vendors are hesitant to comment on the record (the Grocery Manufacturers Association declined to comment for this story), they see slotting fees as tantamount to extortion, and entire issues of industry magazines like Frozen & Refrigerated Buyer are dedicated to the great slotting debate.

With all that in mind, how could slotting fees be allowed?

The case for slotting fees

Mary Sullivan’s 1997 piece about slotting fees lays out some of the clearest arguments that slotting fees are a necessary part of modern retail.

The most compelling argument illustrates how slotting fees seemed to emerge in the 1980s, just as retailers began to introduce dramatically more products to shelves. Thanks to technological improvements like scanners, it became easier to create many more SKUs (stock keeping unit — basically, a single product) without a lot of extra effort. Manufacturers had the ability to throw numerous extra products at retailers.

That created a problem. As the Federal Trade Commission notes in its 2003 review of slotting fees, 80 to 90 percent of new products fail. And despite the availability of all these new products, shelf space was just as scarce. In areas like the ice cream aisle, where freezers make space even more valuable, the problem was exacerbated.

The slotting fee emerged in the mid-’80s as a solution to the problem of manufacturing excess and retailer scarcity. Fees helped remove some of the risk for retailers, signaled to them that a new product might be successful (thanks to behind-the-scenes testing the retailer might not know about), and helped limit product proliferation. As Warren Thayer, editorial director at Frozen & Refrigerated Buyer notes, “I became convinced that too many vendors were throwing new products up against the wall to see if any of them would stick. No consumer research. No consumer support. No real thought about the hassle and expense for retailers when items failed.”

That’s the argument grocers make too. “Slotting fees were instituted at a time when the food industry was experiencing an explosion in the number of new products being brought to retailers to market to their customers,” a spokesperson for the Food Marketing Institute, which represents grocers, told me. “With shelving space a limited and prized commodity, the practice was created to provide food retailers and food manufacturers a contractual and mutually acceptable means of determining shelf space and sharing the expense of bringing new products and product line extensions to market.”

Other studies have echoed those conclusions. An influential (and controversial) 2005 study by K. Sudhir and Vithala R. Rao argued that slotting fees were the best way to allocate scarce shelf space. After studying the situation, the FTC argued that more research was needed. (CSPI encourages further investigation from the FTC as well.) FTC studies have also shown that slotting fees are higher where space is scarcer, like the ice cream aisle.

But there’s certainly no consensus when it comes to slotting fees. The Bureau of Alcohol, Tobacco, Firearms, and Explosives banned slotting fees for liquor, and in multiple surveys, small manufacturers have repeatedly said slotting fees are anti-competitive. In that way, slotting fees become a conundrum: The more you know, the more the grocery seems rigged; at the same time, the more you know, the more that rigging seems necessary.

Is there a way beyond slotting fees? Maybe.

It’s possible to see the positives and negatives of slotting fees: Retailers, operating at high volume and thin margins, need ways to reduce risks and recoup costs. For vendors, however, it feels like a brand of extortion that favors large conglomerates over companies that can’t afford upfront fees. Other than new regulation, is there a better way to approach the market behind the supermarket?

One solution might be more and better test stores. If grocers can effectively test products in a small number of stores, they might be able to estimate sell-through without charging fees to manufacturers or risking precious shelf space on thousands of stores. As it becomes easier to track product successes and failures thanks to improved technology, that may be a viable option.

Slotting fees aren’t universal, either. Whole Foods, Costco, BJ’s Wholesale, and Walmart don’t charge slotting fees (though any manufacturer will note that these retailers might aggressively negotiate on wholesale prices instead, or even charge other fees). As a Walmart spokesperson told me, “Unlike many other grocers, Walmart does not charge slotting fees. We are working with our suppliers every day to serve our shared customers.” Retailers are also responding by investing in private-label brands that allow them to cut out placement questions completely.

Interestingly, these pros and cons extend to a range of other industries and countries. You’ll find slotting fees at Barnes & Noble, big-box stores, and most other large chains. They’re also a reality of doing business in the UK and Australia.

The secretive world of manufacturer/retailer negotiations is hard to peek inside, but in 2009 we got one clue thanks to Safeway’s 10-K form, which shows how the grocer makes money. Though it was a relatively small percentage of total revenue, we can estimate slotting fees accounted for $130 million in 2008. The next time you go to the grocery, you should be aware that there are multiple prices behind what you buy.