Inside the “very, very guarded” agreements that dictate what’s sold in grocery stores — and the cost

With food prices up 25% over the last four years, it may be worth asking – what determines the cost of food?

It’s a complicated question, involving supply costs, crop yields, public policy, the availability of raw materials, supply chain issues and animal and plant disease, to name a few factors. 

But in our grocery stores, supermarkets and food manufacturers often determine the final label price consumers pay. Many consumers are unaware of the clandestine cooperative marketing agreements between supermarkets and food conglomerates that influence how food is stocked, how aisles are arranged, what products are highly promoted and, ultimately, what foods consumers get to choose from, and how much we pay. 

“Manufacturers are able to really control and dictate the retail environment, to the detriment of consumers and consumers’ health,” Sara John, deputy director at the Center for Science in the Public Interest, told Salon.

Those systems are particularly harmful to small food brands; a best-case success scenario for those brands often ends in acquisition. And those structures stand to potentially blossom under a proposed $24.6 billion megamerger between Kroger and Albertsons, America’s two largest supermarket brands, that the Federal Trade Commission is suing to block over concerns the deal would create a monopoly.  

“Absent antitrust enforcement and fair competition enforcement, it's really hard to imagine how these companies at the top ever get knocked off, or how three companies controlling 80% of the mayonnaise ever actually changes,” Claire Kelloway, program manager for fair food and farming systems at the Open Markets Institute, told Salon.

Lawyers from both Kroger and the FTC gave closing arguments in the FTC’s antitrust case last week; the judge overseeing the case is expected to issue their ruling as early as October. Kroger did not return a request for comment.

‘A really big source of profits' for grocery stores

Supermarkets’ cooperative marketing agreements are often “very, very tightly guarded documents,” John said. Outside of a handful of public data points, little is known about them. 

One example of such an agreement is slotting fees, which have existed for decades but are shrouded in secrecy – a reality put on full display in 1999, when two small-business owners testified in a Senate hearing on slotting fees “in black hoods,” their voices electronically disguised for fear of retaliation.

“Because it's so guarded, I do think it is such an important part of the retail business model,” John said of the agreements.   

Grocery stores charge slotting fees to brands for favorable shelf space, as well as for things like end-of-aisle placements and special displays. Often, these fees can amount to millions of dollars in extra payments and “effectively elbows out smaller brands,” according to a 2021 report from Food & Water Watch. In 2016, the owner of a small condiments brand said he was charged between $5,000 and $20,000 per item in slotting fees, according to a CSPI investigation into the practice. 

Bemoaning the power imbalance between conglomerates and their competitors, the owner of a small canned tomatoes brand said the biggest canned vegetable companies can pay those fees “just to keep us off the shelf,” per a Federal Trade Commission report on grocery industry marketing practices, published in 2001. (Despite its long shelf life, the report remains one of the more comprehensive sources on the subject.)

The FTC report found that, at the time, slotting fees typically ranged between $75 and $300 per item, per store, and could be “likely to increase the wholesale price of a product, because the manufacturer must raise its price to cover the expense.” Bedrock Analytics, a consumer goods data company, offered an updated estimate in 2019, describing slotting fees in a report as “typically ranging from $250 to $1,000 per item per store.” 

“There are all these different ways that brands are paying grocers for promotions, for slotting, for a display in the middle of the store,” Kelloway said. “That has become a really big source of profits and revenue for grocers dealing more in promotions and deals and coupons.”

Slotting fees helped Kroger reduce its annual costs by roughly $6 billion between 2010 and 2012, according to a Food & Water Watch report. Kroger did not return a request for comment. 

‘A very clever strategy’

Another common pricing arrangement between supermarkets and food brands? Category captain arrangements, in which the top-selling food manufacturers dictate where their products – and their competitors’ – are placed on the shelves.

In grocery stores, category captain arrangements are “widespread, and likely the dominant mode for many European and U.S. based retailers,” according to a 2020 report in Industrial Marketing Management. Under these agreements, the top manufacturer in a given product – using, prevailing wisdom says, their competitive marketing insights – will create visual layouts dictating how to arrange all the products in that given category. 

“A captain that is able to control decisions about product placement and promotions could hinder the entry or expansion of rivals, leading to less variety and possibly higher prices,” states a 2018 report on grocery captain agreements from the American Antitrust Institute. 

In the 2016 CSPI investigation, an owner of a small ice cream brand said he feared his products being relegated out of customers’ sight by category captains, “behind a hinge . . . so you can barely see it.” 

Nestlé, he said, was the category captain in frozen desserts in 22 of the country’s largest 25 supermarkets. Nestlé did not return a request for comment. 

Smaller brands ‘just hoping to get acquired’

Such arrangements – slotting fees, category captains and perhaps other structures publicly unknown – creates a food ecosystem in which the best business move for a smaller brand is getting gobbled up by a larger one, experts say, further shrinking the number of companies controlling the food on our grocery shelves in an already consolidated system. 

“Most new food businesses, they really are just hoping to get acquired, because that's how you're going to get your product the best shelf placement,” Kelloway said.

It’s a two-way street, experts say – a growth strategy the biggest food manufacturers employ to add brands “already vetted by the market,” Carolyn Dimitri, an applied economist at New York University, told Salon. Recent small brand acquisitions include General Mills’ $204 million acquisition of Annie’s in 2014 and Danone buying Silk’s parent company for $10 billion in 2016. 

In 2020, Mars acquired the maker of KIND Bars for $5 billion. 

“It's actually a very clever strategy,” Dimitri said, adding that consumers often assume they’re supporting smaller brands not owned by a major food conglomerate. 

“If you let small entrepreneurs develop these new products, they're taking all the risk,” she said. “Then, when they have a successful product, Frito Lay or Pepsi will come and buy you out. And then, they keep the same branding.”