June 13, 2007
Slotting Allowances Lead to Dumbed-Down Retailing
A recent article in The Financial Times, America’s Time-Warp Supermarkets, has a number of critical observations to make of the U.S. grocery business. Among the most biting is the author’s contention that slotting fees and other monies have led to a sense of sameness across stores with the same items prominently featured on end-caps for, yawn, purchase.
While being able to command a price for shelf-space gives the impression that retailers hold the cards, the article suggests that retailers in the U.S. are weaker as a result of the practice.
Neil Currie, an analyst at UBS, compared slotting fees to a drug that some chains are addicted to.
Thierry Chassaing, a senior partner at the Boston Consulting Group, said, “U.S. supermarket chains have a tenth of the power of those in Europe. A Giant or a Star Market in Boston can do little against food companies.”
The strongest of chains in the U.S. are those that do not rely on manufacturer funds, according to the article’s author, John Gapper. “It is only since national chains such as Whole Foods and Wal-Mart emerged, with the purchasing and marketing clout to stand up to suppliers, or circumvent them altogether, that supermarkets have sharpened up their act,” he wrote.
Discussion Question: Do you agree that slotting allowances are causing a general ‘sameness’ on supermarket shelves? Have the last 5 years seen any significant changes in the way most U.S. grocers decide what goes on their shelves?
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Slotting allowances are a symptom of management seeking short term fixes (an American problem). The bottom line is a little weak so let’s sell our shelf space! How in the world did the grocers survive before a supplier offered a chain money to put a new item on the shelf? I know Wall Street would never tolerate it, but it’s time grocers start managing their business to satisfy the consumer.
What do consumers want? Would they like more variety? Would they like better products? Would they like lower prices? Well, slotting allowances decrease variety, reduce competition and product innovation and increase prices. The result is that shopping in a traditional grocery store in the USA is one of the most boring activities the consumer experiences. This is good because it opens the door for companies like Trader Joe’s and Whole Foods. The void will be filled by those with imagination. If it’s interesting, word of mouth will provide some traffic. Some common sense has to be applied to this equation but in general it has worked and will continue to work.
As my teenage daughter used to say, “Duh!” Stiff slotting allowances are economically feasible in the business models of the same usual suspects, the brands that “everyone else” carries. The industry has inadvertently shut out the most innovative new ideas, most exciting new brands, and most appealing niches, in favor of the boring defensive approach of making sure it earns its small profit from “buying” rather than “selling.” The largest branded companies that can afford the slotting allowances tend to be the least innovative and those are the brands that dominate the shelves in every “sameness” retail chain with the same assortment. And so what is the result? The only differences between one chain to the next is what items are being discounted, who has the deepest TPR, and who is doubling coupons, etc. Big yawn!
American supermarkets’ “sameness”: it’s been going on since the 1950s. Retailers tend to copy each other, CPG firms copy each other, and shoppers copy each other. It’s not because of slotting fees. It’s the nature of most competitive businesses. Whole Foods and Trader Joe’s are innovative and their customers love them. But look at their market share: while growing, it is tiny. (Kroger sales are 10 times the total sales of Whole Foods and Wild Oats put together.) If coffee brand A triples its monthly volume by offering a deal, it’s very hard for coffee brand B to ignore that. So if slotting fees went away, would supermarket assortments be more diverse? Or would the assortments tend to be similar for larger reasons?
Short of actually having any research on the topic, I’m not sure I’d blame slotting allowances per se. I’m more inclined to point the finger at fear of failure or fear of alienation. Rather than create a unique positioning that would go after specific segments of shoppers, the typical grocery/drug chain tries to appeal to the entire market. You do that and things look the same. Whole Foods is a good example of a niche marketer–they are not targeting the discount or deal shopper. They give up one piece of the market in order to do very well with another piece.
If slotting fees create sameness in supermarkets, and let’s accept that they do, who is the “chicken” and who is the “egg” in this situation–the takers or the givers? Possibly both….
Or is it that the financial analysts and writers such as Mr. Gapper, who says that Wal-Mart stands up to suppliers (and implies they ask for nothing from them), have the best 20-20 eyesight for operating food retailing stores better. If so, and it may be possibly true, let them come aboard and operate the houses of their disdain more inventively without that dull sameness.
Yes, perhaps such folks could elevate supermarketing by entering into it directly and not just with their pedantic pens from their offices. The industry could use more ingenuity. Now turn the coin over….
Would that supermarkets were to create a new media world that would share supermarket operators critiques of analysts and food retailing writers. Could it be possible that supermarkets would then have some “companions of sameness” to share the commercial marketplace with?
I am relatively new to the writing field, but the Financial Times Article sounds like an article written to support a premise rather than a critical review of the facts to produce an article. It begins by walking through the vast variety of cheeses available in a supermarket and then argues that slotting allowances are limiting assortment.
I am not supporting slotting allowances. I agree they distort the market and lead to large manufacturers dominating the supplier channels. Innovative small companies don’t have the cash to finance the purchase of shelf space in the supermarket. This does not mean assortment must suffer but it does mean the number of manufacturers must decline. The remaining manufacturers increase their revenue by offering new varieties either at new price points as additional brands or with new products in existing brands. If we really want to increase the number of manufacturers we have to chose a new way to handle risk.
Slotting allowances made sense in the beginning because they offered the retailer protection against product failures. Rather than get stuck with a new product that did not sell, the retailer could justify experimenting with new products by the “insurance” that the slotting fee provided. Maybe there is an opportunity here for a third party to take on the risk of a new product offering. Just like other businesses offload risk onto third parties willing to take the chance, suppliers and retailers could use “New Product Insurance” to syndicate the risks associated with taking on a new product. Innovative startups could offer their products without a large upfront cost and risk adverse retailers could recover the cost of failed products. This would remove the distorting effect of upfront payments and help both sides provide greater assortment.
When doing research a number of years back working as a crew member at Trader Joe’s, the company line was it did not ask for or accept fees from suppliers because it didn’t want anyone other than perhaps customers telling it how it should run its stores. If you’re looking for a store that differentiates itself from the competition, Trader Joe’s is it.
Slotting fees are legacy incentives that reward sameness. Even so, these fees aren’t responsible for the “sea of sameness” across retailers.
Instead, fiscal conservation is the culprit.
Homogeneity in grocery is like the homogeneity in Hollywood. It’s simple–no one wants to take a risk financially. Big players have a lot to lose and therefore place safe bets, that yield ho-hum products.
Retailing is like anything in life: No guts, no glory.
SAs are like a drug, a habit that’s hard to kick particularly when you are weak in other areas. The short term cash flow benefits of these allowances propped up more than a few players five years ago, but the result is inefficient assortment variety levels, and unproductive space allocation. Hard to look back and say it wasn’t the right thing though, since the bulk of the merchandising talent seemed to lay on the supply side for years. Seems this dynamic has changed, and grocers are growing more confident, and independent, which should lead to much better grocery experiences for all of us.
“Sameness” in retailing is in my opinion only a byproduct of “following the consumer.” We seem to be in a mode of taking big ideas (e.g. organic) and big brands (e.g. numerous line extensions) and overexposing them to reach out to the consumer in an effort to appeal to their immediate interests and needs. Slotting can contribute to the “sameness” but is not the major contributor to this trend.
There are very successful retailers who continue to find ways to differentiate themselves through in-store services and creative merchandising concepts…slotting may influence product assortment but it has no real bearing on real and perceived differentiation!!!
Not to be boring and agree with everyone else but this really is a no brainer. Operating in retail only a few miles from the second largest grocery chain (excluding Wal-Mart) in the country, the rule of thumb here is not what is new and exciting for the consumer, but rather, do you have the six figure slotting dollars to make it work? While I admit that not every new item is for every chain or individual consumer, I feel that the consuming public misses out on a lot of great new items solely due to the manufacturer not having the deep pockets to get it on the shelf. We have created a supermarket arena that tends to allow only the [largest consumer packaged goods manufacturers] of the world to dictate what the consumers get to see as “new.” I agree with the other panelist in saying that Trader Joe’s truly has the upper hand in assigning shelf space.
Slotting fees are an artificial hurdle to store penetration as well as an unrealistic way to grow profits. This distorts the profit picture for a particular category, while allowing for continued inefficiencies to grow with a retailer. Slotting fees allow the same players to continue to grab and control shelf space. This not only restricts competition, but does give stores a standardized look and feel. Eliminating this allows for increased competition while forcing retailers to take a hard look at which items are actually delivering profits or ROI on a square foot basis in each store. Indirectly, this would also drive a greater selection of products onto store shelves, which increases choice for the consumer. More choice means more sales while delivering a satisfied customer who continues to return to the retailer for their future purchases.
Slotting fees both provide retailers with a short term source of income and reduce the number of product decisions which they have to consider.
As slotting fees increase, the smaller manufacturer is not in a position to compete with larger organizations. The major brand houses have the capability of subsidizing new product launches through the revenues created by their portfolio of existing items. The result is that there are fewer new items brought to market, product cost to the retailers are inflated above the levels required to cover actual manufacturing and sales costs.
While in the short term the retailer benefits, in the long term there is a decline in meaningful variety of product. The decline in variety ultimately results in competition between retailers on price rather than selection. This plays into the hand of large retail chains who ultimately will reduce retail prices, weakening smaller regional players.
For those who read it, the FT article actually offered much broader criticisms of American food retailing: personally I found it somewhat of a nose-thumbing we-do-it-better-over-here piece, but I’m sure others would find its comments provocative….
Anyway, though I’m sure slotting–and most other vendor/retailer collusions–are a lazy retailer’s friend, it seems like one of those chicken-egg issues: are SKUs there because they’re popular, or are they popular b/c they’re there?
I hadn’t thought of the “sameness” issue before, but if you look at the four sources of profit in the typical American supermarket, you understand a lot about why things are the way they are:
1. Slotting fees and other promotional money from brands.
2. Float on cash received every day – billions across the industry.
3. Real estate appreciation – unbooked until sale.
4. Margin on merchandise sold.
People act as if margin is the major motivator, and it is not, except for those departments the store manages themselves–service bakery/deli, meat, etc. So those self-managed businesses end up in prime real estate–the perimeter–while the brands are relegated to the little visited center-of-store, pay the “warehouse-man” to be there, and pay more to peep out at the passing traffic by getting on an end cap or lobby display.
This may seem like a cartoon of supermarketing, but sometimes it takes a cartoon to get at the essence of what is going on.
Food retailers that accept/encourage slotting allowances are essentially getting an advance on gross margin. Unfortunately, that advance does not get reflected in lower, or at times even competitive, retail prices, since manufacturers simply build the slotting cost into the sale price.
So, where food retailers build in a disincentive for greater sales volumes due to non-competitive retailer pricing, the Wal-Marts of the world insist on net prices for the sole purpose of reflecting the total COGS in the lowest possible price, and greatest volume.
If food retailers used the slotting to pay for value-added services and marketing to differentiate themselves it could work, but by dumping slotting fees right to the bottom line they are continuously adding to their competitive challenges. Is it any wonder why other channels have stolen entire critical categories in the last 10 years?
Slotting could almost be considered a ‘tie breaker’ tactic, by the retailer. And many times, the monies are used to promote the new product(s) or Brand, based on the CPG/manufacturer proposed yearly advertising, promotion, and merchandising support. Of course, the track record of the CPG or CPF’s past comes into play, as well.
The major manufacturers know it is part of the ‘game’, and the medium to small, somewhat unknown brands–with a unique point of difference–understand the opportunity to secure the distribution.
The retailer’s weak point is when the CPG/manufacturer has a strong consumer base and marketing clout. The issue always has been whether or not all retailers are treated fairly by the CPG, CPF, or other suppliers…believe it or not. Hmmmmmmmmmmmm
As a busy consumer, I have very limited time to shop and become very frustrated every time I enter the grocery store only to find it has been “rearranged” once more. If indeed this is due to slotting fees, etc., I vote that it absolutely works against the store.
Store owners may think that this keeps us in there longer, looking and purchasing new/more things. Wrong!!! We leave without purchasing everything that we intended to because we don’t have the time to try and figure out where they may have placed it now.
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Slotting allowances are a symptom of management seeking short term fixes (an American problem). The bottom line is a little weak so let’s sell our shelf space! How in the world did the grocers survive before a supplier offered a chain money to put a new item on the shelf? I know Wall Street would never tolerate it, but it’s time grocers start managing their business to satisfy the consumer.
What do consumers want? Would they like more variety? Would they like better products? Would they like lower prices? Well, slotting allowances decrease variety, reduce competition and product innovation and increase prices. The result is that shopping in a traditional grocery store in the USA is one of the most boring activities the consumer experiences. This is good because it opens the door for companies like Trader Joe’s and Whole Foods. The void will be filled by those with imagination. If it’s interesting, word of mouth will provide some traffic. Some common sense has to be applied to this equation but in general it has worked and will continue to work.
As my teenage daughter used to say, “Duh!” Stiff slotting allowances are economically feasible in the business models of the same usual suspects, the brands that “everyone else” carries. The industry has inadvertently shut out the most innovative new ideas, most exciting new brands, and most appealing niches, in favor of the boring defensive approach of making sure it earns its small profit from “buying” rather than “selling.” The largest branded companies that can afford the slotting allowances tend to be the least innovative and those are the brands that dominate the shelves in every “sameness” retail chain with the same assortment. And so what is the result? The only differences between one chain to the next is what items are being discounted, who has the deepest TPR, and who is doubling coupons, etc. Big yawn!
American supermarkets’ “sameness”: it’s been going on since the 1950s. Retailers tend to copy each other, CPG firms copy each other, and shoppers copy each other. It’s not because of slotting fees. It’s the nature of most competitive businesses. Whole Foods and Trader Joe’s are innovative and their customers love them. But look at their market share: while growing, it is tiny. (Kroger sales are 10 times the total sales of Whole Foods and Wild Oats put together.) If coffee brand A triples its monthly volume by offering a deal, it’s very hard for coffee brand B to ignore that. So if slotting fees went away, would supermarket assortments be more diverse? Or would the assortments tend to be similar for larger reasons?
Short of actually having any research on the topic, I’m not sure I’d blame slotting allowances per se. I’m more inclined to point the finger at fear of failure or fear of alienation. Rather than create a unique positioning that would go after specific segments of shoppers, the typical grocery/drug chain tries to appeal to the entire market. You do that and things look the same. Whole Foods is a good example of a niche marketer–they are not targeting the discount or deal shopper. They give up one piece of the market in order to do very well with another piece.
If slotting fees create sameness in supermarkets, and let’s accept that they do, who is the “chicken” and who is the “egg” in this situation–the takers or the givers? Possibly both….
Or is it that the financial analysts and writers such as Mr. Gapper, who says that Wal-Mart stands up to suppliers (and implies they ask for nothing from them), have the best 20-20 eyesight for operating food retailing stores better. If so, and it may be possibly true, let them come aboard and operate the houses of their disdain more inventively without that dull sameness.
Yes, perhaps such folks could elevate supermarketing by entering into it directly and not just with their pedantic pens from their offices. The industry could use more ingenuity. Now turn the coin over….
Would that supermarkets were to create a new media world that would share supermarket operators critiques of analysts and food retailing writers. Could it be possible that supermarkets would then have some “companions of sameness” to share the commercial marketplace with?
I am relatively new to the writing field, but the Financial Times Article sounds like an article written to support a premise rather than a critical review of the facts to produce an article. It begins by walking through the vast variety of cheeses available in a supermarket and then argues that slotting allowances are limiting assortment.
I am not supporting slotting allowances. I agree they distort the market and lead to large manufacturers dominating the supplier channels. Innovative small companies don’t have the cash to finance the purchase of shelf space in the supermarket. This does not mean assortment must suffer but it does mean the number of manufacturers must decline. The remaining manufacturers increase their revenue by offering new varieties either at new price points as additional brands or with new products in existing brands. If we really want to increase the number of manufacturers we have to chose a new way to handle risk.
Slotting allowances made sense in the beginning because they offered the retailer protection against product failures. Rather than get stuck with a new product that did not sell, the retailer could justify experimenting with new products by the “insurance” that the slotting fee provided. Maybe there is an opportunity here for a third party to take on the risk of a new product offering. Just like other businesses offload risk onto third parties willing to take the chance, suppliers and retailers could use “New Product Insurance” to syndicate the risks associated with taking on a new product. Innovative startups could offer their products without a large upfront cost and risk adverse retailers could recover the cost of failed products. This would remove the distorting effect of upfront payments and help both sides provide greater assortment.
When doing research a number of years back working as a crew member at Trader Joe’s, the company line was it did not ask for or accept fees from suppliers because it didn’t want anyone other than perhaps customers telling it how it should run its stores. If you’re looking for a store that differentiates itself from the competition, Trader Joe’s is it.
Slotting fees are legacy incentives that reward sameness. Even so, these fees aren’t responsible for the “sea of sameness” across retailers.
Instead, fiscal conservation is the culprit.
Homogeneity in grocery is like the homogeneity in Hollywood. It’s simple–no one wants to take a risk financially. Big players have a lot to lose and therefore place safe bets, that yield ho-hum products.
Retailing is like anything in life: No guts, no glory.
SAs are like a drug, a habit that’s hard to kick particularly when you are weak in other areas. The short term cash flow benefits of these allowances propped up more than a few players five years ago, but the result is inefficient assortment variety levels, and unproductive space allocation. Hard to look back and say it wasn’t the right thing though, since the bulk of the merchandising talent seemed to lay on the supply side for years. Seems this dynamic has changed, and grocers are growing more confident, and independent, which should lead to much better grocery experiences for all of us.
“Sameness” in retailing is in my opinion only a byproduct of “following the consumer.” We seem to be in a mode of taking big ideas (e.g. organic) and big brands (e.g. numerous line extensions) and overexposing them to reach out to the consumer in an effort to appeal to their immediate interests and needs. Slotting can contribute to the “sameness” but is not the major contributor to this trend.
There are very successful retailers who continue to find ways to differentiate themselves through in-store services and creative merchandising concepts…slotting may influence product assortment but it has no real bearing on real and perceived differentiation!!!
Not to be boring and agree with everyone else but this really is a no brainer. Operating in retail only a few miles from the second largest grocery chain (excluding Wal-Mart) in the country, the rule of thumb here is not what is new and exciting for the consumer, but rather, do you have the six figure slotting dollars to make it work? While I admit that not every new item is for every chain or individual consumer, I feel that the consuming public misses out on a lot of great new items solely due to the manufacturer not having the deep pockets to get it on the shelf. We have created a supermarket arena that tends to allow only the [largest consumer packaged goods manufacturers] of the world to dictate what the consumers get to see as “new.” I agree with the other panelist in saying that Trader Joe’s truly has the upper hand in assigning shelf space.
Slotting fees are an artificial hurdle to store penetration as well as an unrealistic way to grow profits. This distorts the profit picture for a particular category, while allowing for continued inefficiencies to grow with a retailer. Slotting fees allow the same players to continue to grab and control shelf space. This not only restricts competition, but does give stores a standardized look and feel. Eliminating this allows for increased competition while forcing retailers to take a hard look at which items are actually delivering profits or ROI on a square foot basis in each store. Indirectly, this would also drive a greater selection of products onto store shelves, which increases choice for the consumer. More choice means more sales while delivering a satisfied customer who continues to return to the retailer for their future purchases.
Slotting fees both provide retailers with a short term source of income and reduce the number of product decisions which they have to consider.
As slotting fees increase, the smaller manufacturer is not in a position to compete with larger organizations. The major brand houses have the capability of subsidizing new product launches through the revenues created by their portfolio of existing items. The result is that there are fewer new items brought to market, product cost to the retailers are inflated above the levels required to cover actual manufacturing and sales costs.
While in the short term the retailer benefits, in the long term there is a decline in meaningful variety of product. The decline in variety ultimately results in competition between retailers on price rather than selection. This plays into the hand of large retail chains who ultimately will reduce retail prices, weakening smaller regional players.
For those who read it, the FT article actually offered much broader criticisms of American food retailing: personally I found it somewhat of a nose-thumbing we-do-it-better-over-here piece, but I’m sure others would find its comments provocative….
Anyway, though I’m sure slotting–and most other vendor/retailer collusions–are a lazy retailer’s friend, it seems like one of those chicken-egg issues: are SKUs there because they’re popular, or are they popular b/c they’re there?
I hadn’t thought of the “sameness” issue before, but if you look at the four sources of profit in the typical American supermarket, you understand a lot about why things are the way they are:
1. Slotting fees and other promotional money from brands.
2. Float on cash received every day – billions across the industry.
3. Real estate appreciation – unbooked until sale.
4. Margin on merchandise sold.
People act as if margin is the major motivator, and it is not, except for those departments the store manages themselves–service bakery/deli, meat, etc. So those self-managed businesses end up in prime real estate–the perimeter–while the brands are relegated to the little visited center-of-store, pay the “warehouse-man” to be there, and pay more to peep out at the passing traffic by getting on an end cap or lobby display.
This may seem like a cartoon of supermarketing, but sometimes it takes a cartoon to get at the essence of what is going on.
Food retailers that accept/encourage slotting allowances are essentially getting an advance on gross margin. Unfortunately, that advance does not get reflected in lower, or at times even competitive, retail prices, since manufacturers simply build the slotting cost into the sale price.
So, where food retailers build in a disincentive for greater sales volumes due to non-competitive retailer pricing, the Wal-Marts of the world insist on net prices for the sole purpose of reflecting the total COGS in the lowest possible price, and greatest volume.
If food retailers used the slotting to pay for value-added services and marketing to differentiate themselves it could work, but by dumping slotting fees right to the bottom line they are continuously adding to their competitive challenges. Is it any wonder why other channels have stolen entire critical categories in the last 10 years?
Slotting could almost be considered a ‘tie breaker’ tactic, by the retailer. And many times, the monies are used to promote the new product(s) or Brand, based on the CPG/manufacturer proposed yearly advertising, promotion, and merchandising support. Of course, the track record of the CPG or CPF’s past comes into play, as well.
The major manufacturers know it is part of the ‘game’, and the medium to small, somewhat unknown brands–with a unique point of difference–understand the opportunity to secure the distribution.
The retailer’s weak point is when the CPG/manufacturer has a strong consumer base and marketing clout. The issue always has been whether or not all retailers are treated fairly by the CPG, CPF, or other suppliers…believe it or not. Hmmmmmmmmmmmm
As a busy consumer, I have very limited time to shop and become very frustrated every time I enter the grocery store only to find it has been “rearranged” once more. If indeed this is due to slotting fees, etc., I vote that it absolutely works against the store.
Store owners may think that this keeps us in there longer, looking and purchasing new/more things. Wrong!!! We leave without purchasing everything that we intended to because we don’t have the time to try and figure out where they may have placed it now.