May 12, 2015
When are slotting fees warranted?
Through a special arrangement, presented here for discussion is a summary of a current article from Frozen & Refrigerated Buyer magazine.
When slotting fees became commonplace in the 1980s, one trade magazine wrote outraged editorials against them in every issue, vowing to continue until slotting went away.
At the start, slotting seemed nothing more than a rip-off of vendors by retailers — yet another scheme to make money on the buy rather than on the sell. For many retailers, that’s still true today, especially when fees go far beyond actual costs tied to new item introductions.
As slotting became institutionalized and as I developed friendships with more retailers who dared to be candid, my feelings changed. 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.
To a degree, I came to believe that slotting had a place after all — but only to the extent of the retailer’s actual costs. I was always bothered, and still am, by the retailers who charge absurd slotting fees and just drop the cash to the bottom line.
But perhaps because it is difficult to continue moral outrage for decades when it seems the rest of the world has moved on, I eventually moved on as well. Slotting was just another fact of life in the industry that everyone winked at.
The abusers of slotting are still with us. But today, I no longer think of them as morally weak — I just think of them as foolishly headed for failure. The abusers who pad their bottom lines with slotting should dust off the ancient literature about Efficient Consumer Response.
Yes, I know, ECR was hot back in the last century and nobody takes it seriously anymore. But what’s hot today is the very same thing — under new names — three "paradigm shifts" later. (Hey, consultants have to make a living too, you know.)
ECR was designed to meet consumer needs efficiently and effectively. Trade funding was designed to help get consumers into the stores to buy. Slotting was designed to reimburse retailers for the costs of rampant new product failures. Slotting was not designed (or it shouldn’t have been) so retailers could use vendor funds to pay the electric bill or the CEO’s bonus.
Increasingly, vendors are insisting that all trade funds be spent to benefit the consumer, the retailer and the vendor. Retailers ignore this basic ECR concept at their peril.
BrainTrust
Dr. Stephen Needel
Managing Partner, Advanced Simulations
Dick Seesel
Principal, Retailing In Focus LLC
Recent Discussions
Discussion Questions
What do you think of slotting fees? When are they merited and when are they abusive?
Poll
Retailers took an elephant gun to a mouse hunt with slotting fees. Instead of requiring research to demonstrate the new product had a chance of making it, they were willing to take anything for a price. If a vendor simply wants to swap variants, and if that leads to costs for retailers, the vendor should pay a slotting fee. If it’s a new product with demonstrated potential, the vendor and retailer should be working together to bring it to the shopper — no slotting fees needed.
Slotting fees that actually cover demonstrable costs can be merited. If the issue is risk of a new product selling, the retailers should just demand that the manufacturers show them the data supporting claims of consumer demand. If the manufacturers can not justify the introduction of the product, slotting fees are just money to cover bad decision making and help no one in the long run.
One way to think about slotting fees: Another kind of markdown money, which is a widely accepted practice even though vendors may not like it. If a retailer has to clear inventory from another brand or vendor in order to provide shelf space for something new, the new supplier ought to at least share in the margin hit that follows. It’s not just about the risk of trying a new product, it’s just as much about the cost of liquidating something else.
First of all, as maybe the first trade journalists to drag the whole infrastructure of “pay-to-play” schemes out of the shadows back in the Dark Ages, let me say that in a sane retail world, slotting fees would rarely — if ever — be paid.
Why?
Well, inherent in the slotting fee rationale is the notion of the retail buyer as a passive, uninformed victim, forced to take on all those shiny new products from the evil manufacturer.
Want to solve that problem?
To quote a famous former First Lady, “Just Say No.” If a buyer knows his or her market and believes a product isn’t good, they shouldn’t take it on. If they are wrong, well, there are a lot of potential buyers out there.
From the manufacturers’ point of view, Warren is right. Slotting is a lazy person’s substitute for market research and original product design. And so, shame on the manufacturers as well.
The real answer is that both manufacturers and retailers have forgotten that the customer’s role in the supply chain is to be a satisfied purchaser, not a liquidator of SKUs for which there never was, and never will be, legitimate demand.
Back in those Dark Ages there was a long-forgotten concept called, “the cost of doing business.” It was rooted around the quaint idea that profit isn’t guaranteed in a free market and that the words capital and risk are often correctly used in the same sentence.
Too many people ignore the fact that modern self-service retailing was built on the concept of close to zero margin on sales — actually, just enough to cover operating costs — and then harvesting profits, serving as an “advertising” outlet to reach customers. See: “The Great A&P and the Struggle for Small Business in America.” Whether it fits their self-image or not, most retailers have become merchant warehousemen — supply-chain focused, and why not? The shoppers are unpaid stock-pickers who essentially sell themselves whatever they want from the generously stocked warehouse.
This makes the REAL customers of the store the suppliers who run high margins themselves and buy access to the market in the store. They pay for the gross inefficiency of the shelves and their brand-on-brand mayhem, battling the other suppliers for the same space.
It is a business model being slaughtered, slowly, and probably will never completely die. But the massive capital waste is, and it will reap a toll: “The Problem: ‘Parked’ Capital.” Online and “efficient” stores like Costco, Trader Joe’s and Aldi will reap the benefits, except as the slotting fees/long-tail disasters reform themselves and actually achieve something of their proclaimed “shopper-centricity.”
I agree with the points being made here. The column was an opinion piece. For the in-depth story, including insightful comments from some of the RetailWire BrainTrust, click on the second link provided above, “Vendors Push Back on Slotting.” Thanks.
First off, great article by Warren Thayer. It’s the most comprehensive yet understandable piece on this complex topic I’ve ever read.
Slotting fees are a retail risk management tool, plain and simple. There is a potential opportunity cost for retailers taking on a new product, namely the sales of the line that was cut back or replaced. Research is great and in a perfect world demand forecasts would be 100 percent accurate, but they’re not and a shopper’s intent to buy doesn’t always equal a sale. The retailer is putting his real estate on the line and the supplier is putting research, production and marketing dollars behind the product. A collaborative effort to promote the line at retail dramatically increases the likelihood of a successful launch.
Let me begin by saying I am not exactly opposed to slotting fees nor do I strongly condone them. It appears the vendors are trying to do their market research on the retail sales floor. Not really a good thing. But it has to reduce what would have been the cost to get the product to market.
While the whole idea of risk-shifting is not in sync with Ryan’s concept of “the cost of doing business” — it is a real business strategy, perfected by the finance industry. To that end, I always thought the better concept was “failure fees.” Make the manufacturer pay the cleanup costs plus a “fee” if the SKU doesn’t meet agreed hurdles. In order to qualify for the failure fee the retailer must have also met agreed levels of distribution, pricing and promotion support, etc.
Of course, the retailers Warren is referring to usually charged both fees — what my grandfather used to characterize as “gettin’ ’em comin’ and goin’.” Maybe Pop should have been a retailer instead of a farmer and horse trader.
Many great comments made here and it’s nice to see some in defense of slotting. I was once a grocery buyer and collected millions of dollars in slotting. Slotting was created as a natural market mechanism that actually helps manufacturers take products to market. If a retailer accepted every new product their shelves would be choked with the 95 percent of new products that fail every year. “Failure fees” are not feasible to execute as another option.
A 2005 report titled, “Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?” was authored by researchers, K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell.
In the report, they discuss the major arguments behind the pro- and anti-slotting rationales. Their findings support the rationale that slotting allowances help enhance market efficiency, by optimally allocating scarce retail shelf space to the most successful products, and that the fees do not thwart competition. They said the data shows slotting allowances help balance the risk of new product failure between manufacturers and retailers, help manufacturers signal private information about potential success of new products and serve to widen retail distribution for manufacturers by mitigating retail competition.
The authors also suggest that the popular argument that slotting allowances shut out competition from small manufacturers does not have much empirical support.
I think the proof lies in the author Sudir’s conclusion, “Overall, we believe the FTC is correct in its reluctance to ban the practice of slotting allowances in the grocery sector.”
Very simply, I don’t think of slotting fees. They went the way of Atari and IBM’s PC Junior. Aberrations that morphed from screening schemes to quantifiable costs of “supply chain friction.” Now, with the advent of newfangled market research (the net), democratization of targeted media (social and viral) and apps (not the appetizer section in the deli case), we are exposing the world of food chain costs—and commensurate opportunities—like never before. Slotting fees…ahhh, the cost of doing business—in the old days.
Having worked in both the retail and CPG industries since the ’70s, I can actually see both sides of this somewhat taboo subject. I do like that we are talking about it today. It is a challenge to deal with. Working in the grocery biz for some twenty years, I can see the opportunity. Supply and demand for space, right? The opportunity is to see what the market will bear. I can also see the CPG brand perspective in getting both new and existing product placement in stores at a reasonable cost.
However, today we have the explosive growth of eCommerce. More and more CPG brands are becoming available direct-to-consumer (D2C) and this obviously circumvents the slotting fee issues. Yet, brands selling in physical stores will continue for the foreseeable future, so trade funds should be directed to benefit the consumer, in my view, and that’s where this discussion gets interesting. To be continued offline…. 😉
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Retailers took an elephant gun to a mouse hunt with slotting fees. Instead of requiring research to demonstrate the new product had a chance of making it, they were willing to take anything for a price. If a vendor simply wants to swap variants, and if that leads to costs for retailers, the vendor should pay a slotting fee. If it’s a new product with demonstrated potential, the vendor and retailer should be working together to bring it to the shopper — no slotting fees needed.
Slotting fees that actually cover demonstrable costs can be merited. If the issue is risk of a new product selling, the retailers should just demand that the manufacturers show them the data supporting claims of consumer demand. If the manufacturers can not justify the introduction of the product, slotting fees are just money to cover bad decision making and help no one in the long run.
One way to think about slotting fees: Another kind of markdown money, which is a widely accepted practice even though vendors may not like it. If a retailer has to clear inventory from another brand or vendor in order to provide shelf space for something new, the new supplier ought to at least share in the margin hit that follows. It’s not just about the risk of trying a new product, it’s just as much about the cost of liquidating something else.
First of all, as maybe the first trade journalists to drag the whole infrastructure of “pay-to-play” schemes out of the shadows back in the Dark Ages, let me say that in a sane retail world, slotting fees would rarely — if ever — be paid.
Why?
Well, inherent in the slotting fee rationale is the notion of the retail buyer as a passive, uninformed victim, forced to take on all those shiny new products from the evil manufacturer.
Want to solve that problem?
To quote a famous former First Lady, “Just Say No.” If a buyer knows his or her market and believes a product isn’t good, they shouldn’t take it on. If they are wrong, well, there are a lot of potential buyers out there.
From the manufacturers’ point of view, Warren is right. Slotting is a lazy person’s substitute for market research and original product design. And so, shame on the manufacturers as well.
The real answer is that both manufacturers and retailers have forgotten that the customer’s role in the supply chain is to be a satisfied purchaser, not a liquidator of SKUs for which there never was, and never will be, legitimate demand.
Back in those Dark Ages there was a long-forgotten concept called, “the cost of doing business.” It was rooted around the quaint idea that profit isn’t guaranteed in a free market and that the words capital and risk are often correctly used in the same sentence.
Too many people ignore the fact that modern self-service retailing was built on the concept of close to zero margin on sales — actually, just enough to cover operating costs — and then harvesting profits, serving as an “advertising” outlet to reach customers. See: “The Great A&P and the Struggle for Small Business in America.” Whether it fits their self-image or not, most retailers have become merchant warehousemen — supply-chain focused, and why not? The shoppers are unpaid stock-pickers who essentially sell themselves whatever they want from the generously stocked warehouse.
This makes the REAL customers of the store the suppliers who run high margins themselves and buy access to the market in the store. They pay for the gross inefficiency of the shelves and their brand-on-brand mayhem, battling the other suppliers for the same space.
It is a business model being slaughtered, slowly, and probably will never completely die. But the massive capital waste is, and it will reap a toll: “The Problem: ‘Parked’ Capital.” Online and “efficient” stores like Costco, Trader Joe’s and Aldi will reap the benefits, except as the slotting fees/long-tail disasters reform themselves and actually achieve something of their proclaimed “shopper-centricity.”
I agree with the points being made here. The column was an opinion piece. For the in-depth story, including insightful comments from some of the RetailWire BrainTrust, click on the second link provided above, “Vendors Push Back on Slotting.” Thanks.
First off, great article by Warren Thayer. It’s the most comprehensive yet understandable piece on this complex topic I’ve ever read.
Slotting fees are a retail risk management tool, plain and simple. There is a potential opportunity cost for retailers taking on a new product, namely the sales of the line that was cut back or replaced. Research is great and in a perfect world demand forecasts would be 100 percent accurate, but they’re not and a shopper’s intent to buy doesn’t always equal a sale. The retailer is putting his real estate on the line and the supplier is putting research, production and marketing dollars behind the product. A collaborative effort to promote the line at retail dramatically increases the likelihood of a successful launch.
Let me begin by saying I am not exactly opposed to slotting fees nor do I strongly condone them. It appears the vendors are trying to do their market research on the retail sales floor. Not really a good thing. But it has to reduce what would have been the cost to get the product to market.
While the whole idea of risk-shifting is not in sync with Ryan’s concept of “the cost of doing business” — it is a real business strategy, perfected by the finance industry. To that end, I always thought the better concept was “failure fees.” Make the manufacturer pay the cleanup costs plus a “fee” if the SKU doesn’t meet agreed hurdles. In order to qualify for the failure fee the retailer must have also met agreed levels of distribution, pricing and promotion support, etc.
Of course, the retailers Warren is referring to usually charged both fees — what my grandfather used to characterize as “gettin’ ’em comin’ and goin’.” Maybe Pop should have been a retailer instead of a farmer and horse trader.
Many great comments made here and it’s nice to see some in defense of slotting. I was once a grocery buyer and collected millions of dollars in slotting. Slotting was created as a natural market mechanism that actually helps manufacturers take products to market. If a retailer accepted every new product their shelves would be choked with the 95 percent of new products that fail every year. “Failure fees” are not feasible to execute as another option.
A 2005 report titled, “Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?” was authored by researchers, K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell.
In the report, they discuss the major arguments behind the pro- and anti-slotting rationales. Their findings support the rationale that slotting allowances help enhance market efficiency, by optimally allocating scarce retail shelf space to the most successful products, and that the fees do not thwart competition. They said the data shows slotting allowances help balance the risk of new product failure between manufacturers and retailers, help manufacturers signal private information about potential success of new products and serve to widen retail distribution for manufacturers by mitigating retail competition.
The authors also suggest that the popular argument that slotting allowances shut out competition from small manufacturers does not have much empirical support.
I think the proof lies in the author Sudir’s conclusion, “Overall, we believe the FTC is correct in its reluctance to ban the practice of slotting allowances in the grocery sector.”
Very simply, I don’t think of slotting fees. They went the way of Atari and IBM’s PC Junior. Aberrations that morphed from screening schemes to quantifiable costs of “supply chain friction.” Now, with the advent of newfangled market research (the net), democratization of targeted media (social and viral) and apps (not the appetizer section in the deli case), we are exposing the world of food chain costs—and commensurate opportunities—like never before. Slotting fees…ahhh, the cost of doing business—in the old days.
Having worked in both the retail and CPG industries since the ’70s, I can actually see both sides of this somewhat taboo subject. I do like that we are talking about it today. It is a challenge to deal with. Working in the grocery biz for some twenty years, I can see the opportunity. Supply and demand for space, right? The opportunity is to see what the market will bear. I can also see the CPG brand perspective in getting both new and existing product placement in stores at a reasonable cost.
However, today we have the explosive growth of eCommerce. More and more CPG brands are becoming available direct-to-consumer (D2C) and this obviously circumvents the slotting fee issues. Yet, brands selling in physical stores will continue for the foreseeable future, so trade funds should be directed to benefit the consumer, in my view, and that’s where this discussion gets interesting. To be continued offline…. 😉