Bill Seeks To Bring Slots Out Into the Open
By George Anderson
A bill (SB 582) introduced in the California state legislature would impose fines on retailers that do not let vendors know up front what they will be required to pay in slotting fees to first gain and then maintain space on store shelves.
State Senator and chairwoman of the Senate Business, Professions and Economic Development Committee Liz Figueroa told the East Bay Business Times, “(Slotting fees) are prevalent throughout the grocery industry and, in some cases, cause harm to food suppliers and consumers.”
According to Federal Trade Commission estimates, $9 billion trades hands from manufacturers to retailers every year either in slotting-related fees.
Moderator’s Comment: On balance, do slotting fees charged to manufacturers improve or hurt a retailer’s competitive position?
We recently heard a description of true patriotism attributed to Mark Twain that we also thought had a strong correlation to what it means to be a good
friend. Essentially the remark went, “A patriot supports his country all the time and the government on those rare occasions where it is manages to be right.”
As a friend to retailers, we say it’s time to kick the slotting habit. We say this knowing it will be an unpleasant withdrawal for those who have built
their business model around the upfront deal.
We would offer to those who quit, however, the knowledge that many of the fastest growing retailers in the business have created corporate cultures that
shun taking “any” promotional dollars from manufacturers.
Trader Joe’s, for example, views and refers to slotting fees corporately as a form of blackmail. The company’s position as articulated to store crews is
that when a retailer accepts money, its shelf space is no longer its own. To others we say, it’s time to take back your shelf space and to return to making decisions based on
what your customers will buy. –
George Anderson – Moderator
Bill 582 doesn’t ban slots. It requires disclosure of slots and “pay-to-stay” fees.
The slotting fee furrow is well ploughed; it’s a small line in the total trade promotion story. I also doubt new laws like Bill 582 would add much value to the overall body of competition law.
Without touching on the topic of sales and merchandising practices–and the usual finger pointing– vendors and retailers have a lot to gain by using shared databases and collaboration services over the internet as promotion resources instead of carbon paper deal sheets and Excel templates. The stakeholders waste a lot on the frictions and weaknesses of obsolete methods and processes.
Key text of Bill 582:
“This bill would make it unlawful under the act for a retailer to charge a supplier or manufacturer for placing a product on the retailer’s shelf space or for maintaining that placement unless the retailer makes specified disclosures…”
“It is unlawful for a retailer to assess a supplier or manufacturer either of the following shelf placement charges [see above] without disclosing, at the time of offering to provide shelf placement space, in a clear and unequivocal manner, the amount of the charge the retailer assesses other suppliers or manufacturers for placement of similar products on its shelf space…”
Slotting fees account for the entire net profit margin for many of the retailers out there. I can’t see them going away just because a disclosure of the amount will be required.
It might be heresy for me to say this, but I don’t see them as all bad. As a supplier, it would be nice to have some guaranteed shelf space in return for an upfront fee.
Without slotting fees, the guarantees that the retailer won’t drop the supplier’s shelf space also disappear. If this legislation was intended to help suppliers, I don’t think it was fully thought through. If it was intended to help consumers, I can see that it is well-intentioned since it drives upfront costs out of the system, but I think it will backfire since it will increase the risk exposure (which, ultimately, is just another kind of cost) for suppliers.
Perhaps the bill should be amended so that the disclosure is made publicly by the retailer. That way, customers would know which brands had bought their way onto the shelves. ‘Twould be interesting to see if any of them cared or changed their purchasing habits. It might even answer a few questions about why other products might not be stocked. Go on, let the customers really tell you what they want to buy.
Retailers charging slotting fees remind me of actor Errol Flynn’s “operating” philosophy: “My main problem is reconciling my gross habits with my net income.” But perhaps Flynn was not alone in that philosophy.
Retailers do not become more competitive charging slotting fees since manufacturers offer them – reluctantly or willingly – to all retailers in some form and fashion. That makes the practice of slotting fees a sort of a competitive wash. Are slotting fees much different than a huge buyer pressuring a supplier for bigger volume allowances than his competitor?
Now turn the coin over. Does the manufacturer who proliferates
line extensions to pressure retailers to try to force them to give them more of their valuable shelf space for lazy sales make them more competitive? And is that why most slotting fees are paid? Thus, within our world of rationalized goodness in our competitive maneuvers, “Who is most culpable – the John or the hooker?”
For three decades, slotting fees have been the worst kept secret in retailing. They have been the subject of industry discussion and the occasional Congressional inquiry–usually when someone’s up for re-election and doesn’t want to approach issues of substance.
This is a business issue, not a subject for legislation. Yes, it can be harmful to all parties and, yes, it should be abolished. But the industry needs to wash its own laundry.
The California legislature has better things to put on the agenda. You have a state with some of the unfriendliest business policies in the nation, healthcare costs are putting businesses out of business, Workers Comp is the highest in the nation and energy costs can go through the roof due to a muddle of regulations and limited energy-generating capacity.
I suggest that Ms. Figeroa stop running for re-election, get her nose out of the cloakroom and start tackling some of the issues impacting her constituency.
Gene, I could not agree more. Is it the chicken or the egg? I believe that both parties are culpable for the slotting situation we are in. If the average grocery store carries 30,000 sku’s, and 30,000 new ones are introduced every year, that puts a lot strain on the system. I know retailers where the Category Manager is evaluated on the amount of slotting dollars captured. Hmmm… is the system broke? Also, some suppliers do not pay slotting allowances or pay different rates.
In the mid 90s, I approved $20k in slotting fees to a single
Southern Cal supermarket chain for the frozen food company I represented. They
required either an up-front payment or shipping the first order for free. We paid
the slotting fee up-front, the product arrived on time, a warehouse worker
stored the product in the chilled food area rather than the freezer, the product spoiled, and the supermarket chain demanded that we replace it for free
and pay to pick up the damaged goods.
At about the same time, two of our larger customers merged and began shutting down one of their central buying facilities. Everyone at the facility was losing their job, and according to two buyers located there with whom I worked regularly, the company offered departure bonuses to those who could generate the most bogus invoice deductions.
Their reasoning was that by the time manufacturers tracked down the incorrect deductions, everyone would be gone from the facility and most suppliers would just give up.
That’s just two of the many similar ways in which supermarket chains
commonly abuse manufacturers, and why a drastic change is required. As George mentioned, not all chains indulge in these practices, but enough do to cause larger suppliers to pass the extra costs along to shoppers, and to cause smaller suppliers to go out of business.
Slotting fees can cloud a retailer’s judgment and cause them to make bad decisions regarding shelf space and item authorizations. Product authorizations should be made based on what the consumer wants — period. Slotting fees justify carrying and giving space to items that wouldn’t and shouldn’t be on the shelves based on their own merits. This does an extreme disservice to the entire process, but most likely hurts the retailer the most. Many of the largest and most successful retailers have already realized this.
On a more serious note concerning allowances, see:
http://www.sec.gov/litigation/admin/33-8525.htm for the latest SEC order on Daisytek. Among the more interesting highlights:
“4. Daisytek regularly announced earnings forecasts it could not meet, and its inability to meet those forecasts led it to implement a practice known as ‘booking to budget.’ The practice involved, on a monthly basis, booking fictitious ‘budgeted’ revenue and expense amounts, based on the earnings forecasts and budgeted expenses, instead of actual revenue and expense amounts.
“5. At the end of each quarter, Daisytek closed the gap between its actual results and the ‘booked to budget’ amounts by making large inventory purchases. The large inventory purchases provided the Company with vendor allowances…which the Company immediately booked as revenue or as reductions to the cost of goods sold during the quarter. Daisytek thereby instantly inflated reported earnings and appeared more profitable.
“6. The large, quarter-end inventory purchases negatively affected Daisytek’s liquidity and operations because they typically involved products that were unnecessary for the Company’s operations, but on which manufacturers provided large vendor allowances because such products were slow moving. As a result, Daisytek exhausted its capital through purchases of slow-moving products, which hampered its ability to maintain sufficient inventory of its fastest moving ‘A’ products.”
I have been in the consumer products marketing arena for over 40 years with both small and large companies primarily in the HBC category. For the past 15 years I have been consultant to over 40 companies, most with excellent products that would benefit consumers, but have struggled because of slotting fees. Back in the 60’s and 70’s, entrepreneurs could introduce products with limited funds, most of which went into cost of goods and advertising. Today, cost of goods haven’t changed radically but advertising funding has because slotting has depleted these dollars. Therefore, many new products, in which the small manufacturer paid these slotting fees, have not had proper funding to sell through their products to the consumer because of the lack of ability to deliver an adequate advertising noise level. The end result is the consumer looses out on a quality product, the retailer is disenchanted with the products performance and eventually discontinues the item.
As the congressional committee heard in 1999, Wal-Mart has proven that you don’t need slotting allowances to make money. You need good internal systems and a willingness to be innovative in handling new products as they are. I have dealing with all the drug, food and mass retailers and can tell you, their internal inefficiencies and over-expansion with store numbers is what is hurting their bottom line, not product failures.