BrainTrust Query: What if we found a better alternative to slotting fees?

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Jul 05, 2006
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By Dan Nelson, Sr VP / Chief Operating Officer, GMDC

(www.gmdc.org)



In continuing our efforts to employ RetailWire as a think tank and feedback mechanism for new ideas, we present “BrainTrust Queries”: a series of proposals,
hypotheses and intellectual investigations from our BrainTrust panel of retail industry experts.


New item slotting fees have been described as a “crutch” and a “necessary evil” for product suppliers. In a 2003 report on “Slotting Allowances in the Retail Grocery Industry,” the FTC estimated that manufacturers spend in the neighborhood of $1 million to $2 million, depending on the product category, to introduce a product to 85 percent of U.S. supermarkets.


And yet, few believe all that money is being applied effectively. The FTC’s study, done in five different categories, showed that the success of giving allowances to achieve
market penetration is highly variable.



“In some cases, the total dollar amount of slotting allowances reported for a particular product category in a particular metropolitan area was more
than the category’s new product revenue in the first year. In other cases, [it] represented less than 5 percent.”



Clearly, both manufacturers and their retail trading partners would benefit if promotional monies could be performance-based, rather than relying on a system that blindly “throws money at a new product.”


My proposal…What if retailers eliminated new item slotting fees and replaced them with retail sales and profit goals per inch of space on the shelf?


The supplier introducing the new item would have to meet the average sales and profit per linear inch of shelf used to introduce their new item. The measurement period would
span 16 weeks. At the end of that timeframe, the supplier of the item either meets the hurdle rates or pays the retailer the difference for any sales and profit shortfalls.



The result…The retailer’s sales and profits in the category increase, since the measurement used is the average for the category, while the lowest selling items are deleted
to make room for the new, more profitable items being introduced. The supplier is now more focused than ever on investing in the item’s sell through, vs. investing in the
sell in via the slotting dollars historically paid.



Moderator’s Question: What do you think of the plan to tie promotional allowances to performance? Is this a better partnership than the method of charging
slotting fees, and what are the inhibitors that could derail this effort?

Dan Nelson – Moderator

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19 Comments on "BrainTrust Query: What if we found a better alternative to slotting fees?"


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David Zahn
Guest
14 years 7 months ago
Makes sense as a starting point from the manufacturer’s point of view (of course, there are issues to be worked out – but, directionally, it would be an improvement from the CPG manufacturer perspective). What I think would be the largest hurdle is for the retailer to agree…they can do ALL that you suggest or might suggest in refining the idea PLUS charge slotting. Why give that up? They ALWAYS have the ability to charge “failure fees” or establish other hurdle rates IN ADDITION to slotting. As long as there are manufacturers that will “blink” (pay to get on the shelf) – then, retailers will continue to use that as a tactic. Additionally, as much as there have been appropriate challenges to slotting, there really are true expenses that need to be borne by “somebody” to get the product into the appropriate distribution, plan-o-gram, pricing look up files, etc. I am far from being an apologist for the exorbitant fees charged at times, but am realistic enough to know that there are “real” costs that… Read more »
Charlie Moro
Guest
Charlie Moro
14 years 7 months ago

I think the measurements are not only good but should truly replace ‘slotting.’ Failure fees based on a clear definition of what the retailer is looking for in terms of sales and margin dollars and the manufacturer’s expectations of sales rate can bring both closer together in allocating promotional monies to gain sales rather than placements. Many more manufactures will be more inclined to meet a standard rather than play defense against the next brand down the road who is willing to replace a line simply because they have slotting dollars.

Ben Ball
Guest
14 years 7 months ago
There are two ugly sides to this coin, and I find it a little surprising that no one has addressed the second one yet — why manufacturers may resist this proposal. #1. By the terms of the proposal, the new item would have to perform at or above category averages to avoid penalty payments. The nature of most categories is that a relatively few well established skus make up the top half of sales. My guess, (and I think the IRI “New Products” analyses published in their “Times & Trends” reports would prove this) is that far more than half of all new items launched fall below the category average sales velocity during their first 16 weeks. So this scheme may end up costing the manufacturers substantially more than today’s slotting fees. #2. There is a reason manufacturers keep paying slotting fees to launch me-too skus. The pipeline and initial sales velocities usually wind up paying out — at least at the margin and for the fiscal year — if the items get launched in… Read more »
Dennis Serbu
Guest
Dennis Serbu
14 years 7 months ago

In my experience, retailers will take on a new product they know is not beneficial to his mix, purposefully to generate the slotting revenue. Manufacturers use slotting payments to force line extensions, or SSDB SKUS (Same Stuff Different Bag) into a mix as a defensive measure to gain or retain space. Neither approach is good for the store, the category or the customer. If a manufacturer has a viable item to present, the best value to anyone is to offer a support package to drive customer awareness and trial. This benefits everyone.

A senior executive at a large retailer once told me, “Sometimes we can make money by selling things.” Very unique approach to the business. Most other approaches cloud and confuse.

Art Turock
Guest
Art Turock
14 years 7 months ago
A growing number of supermarket retailers are realizing that time conscious shopper’s definitions of what’s desirable in product assortment are changing… specifically from variety to edited assortment. Variety means stocking many sizes, price points, brands, etc. Edited means knowing your target customer so well that you include the most relevant assortment for them, thereby saving them time. I was first introduced to the concept of editing by John Campbell one of the founder’s of HEB’s Central Market. When I asked John why there were no icon national brands, he said, “We want to have the highest quality for our customers and if the national brand doesn’t fit, then we will search out local suppliers or specialty suppliers. You differentiate not only by what you stock, but also by what you don’t stock.” There are several trends that support moving to edited assortment. A growing number of conventional retailers going to upscale formats. United, Giant Eagle, A&P Fresh Market are designing new prototype stores. Kroger is using loyalty card data to sort product for upscale, value… Read more »
Regan Lombardo
Guest
Regan Lombardo
14 years 7 months ago

If retailers utilize a 16 week hurdle rate for product performance, the product either meets that rate through sales volume, or the manufacturer pays the difference. The next step for retailers is to determine annual hurdle rates for the shelf, and ‘rent’ the space to manufacturers. Retailers then have a guaranteed revenue stream, and manufacturers have the liability/opportunity to drive consumers not only to their product, but also to the specific retailer’s shelf. Sadly, this is too much of a real estate game.

Charles Magowan
Guest
Charles Magowan
14 years 7 months ago
The proposed reform would place a cap on the manufacturers’ contingent liability. If this cap is not as high as what the most optimistic vendor was otherwise willing to pay, then that vendor cannot signal their unusually high confidence in a new item and the retailer would receive less money. In addition, by standardizing the contingent liability for any item in a category, the new system would make it easier for vendors to horizontally coordinate pricing and thereby lessen the benefit to consumer welfare that results from the privacy of the discounts in the current system. As is, the retailer and the consumer benefit from a competitive marketplace where competing vendors, not knowing what their rivals are willing to spend, are compelled to make their own best offers according to their own private estimates of their item’s chances. Even with the current slotting system that to some extent allows vendors to signal and retailers to screen items, most new items don’t succeed. Even if there were no slotting allowances, or a revised system of allowances,… Read more »
James Tenser
Guest
14 years 7 months ago
What a fascinating discussion thread. Kudos to Dan for provoking us on this topic. Here’s my 2 cents worth: I have a dim recollection that slotting fees were invented to dissuade manufacturers from using precious retail shelf space as their low-cost proving ground for trivial new product introductions. Retailers soon discovered that slotting fees gave them a financial benefit from assortment churn – the more new items introduced and failures deleted, the more upfront fees were collected and applied to the bottom line. Shifting to a system based on measured performance may therefore be resisted by some retailers even more than manufacturers. It’s hard to go “cold turkey” off the cash flows you have been dependent upon for 20 years. The system also places great pressure on forecasts that are generally not as reliable as we’d like them to be. In this regard, Mark Heckman’s modest proposal — that fees be adjusted using rebates after the trial period, is worth exploring further. My concern with performance-based slotting concept is that it requires that shelf space… Read more »
W. Frank Dell II
Guest
14 years 7 months ago

One reason the supermarket industry keeps losing ground is continuing the old ways of doing business while the competition moves forward. Someday, supermarket executives are going to have to take control and responsibility for decisions. Never is selling self space in the interest of the customer. Category Managers or Super-Buyers need to decide which new products their target consumers will want and need. Why should a CPG company give one retailer a slotting allowance and not another? This is just another reason alternative formats continue to take share and profits from the supermarket industry. I don’t think anything is needed. Either you take the product or you don’t.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 7 months ago
Lots of great ideas. A basic question, though: Upon whose movement data or performance requirements do these systems rely? Some years ago I represented a brand that agreed with a prominent southeastern chain to award an allowance on all inventory sold during a 4-week advertising period (in a 12-week deal window). And wouldn’t you know, during that 12-week deal period over 98% of all of the product was sold during the 4-week promotional period! Amazing! “Don’t trust us, just check our figures.” Yeah, right. Of course they were lying. I’m a supermarket retailer, first and foremost, and the chain in question was a previous employer. I knew what was going on. For any performance-based system to work, manufacturers must have access to truthful and trustworthy data. It can’t be warehouse movement (who knows where that stuff was diverted to); it can’t be new orders (“we had a bad month”); and it can’t be count-and-recount (all the broker labor is gone). RFID comes to mind as a reliable performance verifier. Wouldn’t it be interesting if the… Read more »
Herb Sorensen
Guest
14 years 7 months ago
The economics of the industry haven’t moved that far since the middle of the last century. Conceptually, the store is still a local neighborhood warehouse and profits are driven by appreciation on real estate, float on cash and, increasingly on promotion dollars, including slotting allowances. A business that does not live or die based on the profits from sales to shoppers will NEVER revolve around the needs and interests of shoppers. There is nothing “wrong” with this, but the economics of limited shelf space and competition by suppliers for that space means fees for accessing that space are not going anywhere soon. Change will have to come from retailers becoming more profitable from their ostensible real business: selling to shoppers. This is happening, but it is a lurching process, poorly focused on the shoppers themselves. Knowledge of shoppers’ behavior in stores is sparse, other than the economics represented by scanner data. In fact, the ubiquity of scanner data has seriously distorted views of shoppers, as if the list of items they buy and the money… Read more »
John Lingnofski
Guest
John Lingnofski
14 years 7 months ago
As an Account Manager for a large CPG company, I have always felt that flat slotting fees on the part of a retailer are unfair. As noted in the study cited, often the slotting fee exceeds the revenue I can expect in the first year of sales; in some cases, the slotting fee might exceed the total SALES I might expect for the first year. Recently, I have proposed to my retailers with slotting fees that the slotting fee reflect the cost of placing a case of the new item in each of their stores — essentially a sliding scale based on the cost of the item. In addition, I will pay them a 1 percent accrual on all cases purchased in the first 12 weeks of the launch. In this way, we share the risk. If the item does well, we both benefit; conversely, if the item bombs, we have minimized the cost of finding that out. Ideally, this leaves more money in the fund to actually engage in promotional activities, rather than simply… Read more »
Len Lewis
Guest
Len Lewis
14 years 7 months ago

Procter & Gamble is turning the tables and already making moves in this direction. They are tired–and rightly so–of retailers simply using the promotional fees to bolster the bottom line. They are tying everything to retail performance and space allocation.

As has been the case for 30 years, retailers have to realize that manufacturers don’t represent a bottomless piggy bank and manufacturers can’t expect realignment of display space and merchandising strategies every time they put out a line extension. everything and everyone has to pay their way.

Let’s not forget it was the manufacturer who started the concept of slotting fees in the first place. Now everyone’s getting hoisted on their own petard.

Mark Lilien
Guest
14 years 7 months ago

The Marketing Golden Rule: treat others the way they ask to be treated. Some retailers might be happy to keep slotting fees forever, some would rather just buy everything “net” (no slotting fees, no co-op ad funds, no damage allowances), some would prefer to auction off their shelf space, and some would like to buy everything on consignment and pay by tracking the point of sale data. The real problem: food retailers and manufacturers are all margin-challenged, so if money is spent or allowances given, the investment has to be productive. Since almost all “new” products aren’t compelling, the productivity is poor.

Kai Clarke
Guest
14 years 7 months ago
Slotting fees represent a vehicle for retailers to get extra profits from their vendors. It doesn’t represent the actual costs of placing a product in their warehouse, and often is such a high surcharge, that it artificially places a barrier in-front of small companies to compete on the same level as larger ones even before their products are placed on the shelves. This is an antiquated and outdated way of paying for the cost of logistics and doesn’t represent the success a product will bear in a particular market. It also artificially raises the price of the product (the vendor must pay for slotting fees by raising the price of the product), since it increases the base cost of the product which causes the final cost to increase by an even larger amount than if the retailer simply built it into the selling price. The best way to do this is to eliminate slotting fees, and to have the retailer build the factor into their selling price as a function of their cost of doing… Read more »
Sam Tune
Guest
Sam Tune
14 years 7 months ago

I agree that both retailer & manufacturer decisions should be made on success metrics. To start with, manufacturers have a responsibility to develop new products that provide an incremental opportunity to the category. Retailers then stand to be the beneficiary of this incrementality… that opportunity is more likely to happen if the investment in slotting fees is used for messages to the consumer (advertising) vs. a menu cost for retail placement. The outcome would be a better educated consumer and greater revenue/profit from the category.

Warren Thayer
Guest
14 years 7 months ago

This is a creative, and very cool, concept. It would well serve the retailer, the manufacturer, and the consumer. The only downside is that many retailers need the upfront slots to reach their profitability goals, with the money going straight to the bottom line. While the proposed system is healthier for all, I don’t see it catching on quickly, since retailers are so concerned with getting their “fair share” of the various vilenesses that hamstring the traditional industry. Still, the concept is good enough that I hope a few forward-thinkers will give it a shot, or try to adapt it to their needs.

Mark Heckman
Guest
14 years 7 months ago
While Dan Nelson’s pay for performance approach for slotting allowances sounds logical and even financially superior to the current system, there are several reasons why retailers will resist this. 1. Today, a slotting allowance is essentially “cash in hand” for the retailer and many (if not all) have built these dollars into their trade promotion revenue “buckets.” Retailers fiercely protect their existing revenue streams. 2. The current process is relatively simple and requires little or no support resources within the retailer, whereas a system based upon performance metrics will be inherently more labor and time intensive. 3. The pure volume of new items and line extensions entering the pipeline each year is overwhelming. Retailers obviously want these products to “pay their way,” but retailers are focused on immediate cash flows. Slotting allowances, charged up-front, are essentially payment for valuable shelf space. It covers the expense of re-setting the shelf, placing the item in the warehouse, as well as the discontinuation of the product that it replaces on the shelf. Waiting for a performance report that… Read more »
john rydin
Guest
john rydin
14 years 7 months ago

There is a better alternative to “slotting fees” and it is already here and being implemented by some manufacturers. It is called “New Item Performance Fund” or some other moniker. There is a dual responsibility here. The manufacturer has a responsibility to introduce new items that have been thoroughly researched and have a high probability of success with a strong marketing campaign behind them. The retailer also has a responsibility if they are taking new item funds to perform. That performance includes prompt shipment and speed to shelf. It also includes merchandising support to help in the success of the new item launch.

Hence, the name: “New Item Performance Fund”. Take slotting out of the picture, because that is just a revenue stream. It does nothing to help insure the success of new items.

Manufacturers and Retailers need to partner for the good of both parties!

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