Slotting Allowances Take Center Stage

Recent Congressional hearings on slotting allowances are shining a spotlight on this long-time activity. Such payments are not simply bribes for good floorspace, they do serve a legitimate purpose. The concern is determining at what they go beyond being legitimate payment for a necessary expense and begin to skew the competitive field.A key concern in addressing these fees through legislation or other regulation is that the term is hard to pin down, notes Greg Gundlach, professor of marketing at the Mendoza College of Business at the University of Notre Dame. "It can include fees for new products, 'pay to stay' fees, program payments under merchandising and display programs, and any other type of payment someone wants to include."The major concern is that such payments skew the new-product field to those companies that can afford the hefty price tags. In some cases, especially when the company is using the fee to gain positioning as the category manager, this relationship may allow it to dictate locations or number of facings for competitive products.Gundlach admits that in a space battle between a giant manufacturer and a small independent producer, it would seem that the giant would win even without extra fees due to its existing brand image and other available promotional support. But that's not the way it always occurs on a level playing field."That would happen if retailers only looked at lowest possible price," he says. "But they also realize that consumers want choice and innovation as well as low price. And those factors may not progress if all that's left on the shelves are the big players -- especially if those players are focused only on low price."The reasons that slotting allowances pose more concerns than any other type of promotional allowance or display program are threefold, he says. First, slotting fees are paid off-invoice and that privacy leaves them ripe for abuse. Second, these fees are not reported on accounting records as product discounts, but as more general "secondary sources of revenue." This keeps the fees from being applied against the cost of goods sold as they should, which misrepresents the store's actual gross margins. Third, the payments are received in advance of selling the goods, as are other discounts, but they tend to be actual payments rather than just discounts off the invoice. "Other discounts may just be an adjustment to a line item," Gundlach explains. "With slotting fees, someone is giving them a bag of money."Such fees are gaining attention now, Gundlach says, because while manufacturers have always been under some scrutiny, retailers have been less so -- and the balance of power has shifted to the retailer these days. "Antitrust laws may have to look at how retailers might distort the process of bringing products to the store," he says.But at this point, those studies have barely scratched the surface -- as is indicated by the difficulty in simply defining the terms. "Our understanding of the influence these fees bring to bear is at its beginning stages," Gundlach says. "We have a long way to go. Then we'll have to determine the best way to govern them to promote consumers' needs."That may not require regulation, he says. "There may have to be a way to end a message to curtail or point out any problems that could arise," he says. "But for now, we're still trying to get our arms around the nature of what exactly qualifies as a slotting fee."

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