Slotting Fees: Schools of Thought

Slotting fees aren't going away. In fact, according to a new research report, "Slotting Allowances and Fees: Schools of Thought and the Views of Practicing Managers," retailers are more likely to require slotting fees now than they were just five years ago. The study was published by the Marketing Science Institute (MSI), Cambridge, Mass., and written by Gregory T. Gundlach, University of Notre Dame; Paul N. Bloom, University of North Carolina; and Joseph P. Cannon, Colorado State University.The justification for slotting fees has been argued in industry journals and magazines, and analyzed from a legal perspective. Little has been studied of the actual practice. The MSI report aimed at studying the real use of these fees by questioning manufacturers and retailers on how they view the practice. "The purpose of the survey was not to directly test the theoretical perspectives offered in the literature ... but to determine whether industry participants believed the different perspectives accurately reflect slotting fee practices," says the report.Due to significant differences in the way slotting fees are implemented in different industries, the report focused on the supermarket industry, where respondents to the survey reported the practice is most common.The initial work on the report, which included numerous interviews with manufacturers, retailers and wholesalers, revealed some surprising issues. The term "slotting fees" refers to a number of practices including, but not limited to, fees paid to gain entry into retail channels for a product."At first, we thought that slotting fees were a focused effort on the part of manufacturers to get their products in the door, but not something that would necessarily be there to maintain longevity," says Gundlach. "As we talked to people, we did huge numbers of interviews and it became apparent that you have to put quotes around the term 'slotting fees' because it really means a variety of business practices. The newer definition should be that these are fees paid to manage a product throughout its life cycle as it enters the retail domain. You get fees for point-of-entry, management, display, removal and everything else, and that's beyond the typical slotting notion."The MSI study identified five different types of fees that fall under the umbrella term "slotting fees." They are presentation fees, slotting fees, display fees, pay-to-stay fees and failure fees. (See table on Page 56 for definitions of each.)"A lot of the arguments are that these types of fees allow people to gain entry into stores," says Gundlach. "If you have entry and now you're paying for display space, maybe preferential display space, that raises the specter of something else going on."The whole idea of slotting was always centered around new products," says Gundlach. "Now, products that are there and have been there, accepted products, are being charged these fees. That takes the analyses of slotting fees to a totally different plane. The legitimate argument for slotting fees is that there are risks associated with new products, and manufacturers need to signal to retailers that these are good products. If retailers are charging them for current products that have had experience in the marketplace, then that assumption and the issues surrounding new products get tossed out the door."Schools of ThoughtAccording to the report, most research on slotting fees has consisted of theoretical modeling work or legal analyses of the status of the fees under the antitrust laws. Little research has been done to evaluate the validity of these ideas. Arguments for and against slotting fees fall into two schools of thought: efficiency and market power, respectively.The efficiency school asserts that slotting fees improve the efficiency in distribution channels. These efficiencies are said to be the result of having slotting fees serve as screening and signaling mechanisms for new product introductions. Efficiencies are also thought to result from cost sharing and risk shifting, from the retailer back to the manufacturer. These fees are also argued to provide better competitive efficiencies by serving as a facilitating practice for lowering retail prices. Through slotting fees, manufacturers are argued to be able to distinguish between product innovations that they believe will be successful from those they do not. Retailers can then better gauge the likelihood of a successful product addition.While little research has been done on the actual costs incurred by retailers for a new product launch, one study suggests that on a per-SKU basis, these costs average $13.51 per store, with costs to delete an item averaging $10.77. The same study also found that the average slotting fee was $36.34, suggesting disparity between fees charged and costs incurred.Opposing the efficiency school of thought, the market power ideology, according to the study, finds slotting fees to be "an exercise of retailer market power in the market channel that undermines channel relationships and leads to retail discrimination." These fees are thought to damage competition among manufacturers through their use as a strategy of competitive foreclosure. Also, slotting fees are said to be a facilitating practice for increasing retail prices.Integral to the market power argument is the assumption that retailers have increased clout in the marketplace. Supporting this hypothesis, proponents of this school of thought say that through industry consolidations and technological advancements in distribution, supermarket chains have become more powerful retail forces. Scanner technology, which gives retailers faster access to data with greater precision, is said to provide them with a more accurate way to predict a product's profitability.Critics of slotting fees also claim that large retailers use the fees to gain a competitive advantage over smaller retail rivals, as well as to discriminate among suppliers in a way that favors larger manufacturers.Findings"This project is very much exploratory," says Gundlach. "Our idea was to see whether or not people on both sides of the coin -- manufacturers and retailers -- felt as though there was some credibility to these two arguments that have been offered in the literature."Most notable among the study's findings are the issues that both the manufacturers and the retailers agreed upon.Both sides agreed that slotting fees tend to shift the risk of new product introductions back to the manufacturer.At the same time, both agreed that these fees have evolved out of the growing market power of retailers.Also, they agreed that slotting fees have been applied in a discriminatory manner. "In other words, not all people are charged the same amount for the same space," says Gundlach.Finally, both agreed that these fees ultimately lead to higher prices at retail. Equally telling, both sides mutually disagreed on key issues as well.Both sides disagreed that slotting fees promote efficiencies that act as mechanisms for lowering retail prices. "If retailers are saying that slotting fees lead to higher retail prices and manufacturers are also saying they lead to higher prices, and no one is arguing that they lower prices, there's at least one area that needs further investigation," says Gundlach. "Typically, the retailer would not want to say that it's leading to higher prices, particularly since they're the one asking for the fees."Also, neither side agreed that these fees are useful as signaling and screening mechanisms, which was the key to the efficiency argument. As for issues that showed disparity between manufacturer and retailer opinions, Gundlach says that this may be a result of a lack of information. "A retailer might not know that they're keeping other manufacturers out of the marketplace because it's unlikely that a manufacturer will go in and say, 'Gee, I can't pay that,'" says Gundlach.Gundlach intends to use this study as a springboard into more in-depth analysis of slotting fees. "The fact that you get manufacturers and retailers to agree that these fees are facilitating the increase of price being applied in a discriminatory way is cause for further study," he says."After these findings, we want to investigate whether slotting fees are raising prices at retail and whether or not risk shifting is actually occurring. This allows us to be a little more efficient in where we go from here. It's truly exploratory research but it's fairly powerful. We've got a substantial sampling [of respondents to the survey] and the findings are intriguing when you get manufacturers and retailers, who are supposedly on different sides of the issue, agreeing with some of these arguments that are perhaps not very positive, like discrimination and raising retail prices," Gundlach says.

Slotting Fees: Schools of Thought

P2PI MEMBERS

JOIN P2PI

Related Images

Business Topic

P2PI MEMBERS

JOIN P2PI

Related Images

Related Articles

Business Topic