BUSINESS EXPENSE

DAVID GHITELMAN

Very few people like slotting fees.

However, even fewer are willing to take any steps to change the widespread industry practice of having manufacturers pay retailers to put and keep their wares on supermarket shelves.

Only 1% of manufacturers responding to SN's national survey on the topic said that the current state of slotting fee payments was "acceptable as is," while 87% called for either major change or elimination.

Among retailer respondents, the dissatisfaction was a little less intense, with nearly a quarter saying the current practices were "acceptable as is, since [they] defray cost," but that still left more than three-quarters calling for some alteration of the current system, ranging from major change (15%) to rethinking (42%) to fine-tuning (15%).

Other findings of the survey included:

Packaged grocery is the product category where slotting fees are most frequently in force, with 80% of retailers/wholesalers saying they require them in this category and 67% of manufacturers saying they encounter them here.

Packaged grocery is also where the fees are most likely to rise next year, with 58% of retailers/wholesalers and 62% of manufacturers saying they anticipate growth in this category.

Slotting fees may not be anyone's favorite part of the industry, but how any sort of change -- from elimination to fine-tuning -- is likely to come about remains uncertain.

Last month, the Federal Trade Commission declared that it would not issue guidelines on slotting fees. The decision to do nothing had been preceded by a staff report issued last year that recommended not issuing guidelines at present but continuing to study the issue. An FTC spokesman told SN last month that, yes, the agency was collecting data from retailers about their slotting practices on an ongoing basis and would perhaps issue another report should that be deemed necessary.

The FTC staff report had pointed out that even if the agency wanted to regulate slotting fees, it would not be easy to draw up a set of rules that manufacturers and retailers interested in maintaining some sort of pay-for-display policy would be able to navigate around.

The major national industry trade associations appear no more ready than the FTC to spring into battle on this issue. Both the Grocery Manufacturers of America, Arlington, Va., and the Food Marketing Institute, Washington, told SN that they regard slotting fees as a private matter between retailers and manufacturers, in which government regulation is unnecessary.

David Balto, an anti-trust attorney formerly with the FTC and currently at White & Case, a Washington law firm, told SN the courts are probably a better place than a regulatory agency to decide the fairness of slotting practices.

"Courts have found that these practices may limit consumer choice and ultimately lead to higher prices," he said. "In promotional practices, 'buyer beware' is always an important caution."

SLOTTING FEE SURVEY REPORT

RETAILERS/WHOLESALERS

% of respondents

1. What change in slotting fee activity have you seen in the past year?

Demands for fees have increased by more than 15%

23.6%

Demands for fees have increased 10-15%

29%

Demands have increased 0-5%

37%

Demands have decreased

9%

2. In which of the following categories do you encounter slotting fees:

Packaged grocery 80%

HBC/nonfood 61.8%

Perishables 44%

3. In which of these categories, if any, do you anticipate the growth of fees in the next year:

Packaged grocery 58%

HBC/nonfood 40%

Perishables 39%

4. How would you describe the current state of the slotting-fee practice?

Acceptable as is 23.6%

Needs to be eliminated because it is unfair 42%

Needs major change 15%

Needs to be fine-tuned to achieve fairness 15%

5. Do slotting fees ultimately keep some promising products out of distribution?

Yes 66%

No 29%

Retailers/Wholesalers: Fees Unfortunate but Needed

SN asked survey participants to comment anonymously about slotting fees. Some examples of retailers and wholesalers' comments appear below. Manufacturers' comments appear on Page 14.

What are your perceptions about slotting fees, and why do you think they are up or down?

"The manufacturers are willing to pay, since they no longer do intensive test marketing on new items. They find it to be cheaper to allow the retailers to take the expense of failed items, and they pay the slotting fees."

"We do not require slotting fees. We only ask for slotting fees when that is the only way to get all available marketing funds. Slotting fees only benefit those who seek to improve their bottom line at the expense of their vendors. At the same time, vendors must realize that the space in our stores is ours and we are only going to put in those products that will have the greatest benefit to us and to our customers."

"Fees are going up due to the cost the retailers incur when they discontinue existing items from the shelf. To move the product off the shelf and make room room for new items, the retailer must put in on sale at a deep discount."

"As a company we have rethought our position as it pertains to the collection of slotting fees. We feel it is critical to the success of a new item to ensure that marketing and consumer support remain strong, and the manufacturers have done a good job of blurring the lines between those two expenditures. This blurring forces us to relieve slotting fees to keep marketing support intact."

What are your category-specific observations about slotting fees?

"There are no departments that can hide from fees."

"Perishables, especially deli and [packaged meat] are underpaying. They should not be treated any differently than the rest of the vendors."

Why do you think the state of the slotting fee practice is as it is?

"While I believe it should not be viewed as a profit center, I still believe in the concept of slotting feels being a 'failure fee.' The reason slotting fees will never go away is because they act as a deterrent to bringing questionable products to market."

"We use the slotting fees to cover auto-distribution expense and to entice speed-to-shelf at retail."

"Set-up costs, retail cut-in and initial distribution are all costs that should be defrayed with slotting allowances. Funds beyond those costs are better served to promote product sales."

Comment on the type of products being kept out of distribution and the degree to which it happens. If that's a problem, what's the solution?

"Retailers are not out there to satisfy every fly-by-night manufacturer. If a manufacturer does not have the infrastructure to support slotting fees, they probably will not be one of the products that last. This leaves the retailer holding the bag on the costs of inserting the item into their POS, electronic receiving, cutting it into the shelf, discounting it to move it out to make room for the next item, and so forth. Retailers are also the ones facing the customer, explaining why their favorite product is no longer on our shelf."

"We do not let slotting fees stand between a good item and our ultimate consumer."

"The degree to which this happens is minimal. To be successful, new items need mass marketing budgets anyway, and slotting should be part of the budget consideration. The only items that may be kept out of distribution that should be of concern are local/regional items, and then the retailer should accommodate them because it gives the retailer a marketing advantage to utilize the products as 'local.' In this case, the retailer needs to evaluate the product on merits, not slotting money."

"It unfairly hurts the smaller manufacturer."

SLOTTING FEE SURVEY REPORT

MANUFACTURERS

% of Respondents

1. What change in slotting fee activity have you seen in the past year?

Demands for fees have increased by more than 15%

33%

Demands for fees have increased 10-15%

40.6%

Demands have increased 0-5%

23%

Demands have decreased

2.9%

2. In which of the following categories do you require slotting fees:

Packaged grocery 67%

HBC/nonfood 28%

Perishables 35.7%

3. In which of these categories, if any, do you anticipate the growth of fees in the next year:

Packaged grocery 62%

HBC/nonfood 34.6%

Perishables 41.7%

4. How would you describe the current state of the slotting-fee practice?

Acceptable as is 1%

Needs to be eliminated because it is unfair 36%

Needs major change 41%

Needs to be fine-tuned to achieve fairness 20%

5. Do slotting fees ultimately keep some promising products out of distribution?

Yes 91.8%

No 6%

Manufacturers: Slotting Fees Discourage Innovation

Following are some of the anonymous comments offered by manufacturers who completed SN's online survey about slotting fees. Retailers and wholesalers' comments appear on Page 12.

What are your perceptions about slotting fees, and why do you think they are up or down?

"Slotting fees are charged by retailers who wish to stock and sell what manufacturers pay them to sell, instead of what consumers want to buy. Slotting fees are paid by manufacturers who are interested in short-term distribution goals."

"Most retailers are continuing to demand slotting fees. However, there are a few retailers, those that understand the Wal-Mart way of doing business, who are beginning to request their money in the form of reduced cost/retail instead of space rental."

"I have seen many examples of slotting exhausted only to have an item dropped in order to generate new slotting revenue. I have had experiences where a product did well on movement but the retailer insisted on 'pay-to-stay' money."

"Retailers are using acquisitions and mergers as reasons to up their slotting fees. The rationale is that they have more stores, ergo the manufacturer pays more to play."

"Demands have increased, but they are more negotiable than in the past."

What are your category-specific observations about slotting fees?

"Dry grocery fees have historically increased year to year. Retailers will probably view slotting fees in the perishables arena as an opportunity to increase fees overall."

"Because of the increased use of packaged goods in the perishables departments, they are treating the items as they would in the grocery department, as branded items."

Why do think the state of the slotting fee practice is as it is?

"If you have a manufacturer who continually offers the 'flavor of the month' new product introduction, then I would agree that slotting fees should be charged. But if you have a manufacturer who brings added value and solid brand entries into the category on a continuous basis, then slotting shouldn't be charged, or a limited new-item setup fee should apply."

"We feel no pressure on slotting fees. If the amount is within our guidelines, and if we can justify the payback [within a six-month window], we pay it. Otherwise, we walk, knowing we have made the right business decision."

"Slotting has become a simple profit center with little or no value to the manufacturer other than it allows you to direct your broker to make sure the product is ultimately placed on the shelf. We pay our brokers to place a new SKU on the shelf after we have already paid the retailer to do so."

"We would rather give the money to support a new item promotion and reach the consumer than just donating it to the retailer's bottom line."

"As retailers become more dependent [on slotting fees], then they accept items for the fees only without regard for sales potential or consumer satisfaction."

Comment on the type of products being kept out of distribution and the degree to which it happens. If that's a problem, what's the solution?

"What happens is manufacturers are now doing a [return-on-investment] analysis to see whether or not they can recoup their slotting investment at smaller operators. The small retailer/wholesaler may get left off the list for an introduction if the manufacturer feels that their slotting fees are too high."

"The original Hershey Bar would have never made it to national market based on the current business scenario. Small manufacturers, especially in the area of consumables, are being kept out of the niche market entry due to the high start-up costs associated with chain requirements."

How the SN Survey was Conducted

The slotting fee survey was conducted online from May 1 to June 1 of this year. Survey questions were posted on the SN Web site. Visitors to the site saw a pop-up box inviting them to take the survey, and subscribers to SN's free daily e-mail newsletter were also invited to take the survey. Respondents were asked to identify whether they were retailers/wholesalers or manufacturers, and were then linked to the appropriate question group based on their response. There were 186 retailer respondents and 517 manufacturer respondents.