INTRODUCTION INCENTIVES

JULIE GALLAGHER

The proliferation of new products is changing the shape of slotting fees.

Incited by competition from tens of thousands of new items entering the marketplace this year, manufacturers have begun tying financial incentives to the speed with which their products make it to supermarket shelves.

These slotting fees are typically based on a declining scale, explained Jim Hertel, senior vice president, Willard Bishop, Barrington, Ill.

"The manufacturer might expect their new product to show up in the store in eight weeks," he said. "The supplier might say to the retailer, 'We'll pay you 100% of the fee if the product is on the shelves within eight weeks, but if it takes you nine weeks, we're only going to pay you 90%.'"

Unlike traditional slotting fees - paid to compensate retailers for the risk assumed for introducing a new product, as well as resources like the warehouse space that it will occupy - speed-to-shelf incentives are only rewarded to retailers when the product makes it to the supermarket shelf.

"Some of the pitfalls associated with traditional slotting fees are the idea that manufacturers paid money but the product never made it to the supermarket," Hertel explained. "Although the slotting fee is for space in the warehouse, they are paid under the assumption that the product will show up in stores on the shelf. I don't think it's broadly underhanded, it's just a complex system so products don't always make their way out to the store."

Considered controversial for that reason, Hertel said, slotting fees are earnest money.

"The retailer incurs a lot of costs when bringing in new items and there is a significant amount of risk that they assume," he explained. "There are probably

20,000 new items that come out every year and only about 2,000 of them end up being successful. Retailers have a scarce resource [warehouse space] and they also have to pay out-of-pocket expenses associated with physically moving the product, so they're looking to be compensated. There is the potential [for retailers] to invest time, effort and money and have nothing to show for it."

Still, the lure of introduction incentives can inhibit the achievement of truly demand-driven supply, explained Kent Phillips, chairman, Data Bank USA, Fort Wayne, Ind.

"In many ways, the manufacturers have created this slotting fee monster by introducing so many products that don't sell," he said. "Every product carried through the warehouse should carry its own profit weight through good sales movement, justifying warehouse and store placement. The allowances help to prevent a manufacturer from introducing a dead product and they promote test marketing. But the bad news is that a small company with an exclusive brand newly invented may not be able to afford the payment to get it into distribution."

Denis Wojcik, vice president of enterprise procurement at Dallas-based 7-Eleven, expressed that sentiment last month during a panel discussion at Washington-based Grocery Manufacturers Association's Merchandising, Sales and Marketing Conference.

"Are we stagnating innovation in our industry because it's so difficult for a small innovative company to get on the shelf? They can't afford to pay slotting fees because they don't have resources like that," he explained.

Large manufacturers might budget $1 million to $2 million for slotting fees per stockkeeping unit per national rollout, Hertel said. "For newer smaller companies that fee is much more burdensome."

Although he would not comment on specific introduction incentives or whether Kraft ties payments to speed-to-shelf, Larry Baumann, spokesman for the Northfield, Ill.-based manufacturer, confirmed that the company will have introduced about 100 new products by the end of this year.

"We and our competitors offer a wide range of incentives to customers in connection with the introduction of new products," he said. "We also work closely with each customer to design a merchandising program that meets its particular needs and ours."

Boulder, Colo.-based Wild Oats Markets has a policy against "charging" slotting fees, said spokeswoman Sonja Tuitele.

"We work with our vendor partners to develop merchandising and marketing plans to help new items launch successfully in our stores," she said. "This allows us to support more artisan, local and specialty brands that normally could not afford slotting fees in a conventional environment."

Although Lakeland, Fla.-based Publix Super Markets accepts slotting fees, it doesn't impose them on manufacturers that don't offer them to other retailers, explained spokeswoman Maria Brous. The chain does, however, expect equitable treatment from its vendors and to be placed in the best cost of goods bracket, she said.

"Publix should receive the same consideration in time, resources and/or dollars that our competitors gather from the same supplier," Brous said. "We ask that our suppliers treat Publix fairly so that we do not operate at a disadvantage."

Wal-Mart Stores, Bentonville, Ark., on the other hand, has a policy against accepting introduction incentives. Instead, it prefers getting lower prices from its manufacturers that it will then pass on to consumers.

"Products are placed on our shelves based on customer convenience and demand," said Wal-Mart spokeswoman Karen Burk. "Therefore, you may see variations in placement of products from store-to-store just as the customer demand varies from community to community. Our goal is to make the shopping experience as convenient as possible for our customers in every community in which we operate."

Regardless of incentive plans offered and accepted, manufacturers aren't the only ones who stand to gain from new-product introductions.

"Most retailers understand that a significant amount of their growth comes from new items," Hertel said. "If you look at year on year growth, about 60% comes from items not in distribution during the prior 12 months. If you want to grow, new items are critical."

Although labor intensive for retailers, expediting the speed with which a new product is introduced can be mutually beneficial for both trading partners.

"It can be a rather large and complex task," Hertel said. "Labor reset crews would have to come in and physically reconfigure product. Retailers would be potentially managing tens of thousands of new items, plus 40,000 to 50,000 turn items in the store."

The manufacturer's advantage is that the product is in front of consumers.

"The retailer benefits because there is a persistent share advantage that you see when you're fast to the marketplace," Hertel said. "The retailer enjoys better performance and that is persistent over time."

A pilot project developed by Commerce, Calif.-based Unified Western Grocers last year is hastening the speed that new products make it to its independent retailer members' shelves.

New-item information is communicated from suppliers to individual retailers electronically via Unified's Memberlink portal. Then retailers can send commitments and orders back through the system. The main objective of the project is to reduce the delay between the first vendor ship date and the arrival of the product on store shelves.

"For wholesalers, that can take between seven and 18 weeks," Greg Vick, Unified's director of distribution and Web development, said during an SN e-seminar earlier this year. "Our target is to improve the time line by 45 days."