STUDY SEES PURPOSE IN SLOTTING FEES

Mark Hamstra

NEW HAVEN, Conn. -- Slotting fees serve to make the introduction of new products more efficient by mitigating the risk of product failure and signaling the potential success of new products, according to a study released last week by the Yale University School of Management here.

The study -- called "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?" -- was conducted by researchers at Yale and Cornell University, Ithaca, N.Y., using data that Cornell had collected during a six-month period in 1986 and 1987 from an unidentified retailer in the Northeast operating about 100 stores.

The 18-year-old data was used because they were the most thorough figures available. The data had not previously been analyzed in such a systematic manner, according to K. Sudhir (he prefers to be identified only by the first initial and his surname), associate professor of private enterprise and management at the Yale School of Management.

"There were a lot of theories about slotting fees, but we felt it would be a good thing to test it since we had the empirical data," he told SN. "Currently, what we know about slotting fees is from surveys of what retailers said and what manufacturers said, but there's no convergence."

Sudhir co-authored the study with Vithala R. Rao of the Johnson Graduate School of Management, Cornell.

Although small manufacturers have often criticized slotting fees because, these vendors allege, the fees make it difficult to introduce new products into retail stores, the study found evidence that small companies can get consideration from retailers without slotting fees.

"The good news for small vendors is that the retailer is much more amenable to more favorably rating the likelihood of success of small vendors' products if they provide them evidence of future success," said Sudhir. "For example, the paper finds that when a small vendor provides test market information, advertising support or evidence of acceptance by competing retailers, the retail buyers increase their self-assessment of the likelihood of product success, which in turn reduces the need for slotting allowances."

He suggested that small manufacturers have a better chance of getting shelf space at major retailers without paying slotting fees if they can provide evidence of their products' success at smaller retail outlets.

Retailers are less likely to evaluate test data and other information provided by large manufacturers because, the study suggests, retailers have a higher level of familiarity with these companies and their products.

Another conclusion drawn from the study is that slotting fees mitigate retail competition because they are accompanied by higher wholesale prices. The study concludes that manufacturers act this way to gain broader retail distribution, however, rather than to reduce competition among retailers, as had previously been theorized.

The study also concludes that the Federal Trade Commission "was correct in being circumspect about planning slotting allowances outright." The FTC concluded in 2002 that it would not issue any guidance on slotting fees, but would continue its investigation of their impact on the marketplace.

Sudhir said the Yale-Cornell report was originally prepared last fall for publication in a professional journal. It has not been published, however, and the authors are making some minor revisions before seeking publication.

The study, can be downloaded at http://mba.yale. edu/faculty/pdf/slottingallowances.pdf.