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RETAIL VIEW: Academics blasted for slotting fee defense

Two academics who recently published a paper that concluded that retail slotting fees were an efficient way to introduce new products have seen their study blasted by many in the grocery industry.

The report, Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?, was written by K. Sudhir, a professor at the Yale School of Management, and Vithala R. Rao, a professor at Cornell Universitys School of Management.

Using data from one northeastern chain and dating back to the mid-1980s, the researchers concluded that slotting allowances serve to efficiently allocate scarce retail shelf space. In addition, the two researchers said that slotting allowances help to balance the risk of new production between manufacturers and retailers, and they do not produce the anti-competitive results that are often attributed to them.

In fact, the researchers concluded & that efficiency rationales are more at work than anti-competitive rationales & and that the Federal Trade Commission was correct in its reluctance to ban the practice of slotting allowances in the grocery sector.

The reports conclusion, and an on-line story by the grocery industry trade publication Progressive Grocer in early April, elicited many strong anonymous responses from people within the industry.

For example, one self-described longtime grocery industry observer said that the Yale-Cornell study could not be farther from reality. That observer, in fact, blamed the poor performance of traditional retailers on their insistence on collecting slotting fees. He urged retailers to follow the lead of Wal-Mart if they want to be successful. Traditional retailers, he said, have attempted to make money buying goods rather than selling goods, with slotting fees, failure fees, reclamation center fees.

Another on-line respondent to the Progressive Grocer study wrote in part, Contrary to their [the research papers] opinion, slotting fees prevent small manufacturers with better quality products from gaining shelf space, period. I wonder where their funding comes [from]. & Slotting fees prevent better quality and less expensive products from reaching the consumer.

Other on-line responses published by Progressive Grocer gave similar viewpoints. One writer said, The evidence is truly indisputable at this point: Whole Foods success in the perishables categories  largely unbranded territory  vs. the decade-long slump in the CPG [consumer product goods] center store says it all. Well, almost all. Wal-Mart, at the other end of the marketing spectrum, says the rest.

Another respondent described as representing the manufacturer viewpoint wrote, I have called on nearly every major chain in the country, and I have seen the chains fall, one by one. The similarity among all these chains was the fact that they all were more focused on slotting fees than selling product and making margin. This is the one reason, which is systemic in retail, of why Wal-Mart has crushed the competition. Simple. End of story.

It is well known that the model followed by Wal-Mart is to try to extract the lowest everyday price from its suppliers without tacking on these extra charges that have become commonplace in the industry.

The researchers, in fact, did acknowledge in their study that their data were more than 15 years old and slotting fees had become more pervasive in that time period. They called for more research on the subject and called their report a historical snapshot.

However, they also labeled it the first empirical study on the subject. They did conclude that shelf space is at a premium as food companies introduce thousands of new SKUs each year and retailers have limited shelf space. Over a six-month period in 1986 and 1987, the researchers studied more than 1,000 new products that were offered to a specific Northeast retailer by both large and small manufacturers. In about 14 percent of the cases, slotting fees were utilized to introduce the item. The research compared those products to determine their characteristics with regard to size of manufacturer, test-market research done before the product was offered for mass distribution and the promotion allowances that accompanied the various products. They used a rating system to determine how the retail buyer viewed the various products. In general, the lower the buyer rated the product, the more likely it was to have a slotting allowance. It was also true that products from a smaller manufacturer had a higher rating still needing a slotting allowance, lending credence to the theory that small manufacturers are not treated the same as large manufacturers.

But in general, the researchers found that slotting fees were not offered or needed when dealing with a sure hit. They concluded that slotting fees were an efficient way of introducing other items to the marketplace. They said that when a products success is uncertain to the retailer, the slotting fee allows the manufacturer to market an item that would not see the light of day. Presumably, the manufacturer decides not to pay the fee and thus eliminates the product from consideration when its value is questioned.

But the research also pointed out that slotting fees greatly increase the cost of a new introduction. The retailers said that they represent 16 percent of the cost of a new introduction. Dealing with 1986-87 data, their research showed that the per-store costs ranged from $75 to $300 per item, making the rollout in a small chain $3,000 to $40,000. For national distribution, they estimated the slotting fee costs at $1.4 million to $2 million.

After Progressive Grocer wrote its story and published the many negative responses from industry members, the two researchers issued their own lengthy rebuttal. Specifically, they said that they had no ax to grind as the report was not funded by any segment of the food industry. The researchers reiterated that their data came from only one retail chain, but that they believe they followed proper analytical procedures for their conclusions.

Mr. Sudhir and Mr. Rao said, One important point that we wish to make is that we find support for several theories that are consistent with efficiency-enhancing explanations, and we do not find much support for anti-competitive explanations in our data. This does not mean that there cannot be any support for anti-competitive explanations in other data. Our key conclusion is a very cautious one: Given that we find support for several efficiency-enhancing explanations in our data, the FTC is correct in its reluctance to completely ban slotting allowances without additional empirical support for anti-competitive explanations.

The fresh produce industry was among supplier groups a few years ago that asked Congress and the FTC to investigate many of the practices of the retail sector. After examining the issue, the FTC chose not to follow the lead of the Bureau of Alcohol, Tobacco & Firearms which has banned slotting fees for the marketing of products containing alcohol.

In an on-line poll conducted by Progressive Grocer only 8 percent of respondents agreed with the conclusions of the researchers when given the opportunity of choosing one of four answers. A majority  54 percent  chose the answer that called slotting fees anti-competitive, while 28 percent thought that the collection of such fees has led to the downfall of some retailers. The other 10 percent of the respondents said the controversy is over-rated.