|Thursday, May 08, 2003|
|Thursday, May 08, 2003|
Slotting fees and oligopolies
Over the past few decades, and especially over the past few years, supermarkets and other retail outlets have been charging slotting fees for all new products. These payments are also known as new product introduction fees or product placement fees. Basically, the manufacturer pays a fee to the retailing for the privilege of "slotting" their products in the retailer's warehouse, and ultimately placing their products on the supermarket shelves. The fee can be either in cash , goods, or services, or all three. The practice is not quite universal, but more and more its the custom.
Supermarkets offer the most typical case. The typical supermarket carries 30,000 items out of the 100,000 SKUs available on the market at any time. (A SKU, a stock keeping unit, as a method for assigning a number of each variation of each product, so that different flavors of fruit juice from the same manufacturers each have different SKUs, as do different sized bottles of the same juices.) Around 20,000 new SKUs from manufacturers large and small are introduced every year in the grocery business.
Most products introduced to the market fail. One estimate is that 80% go down the tubes. It's a numbers game. Markets complain that the cost of warehousing, shelving, and maintaining new products runs into the millions of dollars. Plus there is the risk of being stuck with many cases of product when a small company goes bankrupt and 200 cases of extra-tangy salsa have to be gotten rid of at a big loss.
But the big factor is the opportunity cost. Every product, every SKU replaces another on the shelves. To a great extent, every purchase of a new product means one fewer purchases of an old product. With the narrow margins of most retailers, that lost opportunity can make the difference between profitability or not. Supermarket margins, for example, are often claimed to be around 1 cent on every dollar sold.
Slotting fees started out as a charge for the concrete task of making warehouse space available for products. But over the years they have involved into a major profit center. In the food industry, it's estimated that manufacturers pay up to $9 billion in slotting fees. That adds up to over half of the supermarkets' total profits, which run at a thin 1% on all the goods sold. Slotting fees are a very important revenue source for the chains, and they are squeezing harder and harder.
But slotting fees are just the beginning. In addition, retailers have come up with a number of add-on fees that they get manufacturers to pay. Manufacturers are hit up for marketing and promotional "allowances", paying for supermarket ad campaign and newspaper inserts, or in-store promotions. Finally, they are asked to give product tastings in the store. One estimate has these costs far exceeding the narrowly defined slotting fees by a factor of 20. In fact, estimates have manufacturers now paying over 10% of sales on trade promotions, up from 5% in 1978. Note that these promotional fees are sometimes lumped in with slotting fees.
Large retailers Wal-Mart and Target as well as food chains like Safeway and Kroger and drug chains like CVS and Walgreen's from strong oligopsonies: you've got to deal with them to make sales, so they can dictate slotting fees. The oligopoly of manufacturers in a wide variety of products may not like paying these high fees. But for them, it has its advantages to: it increasingly keeps any upstarts away from challenging their dominance of their respective product categories. Slotting fees are a maintainer of oligopolies