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A buyer for a major retail chain finally closes the deal and buys your product. The big day has come for your product to shine on the shelf space it deserves. However, you are disappointed to realize you only have a small slot on the shelf and your product is overtaken by the big brands next to it. It is impossible for your product to compete with these brands. What is the process for successfully getting your product to the shelf, and how can you guarantee a good space?

Jan 18, 2021 A slotting fee is the amount of money/fee required by the retailer, once she/he found potentiality for your product, to cover some direct costs (e.g. Opening a supplier code, checking quality standards, list in the IT system,etc.) but mainly to cover the costs of space that is the most scarce/valuable resource for a retailer (both online and offline). A slotting fee is a payment that a Select one: O a. Wholesaler makes to place a new product on a retailer's shelf. Manufacturer makes to a wholesaler as compensation for warehousing inventory. Manufacturer makes to a retailer as compensation for sales not made while the product was on the shelf.

Most consumers unknowingly fall victim to slotting fees controlling their purchasing decisions. Oh, look how convenient it is to grab that eye-level abundant product on the shelf! Why even bother looking at the possibly better product in a single slot on the bottom shelf? With this system in place, retail store offerings shift the control from customer desires to marketing budgets. This can create a barrier for new brands entering the market.

What are slotting fees?

Slotting fees are one-time payments a supplier makes to a retailer as a condition for the initial placement of the supplier’s product on the store’s shelves. This system allows the retailer to protect its return on investment when buying a new product. With 70–80 percent of new products failing, the cost to introduce a product on shelves can be more than the sales received in return. Slotting fees reduce the risk of loss for the retailer.

Where did they come from?

Introduced in the 1980s, slotting fees were initially only demanded by a few stores. Daniel Lubetzky, the founder and CEO of KIND, recalls slotting fees just becoming prevalent when he launched his brand in 1993. In the following years, a grocery store merger mania left many stores desperate and in debt. As a response, these stores looked for any way to make money, and charging slotting fees was an easy one. Lubetzky says, “Slotting ended up becoming more common and more institutionalized.” Nielsen data shows that 85 percent of retailers were charging slotting fees by 2000. Now, almost twenty years later, they have become a standard in the retail industry and almost impossible to avoid.

For many stores, slotting fees are necessary to keep the revenue flowing. Walmart was late to introduce them, first charging certain brands in 2015. It is believed that Walmart’s increase in wages that year was the catalyst for introducing the fees. The company needed to increase its revenues to balance its increase in wage expenses, and slotting fees were an easy fix.

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How much are the fees?

Costs vary greatly and depend on the industry or section of the store. According to the trade publication Frozen and Refrigerated Foods, freezer section space in small chains costs up to $9,000. In larger chains, this number skyrockets. For example, Apple & Eve spent around $150,000 to get its fruit punch into a limited number of Safeway stores. These steep one-time costs are sometimes the only way to guarantee shelf space. According to UCONN’s Food Marketing Policy Center, the total market for slotting fees is believed to total around $9 billion, and it continues to grow. Be ready for some steep requests.

What to know

Chains vary on whether their supplier business deals include slotting fees or not. It is important to research these policies and know what to expect before going into a deal. National stores such as Kroger, Safeway, and Walmart use them, as do regional stores such as QFC and Fred Meyer. It is difficult to find stores that do not take advantage of this potential profit, but Trader Joe’s and The Fresh Market are a few.

A study by NAICS reveals the most common industries that are charged slotting fees by retailers or manufacturers. This does not include every retailer, but it can give you a good idea of what to expect for your product.

Common slotting fee industries

• Breakfast cereal
• Confectionary
• Frozen food
• Ice cream
• Bakeries
• Tortillas
• Snack food
• Seasoning and dressing
• Beverage
• Tobacco

Common non-slotting fee industries

• Flour
• Oils
• Sugar
• Dairy
• Meat
• Seafood

How to negotiate slotting fees

It is difficult to avoid the fees entirely, but by presenting a good argument for how you can guarantee early sales, the retailer may take it easy on the expense demands.

• Present a plan. Know what shelf space you want and how much you want to spend on it, but stay reasonable. It is important to prevent the retailer from walking all over you and up-charging for the space.
• Use sales and marketing. Offer promotions, coupons, and demos to guarantee brand awareness and product sales. By showing that yours isn’t going to be one of the 80 percent of products that fail, the retailer will feel less of a need to strongly protect its investment.
• Have the stats. Prove there is current demand for your product and that it will sell if placed right. You need to exceed the average presentation and provide solid evidence that consumers are actively looking for your exact product.
• Measure and renegotiate. Monitor your sales in each store and renegotiate if sales are going very well. Remember that when you win, so does the store. Look for frequent stockouts, for instance, to indicate unmet demand that could warrant another facing on the shelf.

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From the looks of it, slotting fees are not going anywhere. They continue to be a battle for small companies while simultaneously protecting retailers from losses. It is important to recognize their place in the future of your product and work to jump the hurdle they create.

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Slotting allowances refer to fees that suppliers pay for some type of preferential treatment from their distributors. There are a number of benefits that suppliers can receive from paying a slotting allowance, such as eye-level shelf placement of their products or the opportunity to introduce new ones. This practice is widely used in the grocery store industry. The need for these fees is supported by the risks and costs that are associated with stocking a store's shelves and replacing failed products with new products.

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Consumers tend to be most familiar with the practice of distributors purchasing products for their stores from various suppliers. Many are unaware that slotting allowances refer to a practice where suppliers pay the distributors to take some type of action. The prevalence of this practice greatly varies. Some distributors may require certain suppliers to make these payments or may require these fees for certain products. In other instances, suppliers may offer to pay slotting allowances to motivate a store to invest in a new product, to place a product in a prime location on the shelves, or to motivate a distributor not to drop a product from its stock.

The amount paid for slotting allowances also varies. Instead of decisions being made on an industry-wide basis, fees are often negotiated on a case-by-case basis. Different suppliers may be charged different fees, and it is even possible that one supplier may be subject to different fees for different items.

Grocery stores tend to operate differently than many other retail establishments, which operate on consignment. On the contrary, stocking grocery stores involves substantially greater risks because store owners purchase their merchandise outright. Any merchandise that does not sell or that must be deeply discounted results in losses for the grocery store owner. Annual product failure rates are generally high, supporting the need for slotting allowances in this industry.

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These allowances allow stores to cover their costs. In addition to helping to compensate for the financial losses, the fees paid by suppliers also help to cover other categories of expenses, such as the costs of setting up displays and applying labor to remove unsold products from the shelves. Other costs associated with acquiring, selling, or replacing a product include warehousing, programming new items into vendor systems, and producing new shelf labels.

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There are debates about the fairness of slotting allowances. It is commonly argued that this practice is anti-competitive because large suppliers have an obvious advantage. Some small suppliers cannot afford to pay these fees at all. This may keep their products out of certain stores or may prevent them from ever receiving preferential placement on the shelves.