OM in the News and Video Tip: The Pros and Cons of Slotting Fees

Ice cream can be one of the most expensive slotting fees areas because of the expense of freezer dispays
Ice cream can be one of the most costly slotting fees areas because of expensive freezer displays

When considering a late-night carton of ice cream, most people aren’t thinking about how it got on the shelf. But behind each freezer door is a secondary market that determines what you have the option to buy. “Slotting fees” (see Chapter 9) are fees that manufacturers pay retailers to appear on their scarce shelves. It can cost millions of dollars to launch a product in the nation’s groceries, and through that cost, these fees shape our supermarkets and diets.

“It’s easy to think that these fees show supermarkets are ‘rigged’ — against both consumers and smaller manufacturers that can’t afford the fees,” reports vox.com (Nov. 22, 2016). But as this 7 minute video shows, the debate is an intense one, with decent arguments on both sides.

Cons: Supermarkets charge significant fees before retailers see their products on shelves. A discount fee to introduce a new product might be as high as $30,000 to appear in just 350 stores. These fees exist for a wide range of products, from ice creams to chips and soda, not to mention the scarce space near the checkouts. The implication is clear: Retail power reduces competition and makes it harder for small businesses to compete against big buyers. These advantages for large companies are only compounded by their ability to buy up enough shelf space that they can effectively design a store’s layout.

Pros: Slotting fees emerged in the 1980s, as retailers began to introduce dramatically more products to shelves. Thanks to technological improvements like scanners, it became easier to create many more SKUs without a lot of extra effort. So manufacturers threw numerous extra products at retailers. That created a problem, as 80-90% of new products fail. And despite the availability of all these new products, shelf space was just as scarce. Fees helped remove some of the risk for retailers, signaled to them that a new product might be successful, and helped limit product proliferation.

Classroom discussion questions:

  1. Why are slotting fees an important issue in retail layout?
  2. What are the pros and cons of these fees?

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