Tag: slotting fees

OM in the News: Fighting for Shelf Space

The contest for supermarket and grocery shelf space is heating up as brands—including more lower-cost offerings from grocery stores themselves—vie for a shrinking number of spots in the aisles. Grocers are trimming both the number of items they stock and their overall physical space, reports The Wall Street Journal (Aug. 16, 2024).

Which products are placed where on shelves can move sales up or down significantly.

 U.S. consumers are looking for ways to cut grocery bills that have soared. In response, supermarkets and grocery stores are becoming more selective as they stock their shelves with an eye toward reining in prices for shoppers.  Between 2009 and 2023, square footage in supermarkets decreased 3.3%. Meanwhile, between 2020 and last year, retailers cut unique products by nearly 9%.

A confluence of factors influences which brands make the cut. Among them are brand recognition and whether brands’ products are selling, or are expected to. Retailers also charge slotting fees, a topic in Chapter 9 of your Heizer/Render/Munson text, for aisle space.

The fees, which food companies pay retailers in exchange for shelf space for their goods (and a topic of negotiation), depend on the retailers and brands, as well as on categories. Most companies think of slotting fees as a cost of entry for shelf space. The fees can add up quickly, on average ranging anywhere from around $100 per item per store to five or even six figures. Leading brands may also influence what is on shelves as so-called “category captains,” which are generally a retailer’s top sellers of goods such as coffee, snacks and cheese.

The aim behind these actions isn’t to get just any shelf space—it is to be in a prime location, which is around eye level. Having the choice placement, referred to with descriptors such as the “strike zone” or the “bull’s-eye,” can be significant for sales. “We want to be right there in your sightline…because that really drives consumption,” said one product exec. “If you’re up in the gutter or down in the crack, it’s harder to get the consumer to know you’re even there.”

Once on a shelf, major shelf resets generally follow a strict schedule. Stores usually assess their shelves to determine whether they have the right mix of products and brands just once a year. Minor product changes happen midyear.  If a product doesn’t get its space, then it must wait for the next reset.

Classroom discussion questions::

  1. Slotting fees put small and local companies at a disadvantage. Are they ethical?
  2. What are the sellers options in getting shelf space?

OM in the News: The Changing Technology in Supermarket Layout

Which products are placed where on shelves can move sales up or down significantly.

The biggest U.S. food makers are finding that supermarkets are taking away prime shelf space, writes The Wall Street Journal (Feb. 19, 2020).

Grocers are now relying on their own proprietary research to decide how and where to shelve certain products, rather than counting on companies that sell well-known brands to tell them what to put on what shelf at what price. Kroger and Walmart, for example, are using increasingly sophisticated software to decide where to place items and which products to shelve next to one another—factors that can move sales up or down several percentage points. As we note in Chapter 9, Layout Strategies, “the objective of retail layout is to maximize profitability per linear foot of shelf space.”

Large chains have invested in beefing up their ability to collect and analyze data from customers. That is changing the grocer’s relationships with suppliers and the way it lays out stores. The diminished power of “category captains”—the top sellers of products such as soup or cereal—is the biggest change to the way food is sold in the past 30 years. Retailers once relied on big consumer-goods companies when making decisions about allocating shelf space because the companies were the experts in their respective food categories. Grocers also didn’t want to invest in consumer insights, and they were happy to take the hefty slotting fees (also noted in Ch.9) big brands pay for prime space.

Now, retailers are more focused on doing what it takes to maximize sales growth even if it means giving up some of those fees by stocking more of their store-branded products. Supermarkets are also gaining leverage over retailers with generic products sold under their own brands at cheaper prices than name-brand goods. Kroger owns 33 manufacturing plants to make various store-branded products, which make up a growing share of its sales and shelf space.

Classroom discussion questions:

  1. Explain the tradeoff between slotting fees and the new data analytics approach?
  2.  How does supermarket layout differ from department store layout?

OM in the News: Suppliers and Whole Foods’ Slotting Fees

Whole Foods, which cut prices last year to make it cheaper to shop there, now is making it more expensive for suppliers to get their products onto shelves, reports The Wall Street Journal (Feb.9, 2018). The supermarket chain is asking suppliers of all sizes to pay new rates for prime shelf space as it tries to boost profits and better organize the exploding number of organic products hitting the market.

Many suppliers will see an increase from the average $25,000 “slotting fee” companies were paying to be featured in the stores’ most-visible, high-traffic areas. Additionally, Whole Foods is pitching its biggest suppliers on a promotion costing up to $300,000 for several weeks of prime shelf space along with souped-up marketing. The chain also is asking suppliers to offer bigger discounts on their products to earn the space. A high-visibility nationwide promotion at Whole Foods now often requires companies to cut product prices by at least 25%.  “We knew full-well that there would be discontent,” said Whole Foods’ V.P.

The firm is adopting a suite of retailing tactics meant to enhance profitability, including centralized purchasing decisions, tighter control over inventory and working with a national contractor to do in-store sampling. Grocery suppliers will pay a fee of 3% of the cost of goods delivered, and beauty suppliers will pay 5%. Whole Foods has hired an outside company to stock shelves “to provide a much more effective result.”

On the other hand, Kroger, the largest U.S. supermarket chain, has been courting niche brands over the past year with a new portal for local suppliers and a series of natural-foods trade fairs. The company doesn’t charge slotting fees for small suppliers.

(See our discussion of slotting fees in Chapter 9 on pages 374 and 392.)

Classroom discussion questions:

  1. Discuss the ethics of charging fees to allow products to be placed on supermarket shelves.
  2. Why is this an issue particularly in the grocery industry?

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?