To list a product means delisting another one
The space in a retail shop is limited. And it is already fully optimised. This means that if you want your product on the shelves, the category manager has to remove another one to make space. So he has to disappoint another manufacturer who has already paid a listing fee, but whose products do not sell enough.
Why retailers and suppliers should make use of slotting fees
Having read the above, it may seem like investing in slotting fees provides clear benefits for retailers and only a few, if any, for suppliers. In reality, there are plenty of reasons why you and other suppliers should seriously consider paying such a fee.
Let’s first look at why a retailer would institute a slotting fee.
The first and most obvious benefit is that a slotting fee offsets the costs associated with bringing a new product into their store.
Let’s say a retailer wants to bring in a new product. They need to consider how many people will be responsible for managing the shelf space for their stores. Then, how much will they need to pay their employees to fulfil this role? There is also the warehousing and distribution costs to consider as well as any costs related to introducing it to their inventory management system.
That said, the above calculations are necessary since there are many risks to bringing in new product lines. Consider this: according to Harvard Business School professor, Clayton Christensen, there are more than 30 000 new consumer products introduced into the market every year. And 95% of them fail.
Then, if you look specifically at grocery store products, where slotting fees are most prominent, according to Professor Inez Blackburn of the University of Toronto, the failure rate sits at between 70 and 80%. A slotting fee - essentially sharing the costs of ranging a new product between retailers and suppliers - helps to mitigate this risk.
A second benefit is that it allows retailers to remain competitive with other stores that require slotting, a point made in a case study on slotting allowances conducted by the Federal Trade Commission.
As a supplier, there are quite a few benefits to paying slotting fees. The first two are interdependent.
For example, the first, and primary reason why you’d pay a slotting fee is that it guarantees you space on the shelf. The result, which is also the second benefit, is that it allows for sales. Not only that, by paying for space on the shelf, you’re able to gain exposure for your products.
What’s more, if the product that you’ve bought space for grows in popularity, it might even result in increased exposure for your brand and thus more interest in any other products that you might offer. With that knowledge, you could approach a retailer and confidently argue for more space.
There is also a third benefit. If you buy enough shelf space, you stand every chance of being able to exercise influence over the layout of the grouping as well as the store. That, in itself, is enough of an argument for paying for such a fee because that leads to more sales and exposure for your brand.
While slotting fees may seem unethical and controversial, in many cases they are a necessary evil.
How to ensure slotting fees are free and mutually beneficial
Before you begin to consider playing a slotting fee to get your product into a store, you need to have a plan. That much should be obvious. And yet, that doesn’t mean that this mistake doesn’t happen.
In a rush to get your product into a store, you might not even worry about this. But that’s a mistake that you’ll end up regretting.
So what does such a plan entail?
For one, you must be prepared to expect a slotting fee so that it doesn’t come as a surprise if the topic is brought up.
Then, you must know how much you are willing to spend. How high are you able to go without ruining your business? Once you have a figure that fits your budget, stick to it. Remember, this isn’t a one-way negotiation. If a large retailer is asking too much, don’t agree to meet them just because they can offer you a slot in their store.
Regardless of how much shelf space you’re promised, it doesn’t guarantee sales.
As much as securing shelf space places you at an advantage as it puts you in front of shoppers, you can’t expect to sit back and wait for sales.
Instead, you need to use various sales and marketing tactics available to you. Typical examples here would be to run promotions in-store or host a demonstration.
If you’re looking to improve your promotional planning efforts, there are four steps you need to take: One, decide on your objectives. Two, align yourself with the retailer. Three, implement the promotion in-store. Four, measure the outcomes and adjust where necessary.
We dive into the above steps in more detail in this piece. Considering the statistics we quoted around the failure of new products, promotions and the like are crucial. Also, as noted above, by promoting one product, you can improve your reputation amongst shoppers enough for them to show interest in other products that you offer.
If the product you put on promotion exceeds their expectations, they could also purchase it once it’s returned to its regular price.
As much as you can pay a slotting fee to secure your product's space on the shelf, there is another way to guarantee space. And that is to look at and understand your retail data.
You can use your retail data to prove to retailers that it’s worth giving your products space on the shelf. This is regardless of if you already have products in a retail store and you’re currently renegotiating for more space. Or, you’re in the process of negotiating an initial listing.
Let’s say, for example, that you’ve noticed a trend in the market, which indicates a current or future demand for a product. And you happen to supply that product. You can approach the retailer fully confident in your product and what you can offer.
What’s more, having this information places you in a far stronger position when it comes to negotiating a slotting fee. Instead of taking what a retailer gives you, you can arrange a price that suits your pocket.
The last step, which you could argue is the most crucial, is to measure your progress. You could even include it in with the above point around consulting your retail data.
That’s because you should measure how your product performs throughout the month. It can’t be an afterthought.
After all, this is about presenting yourself and your product in the best possible light. As much as you can pay to get space on a shelf, you also need to prove why a retailer should take a chance on stocking your product.
Also, it’s worth pointing out that as you measure, and you find your products selling better than expected, you can renegotiate your space. And, if you’ve proved yourself with one product, when the time comes for you to begin negotiations around stocking a new line, it could be easier to persuade the retailer to give you a slot, however small.
Of course, that doesn’t guarantee that you’ll get space for a different line. But, at least, you’ll have built up a solid enough working relationship and reputation.
DotActiv Lite, Pro, and Enterprise are all different versions of our category management software that allows you to drive category performance. You can visit our online store here or book a custom exploratory consultation here.
In the competitive world of retail, getting your product onto store shelves is only half the battle. Then you have to pay up for valuable shelf space. This practice, known as slotting fees, has been a staple of the retail industry since the 1980s, particularly in supermarkets and grocery stores. But are these fees worth it?
What Are Slotting Fees?
Slotting fees are payments manufacturers make to retailers to secure shelf space for their products. These fees help retailers offset the costs and risks associated with introducing new products to their inventory.
The Retailer's Perspective
Grocery stores face several risks when adding new products:
Given that the failure rate for new grocery store products is staggeringly high—approximately 70 to 80 percent—retailers use slotting fees as a safeguard against these risks.
The Brand’s Perspective
For CPG brands, slotting fees can be a significant investment. According to Nielsen, initial slotting fees typically range from $250 to $1,000 per item per store. However, these fees can offer several benefits:
The most coveted grocery items are often placed in the "strike zone"—the area just below eye level—which typically guarantees the highest sales. Securing this prime real estate can significantly boost a product's visibility and sales potential.
Are Slotting Fees Worth It?
The answer depends on various factors, but the most important one is knowing your margin. Do the math and calculate exactly what you need to sell to break even and what you need to sell to make a profit. Then consider the following:
While slotting fees represent a significant upfront cost, they can be a worthwhile investment for brands looking to gain a foothold in competitive retail environments. By securing prime shelf space and increasing visibility, these fees can pave the way for long-term success. It’s always important to carefully weigh the costs against the potential benefits and align this strategy with your overall business goals.
It's essential to understand slotting fees and how to minimize them, especially in the CPG market, which is brimming with new products – an average of 30,000 new products launch each year. Slotting fees, also known as fixed trade spending, represent the charges retailers impose for the shelf space your products occupy. These fees can fluctuate based on various factors and may impact your bottom line.
However, slotting fees can offer advantages such as reaching new customers, enhancing your brand, and outperforming competitors. How can you maximize these benefits? How can you leverage visual intelligence solutions to optimize your shelf space? We'll explore these questions in this blog post.
Simply put, a slotting fee is a fee paid by suppliers to retailers in exchange for the placement of their products on store shelves and in warehouses. The fee covers the cost of entering product data in the retailer's inventory system and programming its computers to recognize the product's unique barcode.
It's important to note that slotting fees are different from other fees that suppliers may incur, such as pay-to-stay, promotional, stocking, and failure fees. But why the controversy around slotting fees? Well, retailers need a buffer to account for the fact that new product introductions may fail, with up to 90% of new products failing, according to the FTC. However, the high costs associated with slotting fees can make it difficult for small businesses to introduce new products, with fees ranging from tens of thousands to millions of dollars per product.
So, how can you navigate slotting fees and make the most of your promotional planning efforts? By understanding the value proposition, market potential, and differentiation of your product and using data-driven decision-making to support your pitch. You can also leverage existing relationships or brokers to get referrals or discounts from retailers and offer incentives or trade-offs to make it easier for retailers to say yes to your proposal. By following these tips, you can negotiate lower slotting fees and secure valuable shelf space in retail stores without sacrificing your profits.
Slotting fees, or shelving fees if you may, can vary greatly based on a few factors such as the type of product, manufacturer, relationship with the retailer, market conditions, number of stores and more.
What are slotting fees?
If you've been in the retail business for long enough, you'll have no doubt come across slotting fees. You may even have paid your fair share, depending on the products you offer or the category you supply, so you might not think it's worth unpacking the term.
For the sake of this piece, though, and for any supplier who is new to the business or hasn’t heard about them before, here’s a brief description:
A slotting fee, also known as a slotting allowance, is a payment (usually once-off) that you would offer to a retailer to ensure your products appear on the shelf in their stores. That's why you'll also hear it referred to as a shelf placement fee.
Of course, paying for shelf space isn’t a new trend. It’s been part of the retail industry for at least the last 35 years (it was first referenced in the early 1980s) if not longer. And it’s especially widespread across grocery stores and supermarkets.
But that doesn’t mean it’s not controversial.
For example, it’s common to hear talk of it being unethical. That argument is especially valid if you’re a small supplier with a limited budget. By making use of a slotting fee, retailers create high barriers that make it difficult for you to compete with your larger competitors. There is also the point that retailers can abuse their position and ask for exorbitant fees, thereby profiting at your expense.
An initial slotting fee could be as much as $50 000 per product per store on an annual basis. That cost could also climb significantly if you’re attempting to get into a high-demand market. Then again, you do need to view this from the side of the retailer. They’re looking to fill their shelves with products that will sell. They can’t afford to stock just any product.
So while slotting fees can help CPG companies gain access to new markets, increase visibility, and gain a competitive advantage, they also come with a few challenges that require careful consideration.
Want to get ahead of the competition and increase your market share? Paying a slotting fee can help you secure valuable shelf space in retailers with a large customer base, loyal following, or strategic location. By negotiating better product placement and merchandising strategies with retailers, you can also differentiate your brand on the shelf and increase your chances of being noticed.
According to NielsenIQ, slotting fees can also help you increase your brand awareness, customer acquisition, and market share. Another benefit of slotting fees is that you can secure limited or scarce shelf space for your product category, reducing the competition and clutter on the shelf, which can increase your sales potential and put you in a better position to negotiate favorable terms with retailers.
Paying slotting fees can be expensive and unpredictable, making it hard to budget and plan for them. Additionally, they expose you to the risk of product failure because retailers usually require payment upfront before your product has a chance to prove itself in the market. If your product doesn't sell well or meet the retailer's expectations, you may not be able to recover your investment. Retailers may also delist or discontinue your product if it fails to meet certain sales thresholds or turnover rates.
Moreover, slotting fees can limit your bargaining power with retailers because they may impose additional terms and conditions, such as promotional support, exclusivity deals, or price concessions, which can reduce your profit margins and flexibility, and may even have a negative impact on your brand reputation. Therefore, it's crucial to carefully consider the terms and conditions of the agreement and negotiate a fair deal that works for both parties.
To sum up, paying slotting fees can be a valuable investment that can take your CPG business to new heights. However, it's important to keep in mind the challenges that come with paying slotting fees and ensure that you have a solid plan in place to mitigate any risks. By weighing the costs against the potential benefits and negotiating a fair deal, you can make the most out of slotting fees and achieve your business goals.
Negotiating lower slotting fees can be a daunting task for CPG companies, but it's an essential one for those looking to gain valuable shelf space in retail stores without breaking the bank. Here are some tips to help you reduce slotting fees and increase your chances of getting on retail shelves:
Getting your products on retail shelves can be costly due to slotting fees. But you can optimize your product placement and shelf space with Vispera, a visual intelligence company that offers AI-based image recognition and analytics solutions for retail. Vispera helps you:
Vispera is your visual intelligence partner that helps you drive perfect stores with its innovative image recognition solutions. By using Vispera’s visual intelligence solutions, you can not only reduce your slotting fees but also increase your sales growth, market share and customer loyalty.
Request a pilot today to learn more.
What is the business case for your product?
Of course you can try to negotiate with purchasing managers of retail chains. There are alternative ways of payment, like advertising in the supermarket’s magazine or doing sampling in the supermarket. This will also help your sales. There are many parameters, and eventually you will have to keep in mind you business case: will you still be making money on your product?
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?
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.
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.
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
Common non-slotting fee industries
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.
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.
The Cons of Slotting Fees
Slotting fees significantly burden suppliers, particularly small or emerging businesses with limited financial resources. The high costs associated with slotting fees can hinder innovation and market entry for smaller suppliers, limiting competition and consumer choice. Suppliers often face financial strain due to the upfront investment required for slotting fees without assurance of long-term sales or success. Additionally, slotting fees may force suppliers to allocate a significant portion of their budget to shelf space. This may divert resources away from product development, marketing, and other essential business activities. This could lead to a decrease in innovation and product innovation, ultimately hurting the supplier’s business in the long run. It’s like putting all your eggs in one basket — you might succeed in the short term, but in the long term you’ll pay the price. Therefore, suppliers should carefully weigh the pros and cons of slotting fees and plan accordingly. On the flip side, slotting fees can temporarily enhance supplier profitability. If the supplier secures a slot in a retailer’s inventory, they could reap increased sales and profits. This puts smaller suppliers at a disadvantage, impeding their ability to compete with larger, more established companies. This leads to market inequalities and limiting opportunities for diversification and innovation.
Slotting fees create barriers to entry for small and innovative suppliers, preventing them from accessing retail channels and reaching consumers. Emerging brands with innovative products may struggle to compete with larger companies that can afford larger slot fees. This results in a lack of diversity and innovation in the market. Slotting fees in retail exacerbate inequalities and monopolistic tendencies, marginalizing small suppliers and limiting consumer options. Furthermore, the concentration of shelf space among a few dominant players may lead to market saturation. This makes it difficult for new entrants to gain visibility and establish a foothold in the industry. This can negatively impact competition, leaving consumers with fewer choices and higher prices. Furthermore, slotting fees create barriers to entry for smaller businesses, which may limit competition and lead to higher prices. As a result, consumers may be forced to accept higher prices and fewer choices. In addition, smaller businesses may struggle to gain visibility and establish a presence in the industry. On the other hand, slotting fees can also benefit certain businesses. For example, slot fees can help larger businesses protect their market share by offering incentives to retailers. This can lead to lower prices for consumers, as well as increased profits for businesses. This lack of competition stifles innovation and restricts consumer choice, ultimately undermining the retail landscape’s dynamism and vibrancy.
Unfair Advantage for Large Companies
Large companies wield significant negotiating power when it comes to slotting fees due to their established market presence and financial resources. They can leverage their size and influence to negotiate lower fees or secure preferential treatment, such as prime shelf space placement and prominent product displays. This advantage allows them to maintain or strengthen their market dominance, creating barriers for smaller competitors trying to enter or expand within the market. Well-established suppliers have more resources at their disposal to allocate towards slotting fees compared to smaller competitors. They can afford to allocate larger budgets for marketing and promotional activities, further enhancing their visibility and brand recognition among consumers. This financial superiority enables large companies to outspend competitors, making it challenging for smaller players to compete on an equal footing in terms of market visibility and customer reach. Large companies often enjoy widespread brand recognition and consumer loyalty, which further consolidates their market position. Consumers tend to gravitate towards familiar brands, especially when presented with a wide array of choices on store shelves. This brand loyalty gives large companies a competitive edge, as retailers prioritize stocking products with established brand recognition to cater to consumer preferences and drive sales. The concentration of shelf space among a few dominant players contributes to market consolidation, limiting opportunities for smaller brands to gain traction. Retailers may prefer to allocate shelf space to well-known brands with proven track records, as they perceive them to be less risky investments. This preference for established brands perpetuates the dominance of large companies and diminishes the prospects of smaller competitors, resulting in a less diverse and innovative marketplace. The dominance of large companies stifles innovation in the marketplace, as smaller competitors face significant hurdles in gaining access to shelf space and reaching consumers. Innovative products from smaller suppliers may struggle to secure visibility and shelf placement, leading to a lack of diversity and variety for consumers. This suppression of innovation hampers market dynamism and deprives consumers of novel and unique products that could otherwise enhance their shopping experience. The concentration of market power among a few large companies may attract regulatory scrutiny from antitrust authorities. Regulators may investigate allegations of anticompetitive behavior, such as collusive practices or unfair pricing strategies, aimed at maintaining market dominance. The imposition of regulatory measures or penalties can disrupt the entrenched market dynamics and create opportunities for smaller competitors to gain a foothold in the market. By highlighting these additional insights, we can provide a more comprehensive understanding of the unfair advantages enjoyed by large companies in the context of slotting fees. These insights underscore the challenges faced by smaller competitors and the implications for market competition and innovation.
Impact on Consumers and Market Dynamics
Slotting fees contribute to higher product prices for consumers, as suppliers pass on these fees through increased wholesale costs. Additionally, many companies resort to a practice known as “shrinkflation”, where they reduce the net weight or quantity of products while maintaining the same price. Over time, the cumulative effect of slotting fees and “shrinkflation” on product pricing can result in higher living costs for consumers. This is particularly true for essential items with limited alternatives. Slotting fees and “shrinkflation” indirectly affect low-income consumers, exacerbating economic inequalities and reducing access to affordable goods. The focus on slotting fees can lead to a concentration of products from established suppliers, limiting consumer choice. Retailers may prioritize products from suppliers who pay higher slotting fees, relegating smaller suppliers and niche products to less visible shelf space. This lack of product diversity undermines consumer choice and innovation, as it restricts opportunities for emerging brands to introduce original products and compete in the market.
Strategies for Balancing Profitability and Fairness
To strike a balance between profitability and fairness in the use of slotting fees, retailers, and suppliers can consider adopting the following strategies:
Retailers should improve transparency by clearly communicating slotting fee policies to suppliers, ensuring fair and equitable treatment. Transparent communication helps suppliers make informed decisions about product submissions and prevents unexpected costs or disputes. Retailers can implement tiered fee structures based on suppliers’ size and resources, offering lower fees for smaller businesses to reduce financial barriers to entry. Tailoring fee structures to accommodate diverse suppliers promotes inclusivity and competition in the market. Retailers can tie slotting fees to product performance, encouraging suppliers to invest in marketing and promotion. Performance-based fees encourage suppliers to focus on product quality and customer satisfaction, leading to improved sales and profitability for both parties.
Alternative Distribution Channels
Suppliers should explore alternative distribution channels, such as e-commerce platforms, direct-to-consumer sales, or specialty retailers, to reduce dependence on slotting fees. Diversifying distribution channels enables suppliers to reach a broader audience and mitigate traditional retail risks.
In conclusion, the complex nature of slotting fees in the retail industry requires careful consideration of their impact on businesses and consumers. While these fees provide revenue and quality control benefits for retailers, they can also cost suppliers. This can limit market access for smaller businesses. By adopting transparent and equitable practices, retailers, and suppliers can foster competition, innovation, and consumer choice in the marketplace. Ultimately, finding ways to minimize the negative impacts of slotting fees while maximizing their benefits is essential for building a sustainable and dynamic retail ecosystem.
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Given that shelf space is a retailer's most prized asset, you’d expect them to guard it dearly. And rightly so. They're not going to offer you or any other supplier space unless it makes business sense to stock your products. Of course, there are many different ways you can secure a spot on the shelf. And of these, one is to pay slotting fees.
What is a slotting fee (or listing fee)?
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).
Slotting fees or listing fees, slotting allowances, pay-to-stay
These are all names for the fact that the supermarket or other retail outlet wants to optimise its shelf space. The specific metrics may vary, but the principe remains the same: its a way to share the risk/opportunity of a failure/success of a listing between the manufacturer and the retailer.
Profitability for a retailer is rotation x margin
Retailers make money by selling your goods at a margin. The quantity of goods sold in a certain period is the rotation, and as a manufacturer you have to make credible that the rotation of your product will be high. The other aspect is margin: but mostly retailers set a fixed margin per product category, which may range from 20 to 50% for fast moving consumer goods.
The same applies for online sales: although there you list as many products as you want, online retailers won’t do that. If the online customer has too much choice, he or she will find the website messy and perhaps even won’t buy.
The point of view of a category manager
A category manager of a Retail Chain has:
And a category manager knows that only 1% of new products launched in the market survive more than 1 year…
