Truck and Barter: Slotting Fees are Efficient (or Maybe not)

April 08, 2005

Slotting Fees are Efficient (or Maybe not)

By Kevin

Via Progressive Grocer, we find an empirical study that supports the hypothesis that slotting fees -- extra payment for the best shelf space in a retail stores -- are "efficient":

The authors of the report, "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?", said they obtained a unique data set consisting of all new products that were offered to a large supermarket chain in a six-month period. It captures more than 1,000 product offers in 21 categories, from major manufacturers such as Kraft, General Foods, Procter & Gamble, as well as smaller manufacturers such as Seneca Foods.

The researchers, K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell, maintained that the lack of empirical research on slotting allowances prior to their project was due in part to the difficulty in getting retailers and manufacturers to part with information about these transactions....

"We find that when retailers perceive that a product is likely to be a sure hit, they don't seem to ask for slotting allowances; further, manufacturers don't offer slotting allowances when they perceive the product to be a sure dud, either, because they are unlikely to recover the money from sales," said Sudhir.

"It is in the unknown middle, when uncertainty about product success is greatest, that slotting allowances offer the maximum benefit to obtain retail shelf space," according to Sudhir, adding, "This flies in the face of arguments that slotting allowances are merely a form of extortion by retailers."

Here's a copy of the paper. An abstract of the abstract:

Using data on all new products that were offered to one retailer for a period of six months, we
empirically investigate support for the alternative rationales for slotting allowances. Our analysis indicates that broadly there is more support for the efficiency theories than for the anticompetitive theories. We find evidence that slotting allowances (1) serve to efficiently allocate scarce retail shelf space; (2) help balance the risk of new product failure between manufacturers and retailers; (3) help manufacturers signal private information about potential success of new products and (4) serve to widen retail distribution for manufacturers by mitigating retail competition. We find little support for the anti-competitive rationales in our data. The fact that we find support for the efficiency rationales suggests that the FTC was correct in being circumspect about banning slotting allowances outright.

UPDATE: Read about contrary views on ALP.

Posted at April 8, 2005 07:45 AM

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