Experts find retail slotting allowances 'acceptable'
Researchers at the Yale School of Management and Cornell have conducted an investigation into the rationale behind the controversial 'retail slotting allowance' - the one-time fees manufacturers pay to retailers for shelf space to stock new lines - concluding that slotting allowances do support efficiency in the marketplace.
Retailers, manufacturers, and regulators have long debated the controversial role of slotting allowances, with little consensus. While some argue that they are anti-competitive, others contend that they serve to enhance efficiency by helping, for example, to allocate scarce shelf space.
The study, 'Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?', by K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell, was based on a unique data set consisting of all new products that were offered to a large US supermarket chain during a six-month period. The otherwise obvious lack of research into slotting allowances is due in part to the difficulty of obtaining data from retailers and manufacturers about these transactions.
Hard data Sudhir and Rao captured more than 1,000 product offers in 21 categories from major manufacturers such as Kraft, General Foods, Procter & Gamble, as well as a number of smaller manufacturers. The data collected provided objective information about the new product introduction, including test market results, promotional support, offers of slotting allowances, and how the retail buyer rated the manufacturer and the product.
In their research paper, the authors examined the arguments behind the alternative rationales for slotting allowances and provide evidence from their research in support of and against each one.
Slotting supported However, the overall findings of the study support the idea that slotting allowances help enhance market efficiency by optimally allocating retail shelf space (which is always at a premium) to the most successful products, rather than just thwarting competition.
Specifically, the data showed that slotting allowances:
- Balance the risk of new product failure between manufacturers and retailers;
- Help manufacturers signal private information about the potential success of new products;
- Serve to widen retail distribution for manufacturers by mitigating retail competition.
Conclusion "We found that when retailers think a product is likely to be a success, they don't seem to ask for slotting allowances. Furthermore, manufacturers don't offer slotting allowances when they think the product is likely to be a failure either, because they are unlikely to recover the money from sales," explained Sudhir. "It is in the unknown middle ground, when uncertainty about a product's success is at its greatest, where slotting allowances offer the maximum benefit to obtain retail shelf space. This flies in the face of the common argument that slotting allowances are merely a form of extortion by retailers."
This finding held true for both large and small manufacturers, and the authors suggest that the popular argument that slotting allowances are a means to eliminate competition from small manufacturers does not have any significant empirical support. "Overall, we believe the FTC is correct in its reluctance to ban the practice of slotting allowances in the grocery sector," concluded Sudhir.
The Yale Center for Customer Insights is a research centre devoted to studying consumer behaviour, and welcomes enquiries from organisations interested in research partnerships and sponsorships. The full research paper has been made available to download from the centre's web site - click here (PDF document, 146Kb).