From The Spring 2005 Issue of Natural Grocery Buyer

Slotting allowances

Something wicked this way comes

Kevin Coupe

The notion of slotting allowances is the dumbest idea since man invented preservatives.

The practice of manufacturers paying retailers for shelf space enslaves retailers to a kind of financial heroin and creates within the food industry an insidious, yet acceptable, level of corruption. It turns retailers from marketers into facilitators and changes them from ambassadors for the customer into sales agents for the manufacturer.

Get addicted to slotting allowances, and you begin to make decisions based on what buying the products will gain you, rather than whether the item actually merits that much space or this many facings.

Talk to many large mainstream food retailers, and they will tell you that they would love to kick the habit and get off the heroin of slotting allowances—but that they are too big, and the practice too intertwined within their organizations. It’s simply not doable, they say.

And when you point out to them that one of the segments competing most effectively—natural foods retailers—has not been in the habit of seeking or accepting slotting allowances, they simply look at you with sad but knowing eyes. Mention to them that Wal-Mart doesn’t take slotting, but simply drives for the lowest possible cost of goods in its desire to offer the lowest possible prices, and they shrug with that helpless look that a junkie will give you.

In the world of slotting allowances and promotional fees, there is no such phrase

as “Just say no.”

A senior executive for a major retailer once told me that there is a basic difference between his company and Wal-Mart. When a salesperson goes to see a Wal-Mart buyer, he says, the appointment starts on time and ends on time. When it is over, the amount of goods sold and the price of those goods will have been determined and the salesperson leaves knowing exactly what his or her next steps are. In his company, he says, the appointment usually starts late and ends whenever. When it is over, the salesperson leaves with no idea what has been sold at what price, and has no idea what the next steps are. However, the available allowance dollars will have been clearly defined.

Is this the business model to emulate? I think not.

Several years ago, Glen A. Terbeek wrote a wonderful book, Agentry Agenda: Selling Food in a Frictionless Marketplace (Breakaway Strategies Inc., 1999).

Terbeek—who created the SmartStore at Andersen Consulting—argues that retailers made a colossal wrong turn in focusing on slotting as a primary source of revenue. He notes that the numbers suggested that some retailers had gotten themselves to the point where without slotting, they weren’t profitable, that they were only making money on how they bought items, not on how they sold them—which is a kind of marketing quicksand for a retailer.

Terbeek says retailers need to “create a new-generation ‘logistics network,’ unimpeded by any false economics caused by the misalignment of revenues, organizations and measurements with the shopper’s value.”

By creating an infrastructure in which the retailer is the agent for the shopper, not the manufacturer, Terbeek suggests the result would be a “frictionless marketplace” in which all decisions are customer-centric, driven by what can be sold rather than what allowances or fees may be attached.

The converse, of course, is that the current environment is nothing but friction driven by misplaced priorities and inequitable demands. Is this the business model to emulate? I think not.

(Order and read Terbeek’s book, by the way. He lays out in detail why the mainstream supermarket industry is flirting with consumer irrelevance, and what must be done to rectify the situation. The fact that traditional supermarket chains have not followed his advice only pushes them closer to the precipice and makes them more vulnerable to competitive pressures.)

Want another reason to avoid a business structure based on slotting allowances? One of the reasons that international food distributor Ahold and some of its vendors continue to face so many legal problems is that the buyers in its U.S. Foodservice division essentially cooked the books, moving allowances around so that they simulated more sales than were actually being generated.

In the natural products business, the notion of slotting isn’t really an issue, primarily because most of the suppliers in the category simply aren’t big enough to pay the fees. But as mainstream manufacturers have acquired some of these smaller companies, the scenario is changing.

There seem to be two things taking place in the natural products section. One is that retailers are trying to decide whether to integrate or segregate the category, or to actually do both, which results in multiple facings—and therefore the opportunity to charge a greater number of slotting allowances. At the same time, manufacturers quite naturally want as many facings and placements as possible, and some are quite willing to guarantee this with cash on the table (or in some cases, under it).

The temptation on both sides is palpable, but it needs to be resisted, because neither rationale takes into consideration what is best for the customer. Integrated, segregated, multiple facings or limited selection—from my perspective, it doesn’t matter a bit. The decision needs to be made in a shopper-centric fashion, with no thought of incentives. After all, the best incentive is a happy, satisfied customer.

The incongruity, of course, is that many manufacturers do nothing but complain about slotting, saying that they’re being held up by retailers who want more and more dollars to put products on their shelves. They complain, then write the checks, and then they find new ways to indulge retailers’ demands.

So the fact that some of these same manufacturers would want to introduce slotting into a trade channel where it hasn’t existed is replete with irony.

You would have a hard time, I think, finding anyone in the mainstream food retailing business who thinks slotting is a good thing, a positive influence on how commerce is conducted. Especially because the addiction doesn’t stop with slotting. Once these promotional dollars have been tasted by the retailer, almost inevitably thoughts turn to new ways to extract money from manufacturers—such as failure fees, which allow them to charge a manufacturer a penalty when a product doesn’t sell well enough, after having taken money up front to put the product on the shelf.

Ignoring, of course, the possibility that if the retailer were really doing its job, it never would have carried the product to begin with.

Kevin Coupe covers the retail business on his Web site, www.morningnews beat.com.