Question

there are two very different perspectives.

1. Which side do you most agree with? The new seller, who needs to gain retail store exposure but who cannot afford to pay a slotting fee, or the retailer who must use a "fair" system to determine what will and will not take up the limited shelf space? Please be detailed in your response.

2. The article mentions a few large grocery retailers that do not charge slotting fees. Why does this approach work for these retailers (but not for others)?

Answer 1

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 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.

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.

Shelf space is an important resource for the retailers. Retailers want to effectively allocate shelf space to its brands. Retailer places both types of brands in the shelf e.g. private and national. Allocation of shelf space is critical task for the retailer. Retailer places private labels in the shelves for gaining higher margins. While the purpose of placing national brand is to enhance the brand image of PL, and store. Retailer places PL near the national brands so that customers perceive it of high quality. Retailer allocates more shelf space to private as compared to national brand. Results reveal that about 20% shelf is more allocated to private brands in comparison to national brands. Enhances the performance and total sales of a retail outlet.

Shelf space allowances by the manufacturer increase NB space on shelf. PLs are place in shelf disproportion to their sales. If assortment and advertisement of national brand is greater than the PL, then NBs are allocated more space. Image building, private label shelf space and bargaining power are the factors which influence the shelf space decision.

slotting fees appear to be more widely used by grocery stores than other types of retailers. Interestingly enough, some powerful retailers avoid slotting fees despite their bargaining power, e.g., Wal-Mart. One possible explanation is that such retailers are able to obtain low wholesale prices, which then makes it attractive for them to carry a large assortment without any need for slotting fees. In fact, Jacoby (2004) comments that Wal-Mart tells its suppliers that ‘‘they earn shelf space with rock-bottom wholesale prices,’’ as opposed to requiring slotting fees but accepting higher wholesale prices. In general, slotting fees appear to be less common in retail settings where retailer’s margins are significantly high, e.g., fashion apparel. This is probably because the high profit margins in such settings provide enough incentive for the retailer to offer large assortments in the first place. While in our model the wholesale price is exogenously fixed, it may be possible in practice for the manufacturer to set the wholesale price. When choosing the wholesale price, the trade-off for the manufacturer is that a larger wholesale price increases its unit profit margin, but decreases the size of the assortment chosen by the retailer.

Hence, even if the wholesale price were optimally chosen, the manufacturer would still leave some profit margin to the retailer and double marginalization would continue to exist. Thus, the discrepancy between the retailer optimal and supply-chain-optimal assortments would still be around and the manufacturer may still stand to gain from slotting fees. Nonetheless, it is possible that the fees that are agreeable to the manufacturer would be smaller when the manufacturer is able to choose the wholesale price.

We assumed that the retailer bears all the inventory holding and shortage costs. One could change the contract so that the supply chain uses consignment, i.e., the manufacturer incurs the inventory holding and shortage cost instead of the retailer. In such a case, even in the absence of any fees, the retailer would choose to offer all available products. This follows from the fact that sales volume increases with variety, and the only cost in our model that is keeping the retailer from offering all available variety is the inventory cost. However, such an outcome is not necessarily desirable, unless the supply-chain-optimal solution happens to be to offer all products. How the manufacturer should design its set of potential products is an interesting question. In order to address this problem, future research may consider the use of models where the assortment is a continuum of products as opposed to our model where products are discrete; such a model of product differentiation is likely to render the problem more tractable.