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Journal of Marketing

The chain says it will make room on its shelves for Yummy Mummies, but only if the cereal company pays it $10,000 per store.

Some people would call that extortion. In the grocery business, it=s called requiring a Aslotting allowance.@

The term refers to the cash or merchandise many grocery stores now demand before they=ll carry a new product. The practice has become increasingly common since the mid-=80s. It=s not been declared illegal C except in the case of alcohol beverages C but it is controversial, with some critics saying slotting allowances lead to higher consumer prices.

They probably have, according to a study by a trio of marketing professors. But it=s not clear from their findings whether slotting allowances are all bad.

The researchers, who included Notre Dame=s Gregory T. Gundlach, associate professor of marketing, surveyed more than 800 managers of grocery manufacturers, retail stores and wholesalers and found predictable disagreement over the fairness of slotting allowances. Retailers said the fees help offset some of their costs of adding new products. Manufacturers appeared to think it more likely that the fees exceed the stores= costs and that large grocery chains set fees especially high because they know they have manufacturers over a barrel.

The manufacturers also said they think slotting fees have driven some manufacturers out of business and have kept some worthy products off store shelves. Store managers disagreed.

Ideally a store decides which items to stock based on what it thinks will sell the best. Identifying reliable sellers is especially crucial in the grocery business because profit margins are tight C typically 1.5 percent, according to the researchers. The constant introduction of new products coupled with limited shelf space makes decisions about what products to carry all the more difficult.

Supporters of slotting allowances argue that the fees function to screen new products. The theory goes that a manufacturer will be willing to pay a price for shelf space only for those goods it has researched thoroughly and is sure will sell well.

Slotting fees definitely ought to be an incentive for effective market research. According to a report cited by the researchers, the fees account for an estimated $9 billion in annual promotional expenditures, or 16 percent of all new product introduction costs.

However, neither the manufacturers nor the retailers surveyed saw slotting fees as a good predictor of product sales. In other words, slotting allowances don=t seem to screen the hot new products from the dogs.

The retailers and manufacturers also agreed that slotting fees have resulted in higher prices being charged by retailers for products that were subject to slotting fees.

That doesn=t necessarily mean slotting fees have produced higher grocery bills, though. As the researchers explain, ASince retail profits have not increased during the time when slotting fees emerged . . . it is likely that retailers are passing these new revenues on to consumers by more aggressively pricing other products.@

The researchers stress that their study was of an exploratory natures. More research is needed, they say, to determine whether slotting allowances hinder competition and should be outlawed.

Their study was published earlier this year by the Marketing Science Institute. An article summarizing their findings has been accepted for publication in the Journal of Marketing in early 2000.

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