It is no secret that physical retailers are in the real estate business. Thousands of CPG brands are vying for retail shelf space, which is a retailer's strategic asset. Retailers are very meticulous about which new products they are willing to stock in their stores in an environment with razor-thin margins. Due to the high demand for shelf space and even higher risk of products failing to sell in sufficient volume, CPG brands frequently pay a high price to get their products into stores, obtain premium placement, and run promotions. Suppliers across many food and beverage categories often pay a substantial slotting charge, regardless of the size of their business, in order to have their products put on shelves. For example, a new energy drink brand may need to pay a slotting fee of $50,000 just to get its product on the shelves of a popular grocery chain. On top of that, they may need to offer discounts, promotions, and additional advertising support in order to secure prime shelf space and increase their chances of success. This can be a significant financial burden for small startups, leading many to turn to online sales channels instead.
When choosing which products to carry on their shelves, retailers consider customer demand, profitability, and brand reputation. For instance, a retailer may choose to stock a well-known snack brand with a loyal customer base over a new, untested product that has yet to establish itself in the market. Additionally, retailers may consider the profitability of a product, such as the margins they can make from selling it and the potential for add-on sales.
While prevalent, neither the requests nor the offers for these allowances are consistent. Without slotting allowances, well-proven, innovative merchandise can and does reach consumers. For suppliers from their local communities and minority vendors, many supermarkets often forgo these fees. This decision is typically made upon completion of a range review process, after the category manager is persuaded that a product has the potential to generate sales and profit. The typical slotting fee is $1,500 per store and per SKU. A CPG's bottom line will be significantly impacted by listing these products in a 150-store retail chain, given that a range review may introduce 7–12 new SKUs. Keep in mind that paying slotting fees alone won't increase sales if you don't guarantee constant shelf availability.
It is important to note that not every product category is equally affected by slotting charges. Retailers do not require slotting fees from suppliers of perishable goods and basic commodities like sugar, flour, and oils. Products that require refrigeration, special storage, and handling are usually assessed higher fees for slotting and listing.
The path to securing shelf space involves building strong relationships with retailers and offering unique product features, innovative packaging, and consistent in-store marketing support. Strong relationships begin with understanding your partner's reasons for charging the fee in the first place.
The primary drivers behind the slotting charges are to compensate for the high costs of product launch, remove the item from the shelves, and recover some of the investment in the highly likely event that the new product fails. Retailers do require a safety net to cover the failure rate of new product debuts, which can reach 90%. Suppliers do not place products on consignment in supermarkets, as in many other industries. Supermarkets purchase goods and take the chance that customers will purchase them. The money lost from the item that had to be discontinued to make way for the new product is included in the cost when a new product fails. According to market research company Linton, Matysiak & Wilkes, food retailers spend an average of $956,800 annually per store on new goods that don't succeed.
The major reason cited for failure is a lack of market research. In many cases, manufacturers are using retailers to test-market new products. Through slotting allowances, manufacturers are, in effect, having the retailer conduct a live field marketing trial instead of paying for test market research.
In effect, if a large part of the slotting fee is for outsourcing market research to the retailer, a much more economical alternative is available to the CPG brands: an in-store sampling of their products to actual shoppers. When the very first retail partner is secured, and the products are on the shelves, a carefully planned in-store sampling event can generate very valuable information to foretell the success or failure of the product very accurately at a substantially lower cost than a slotting fee. Moreover, in-store sampling also provides an opportunity for CPG brands to interact with potential customers and receive immediate feedback, which can be used to improve the product and increase its chances of success in the market. This approach saves costs and creates a more direct and personal customer experience and connection between the brand and its target audience.
Because they conduct in-depth market research and invest heavily in advertising to promote new products, many large manufacturers have a strong policy of not paying slotting allowances. However, this policy can make it more difficult for smaller, newer brands to get their products on store shelves. As a result, some retailers may require slotting allowances from these brands in order to offset the risk of carrying a new product.
Developing a strategy for how you’ll approach negotiations with retail buyers is paramount to slotting success. Suppliers have some control over the final amount of slotting fees they will be required to pay, regardless of the size and breadth of the retailer. Suppliers will want to discuss logistical issues, their sales and marketing strategies, and brand authority during the pitch. That is where Grapevine Marketing Solutions can be a valuable partner, helping to amass critical evidence of customer acceptance of the new products. If retailers decide to carry your brand, they need evidence that it will be successful, and we can help provide it.
Dealing with large retailers frequently entails paying slotting fees. Suppliers do have some control over the amount they are paid for a spot on the retail shelf, though. Take on these discussions when you first meet with retailers. Bring data to the table and demonstrate to category managers what customers think about your brand and how willing they are to buy your product.