Slotting Fees 101
Tips for a Win-Win Negotiation
Whether you’re new to the traditional retail grocery industry or a seasoned veteran, slotting fees are a source of frustration and a financial challenge for most CPG brands. However, slotting fees are a grocery industry reality that must be managed carefully to establish a win-win relationship between retailer and brand. The following reading will serve as either a brief introduction for new sales managers or a refresher for experienced managers. It will also offer a few tips and tricks to help close valuable sales while minimizing costs.
In the US they're called slotting fees, in Canada they're referred to as listing fees and in Mexico they are simply called bribes. These are one-time lump sum payments grocery retailers ask CPG brands to pay in return for shelf space in their store(s). The retailer asks for a fixed dollar amount per SKU which is paid to the retailer in several ways (cash, free goods, or invoice deductions). Retailer rationale for why they charge slotting fees includes funds to cover new item data entry costs, labor costs for handling new products from warehouse to shelf and “profit insurance” should the new product(s) fail to sell in their first year. Remember, in order for the retailer to carry your product s/he has to pull an existing product off the shelf that is already selling an replace it with your product. The retailer’s job is to ensure your product brings in more dollars per year than the one being replaced. Slotting fees help make sure the retailer never loses in this swap. You could suggest that retailers with higher slotting fees have faster item turns (stuff sells faster) so they have to charge more to off-set potential new products that fail…in theory this makes sense but in reality, it might not be the case.
As there is no consistent answer as to why retailers charge slotting fees there is also no consistent amount charged from retailer to retailer or what each retailer charges each brand for the same amount of shelf space. Fees vary widely. Why? Because slotting fees are not directly linked to any identifiable retailer expense. If slotting fees were covering actual costs, they wouldn't vary and could easily be assigned to actual costs like labor hours. This lack of transparency is why retail buyers stumble and fumble when asked to explain what the slotting fees cover. Ask your buyer next time you're pitching a new product to explain what slotting fees cover and you will undoubtedly get a vague answer - if one at all.
Most CPG brand sales managers are rightly afraid to challenge slotting fees because they want to win the favor of retail buyers - this is part of the reason why slotting fees remain - fear. “You don’t have money to pay me in exchange for shelf space…then I won’t list your product.”
The very fact that slotting fees are so variable puts this practice firmly into the bribe territory - it is the gifting of money in exchange for favor. Retail category managers and buyers are trained to tactfully justify listing fees if pushed, negotiate for their company's financial gain while at the same time firmly enforcing them when challenged. Lastly, slotting fees are rarely charged on a per store basis. For example, retailers do not charge $10 per SKU per store but rather charge $10,000 per SKU…period. This is a problem for brands because it is common for retailers to charge a fixed listing fee just to be listed but not put the product into all their stores. We have seen cases where brands have paid $30,000 per SKU to be listed in a 1,000-store chain but the retailer only put the product into 120 of their stores. Large established CPG brands don't have this problem because retail buyers know these brands have a lot of resources to ensure the retailer complies with the slotting fee negotiation - meaning they put the product into the agreed number of stores. For small brands with limited resources, it is VERY common for retailers to charge full listing fees but place product into a fraction of their stores. It is easy to confirm if this is a risk during the new item presentation to a retailer…ask the retail buyer point blank how many stores your product will be in…if they are vague and don’t give you a firm answer then you are at risk. This is a massive red flag that should be recognized by all new and emerging brands.
So why then are slotting fees legal? A quick Google search will reveal that listing fees are a legal grey area that lawmakers don't currently debate or challenge. Plenty of healthy debates occur amongst brands during CPG industry tradeshow cocktail hours, but in the end slotting fees remain a reality in traditional grocery. Slotting fees reward the retailers at the expense of brands and ultimately consumers. These lump sum fees fall right to the bottom line of retailers' P&Ls and brands that choose not to pay simply don't play.
Some retailers like Gelson's in Southern California have turned listing fees into a profitable business. Gelson's quickly lists virtually all new products/brands that are presented to their category managers. They charge very high listing fees per SKU, but they do place these products into all their stores. Gelson's knows that most (80%) of these new products will fail. But since they charge very high listing fees up front they don't care. The products that fail after six months are delisted and new ones are brought on. Gelson's will always make money. They have 27 stores; they usually charge $2,500 per SKU ($93 per SKU per store). This covers the profit Gelson's makes on an average item selling in a store over half a year. Think about it, the $93 charged goes right to Gelson's bottom line. Grocery stores on average sell between 30,000-60,000 SKUs, so say a Gelson’s store has about 35,000 SKUs and 5,000 are dedicated to new SKUs. 5,000 x $93 = $465,000 pure profit in 6 months for a store on top of any sales revenue…nice.
In Gelson's defense, they have helped establish some amazing brands by giving them shelf space when no other retailer would. Gelson's is also a very interesting shopping experience because they have a very cool assortment of new and unique products not available anywhere else. If you go into the Safeway across the street from Gelson's it’s a brutally boring shopping experience vs what you will enjoy at Gelson's. Shop Gelson's next time you're in the LA area – you’ll be happy you took the time to visit Gelson’s.
So, which retailers charge slotting fees? The retailers that typically charge slotting fees are traditional grocery retailers with a "high-low" price model. For example, Safeway/Albertson's, Food Lion, Sprouts, Whole Foods, Loblaw, and Sobeys are all examples of retailers using "high-low" pricing. Costco and Walmart are examples of retailers that do not charge slotting fees because they use different price models. You need to know the price model the retailer you are pitching to uses before starting down the new product presentation road. If you don't know what the different grocery price models is you are dealing with you need to stop and read more Ghost Tree Sales blogs…you aren't qualified to present to the grocery channel. Then, once you know the different price models you need to understand the tactics used when presenting within each model.
Let’s address retailer transparency as this is important. Not all retailers embrace a retailer-manufacturer win-win philosophy. Often retailers with large market share (ie., Loblaw in Canada) have little to no incentive to be transparent with suppliers (brands/manufacturers). These suppliers must do business with this large retailer in order to be competitive in the Canadian market. Even more challenging, retail buyers that are new, ego driven or slightly dim-witted are also likely to be opaque because the benefits of data transparency for their business are beyond their understanding/abilities. Walmart is data transparent. Walmart by way of their Retail Link reporting software gives their brand partners rich store/sales data (like the # of stores each SKU is placed in) which enables these brands to help optimize efficiencies and sales on Walmart's behalf in many ways. Data transparency helps Walmart suppliers sell more product through Walmart stores which means Walmart earns more money. Conversely, since we're picking on Loblaw…Loblaw charges high fees for access to their store/sales data that most brands can't afford which enables Loblaw to take advantage of smaller brands with stunts like final store placement of new products that is far below what was negotiated and paid for by the brand. By the way, Walmart is data transparent and does not charge slotting fees.
Below are 10 Do's and Don'ts for sales managers when managing slotting fees:
First, always confirm what the slotting fees are before wasting time and money presenting products to a retailer. If slotting fees are too high for your budget, don't waste resources sending samples, writing sales decks, and traveling to retailer category review meetings. If on the other hand, your business can afford the slotting fees your business has probably graduated to the level where it is ready to drive sales through the account. There is nothing worse for both brand and retailer when new products are accepted by a retailer only to learn that the brand cannot or will not pay the required slotting fees.
Don't be afraid to tell the retailer what you are willing to pay after the slotting fee has been quoted. You can usually (always) negotiate these fees down. If you do not ask for lower fees you don't get. It's that simple.
Always confirm how many stores (doors) each of your SKUs will get in return for paying the slotting fees. Have your retail buyer IN AN EMAIL confirm the number of stores you are getting per SKU in return for buying the shelf space (paying slotting fees). It is important to have written confirmation because retailers often conveniently forget what they promised when it comes time to put product in their stores. It is also very common during new item presentations for retail buyers to not disclose or pretend they don't know the number of stores each of your new SKUs can or will be slotted into in exchange for paying slotting fees. This is a game - retailers want to get as much as they can while giving little. It is in the best interest of the retailer to get the largest slotting fee possible which can be increased by placing products in less stores than negotiated. For brands, a $30,000 listing fee for one product going into 1,000 stores is much easier for a brand to digest compared to 200 stores ($30/store/SKU vs $150/store/SKU). Again, get your buyer to confirm in an email how many stores s/he is giving you per SKU. If the buyer pretends s/he doesn’t know or keeps dodging the question, this is a red flag - be sure to tell the buyer politely yet firmly in an email you will not pay the slotting fee until you know in advance the number of stores you are getting PER SKU prior to shipping.
Confirm with your retail buyer how s/he will validate for you how many stores each of your SKUs has been slotted into once the new plan-o-gram drops (product is placed in stores). Buyers/category managers can produce shipment reports or movement reports to validate you have been given what you paid for with the slotting fees. This report can be a free one-time report that is emailed to you several weeks after the store(s) shelf reset has finished and your product(s) are on shelf. Know that it is becoming increasingly common for retailers to quickly grab slotting fees but not honor the agreement by placing product into far less stores versus what was negotiated. As noted above, not all retailers are the same because some are more transparent than others. Retailers with robust sales portals that manufacturers have free access to (i.e., Schnuck’s) are transparent. It is easy for sales managers to confirm how many stores have their products on shelf with these transparent retailers. Other retailers are not transparent and will make it difficult for brands to validate distribution. (Based on experience, Loblaw in Canada is the worst offender here followed closely by Safeway/Albertsons).
You don't want to pay slotting, but since you often have to pay to play it's helpful to have industry benchmarks. You don't want to pay slotting fees costing more than your product wholesale price to the retailer (calculated per SKU per store). For example, if your product costs you $20 per case to make, you don't want to pay slotting to a retailer costing more than $20 per store per SKU. This is a good benchmark so you can be confident you have negotiated a reasonable deal. For center store shelf stable grocery items, we typically see $20 per SKU per store as the maximum amount that should be paid regardless of the wholesale price of the product.
Negotiate free secondary (out of aisle) merchandising programs to increase the initial amount the retailer buys to off-set slotting fees. The more the retailer buys on the first PO effectively lowers your slotting fee per SKU and thus the faster you will break-even. This is often challenging if you are a small or new brand because retail buyers will tell you they would prefer to give valuable secondary display space to larger and/or proven brands. This makes sense from a retail perspective. But again, you don't ask you don't get.
Be a responsible and realistic owner/sales manager that firmly lives in reality. Chances are if your business can't afford listing fees for a particular retailer it is probably because you're not ready to do business with that retailer. You're too small. Continue selling to smaller retailers with a lower cost of entry until your business can afford the larger lump sum slotting payments charged by larger more valuable retailers. Don't waste energy being resentful towards slotting fees. You can't change the industry so focus your energy on things you can control like closing more doors and driving sales velocity with retailers you can afford. Listing fees are a very real part of doing business in North American grocery and if you are not willing to pay you don't play. Someone else will. As a footnote to new brand owners – do not tell your brokers how great your product is and that retailers should list it because it is great, and you know the retailer will make money selling the product. Don’t insist to your broker that they must close a retailer that charges slotting fees without paying any slotting fees. You love your products, but chances are if you’re new you’re the only one. You must pay to play…particularly if you’re new and unproven.
A free fill is a slotting fee - DO NOT pay BOTH slotting fees and a free-fill. We see retail buyers try this on for size often with new brands. It is always one or the other, but never both. Some retailers will ask for one free case per SKU per store as a first order (or in some cases half a case). This is a free fill and will always suffice as your slotting fee payment. It could be argued that a free fill is a more favorable agreement vs paying cash for brands because the value to the retailer is calculated using their retail price to consumers while the cost to the brand is calculated using COGS. You get more bang for your trade-spend buck by giving a free fill.
Pay in tranches. If a retail buyer refuses to bend on the slotting fee amount and you know you can't pay the full amount upon listing - request that you pay half when the product goes on shelf and the 2nd half at a later date. Again, you don't ask you don't get.
If you have done a good job building your brand and it is outperforming the category where listed, you have all the negotiating power. Particularly if the retail buyer contacts you asking to list your product(s). The managers of both the Sweet Prairie Haskap brand and the Majestic Garlic brand do such a good job of driving sales velocity at independent retailers and regional chains, they find themselves in the rare position of being able to say no to slotting feels with larger retailers. Retailers want the brands because they know they will add incremental sales dollars to their respective categories if they swap them out with slower moving items already on their shelves. Retail buyers for these brands are willing to forgo listing fees because they know they can make good money simply selling these products. They are low risk because the brands have worked hard to drive consumers awareness, trial and adoption. They don't need slotting fees to mitigate the risk that these new products may not perform in their stores. Retailers can go ahead and confidently pull slower moving items off their shelf and replace them with Sweet Prairie Haskap and Majestic Garlic because they know they will sell. In the end, if you work hard and properly build your brand you should be in this position too…otherwise you will always have to negotiate listing fees. Do so wisely and it helps to have a good broker in your corner.
