MEAN4b: Research Slotting Allowances and Failure fees using Google Scholar and Google. Create a discussion of the ethics/legality of this practice. Why does it exist? Whom does it hurt?
When this MEAN was assigned I wasn’t really sure what slotting allowances were, but the fact that the question was on ethics and legality sparked my attention. I find the most interesting topics in business to involve ethics and legal practices. Well, with some research and Google Scholar my findings showed that slotting allowances are “lump-sum advance payments made by manufacturers to retailers for stocking their new products” (Sullivan) Slotting allowances are a semi-new concept since they did not exist prior to 1984, but are currently an important component in agreements on pricing and promotions between a manufacturer and retailer. They have been the topic of much discussion because some say that they are illegal and leading us to a monopolistic market-structure.
Slotting allowances can be traced back to the 1980’s. The grocer industry first started giving retail grocers more power to control their suppliers while manufacturers had overwhelmed their grocers with new products. This is when grocers had required some of their manufactures to make cash payments if they wanted access to the stores shelf space to display their new product. It was in 1987 that the estimated trade promotion budget of grocery manufacturers was $6-9 billion. (Cannon) According to the FTC report (2003), the average amount of slotting allowances per item per retailer and per metropolitan area range from $2,313 to $21,768 depending on the retailer and the area. As far back as 1987, Advertising Age claimed that some large retail chains charge “upward of $100,000 for each product stocked.” I thought we lived in an oligopoly? Obviously businesses have the authority to begin the stages of converting our oligopoly to a monopoly.
Looking at the power that slotting allowance has on retailers and manufacturers, these private negations create barriers for small manufacturers compared to larger ones. It has been discussed that these negations between retailers and large manufacturers make it more difficult for smaller manufacturers to obtain shelf space because they are unable to pay slotting allowances. The retailers can then exclude the smaller manufacturers which only end up monopolizing the overall market. Not only can slotting allowances lead to monopolization of the market but it can create a more distinguished outline of price discrimination, which would favor the large and dominant buyers over smaller ones. Slotting allowances gives large grocery chains the ability to take the funds they have obtained from the large manufacturers and finance competitive behavior that could ultimately kill small retailers. If these things were to take place because of slotting allowances the consumers would end up suffering the most. Grocery prices would increase or the inventory of goods within each store would greatly diminish.
Even though slotting allowances create a fear that these negations will lead to a monopolistic economy, they do however create positive aspects for retailers. Slotting allowances help to locate and fill scarce shelf space, balance the risk of product failure between the retailer and manufacturer, allow the manufacturer to gain private information about the impending success of their new product and help to expand a manufacturer’s retail distribution by alleviating any retail competition. All of these aspects, which have been inspected by the Federate Trade Commission, were considered in the FTC’s decision on whether or not to completely ban slotting allowances. Much to my surprise slotting allowances are being used in numerous categories; including, dry groceries, household maintenance products, snacks and beverages while deli, product and fresh meats and fish are only using “light” slotting allowances. This is shocking when the entire industry is comprised of these few categories. We think about a retail environment that encompasses one to two manufacturers that produce a single product each and one to two retailers that may carry one, both or neither or these products. The desire to be the most shopped at retailer and most bought out manufacturer create a great need by retailers, and manufacturers to participate in slotting allowances.
After reading the background and legality of this practice, I had found that this system is almost “black market” type. There is a little systematic data that can be found on Slotting Allowances because these transactions between manufacturer and retailer are negotiated privately and the firm involved does not report these transactions. I don’t find this system to be legal in anyway. Retailers can require large payments by manufacturers for shelf space, large manufacturers can out-buy small manufacturers for shelf space, small retailers diminish because they can’t compete with the slotting allowances by large retailers and the consumers’ are the ones who end up suffering. If we want to continue to live in an oligopoly market structure then sooner or later we must regulate slotting allowances.
The question that one might ask about these agreements taking place is do they violate the antitrust laws? The answer is no. Since the FTC has semi-regulated the negations which, by law, makes slotting allowances legal. From an outsider's view I find that slotting allowances needs to be reexamined as to if it truly does not violate antitrust laws before our market has gone monopolistic. The people and decisions that make up a successful economy are the consumers and smart business practices. If the retailers and manufacturers are not participating in ethical business practices (charging one manufacturer for shelf spaced based on their size compared to charging another manufacturer a different price based on size) then the consumers end up being able to purchase these retailers good ultimately causing the economy to suffer. Next time you are at a grocery store and you pick up an item off the shelf think about how much a manufacturer just paid to have their product sitting on that shelf.
If you are looking for a great article on the controversy of slottign allowances I attached one below.
http://www.ftc.gov/bc/slotting/comments/009christopherjmacavoy.pdf
Happy Shopping!
Tiffany
Sources:
When this MEAN was assigned I wasn’t really sure what slotting allowances were, but the fact that the question was on ethics and legality sparked my attention. I find the most interesting topics in business to involve ethics and legal practices. Well, with some research and Google Scholar my findings showed that slotting allowances are “lump-sum advance payments made by manufacturers to retailers for stocking their new products” (Sullivan) Slotting allowances are a semi-new concept since they did not exist prior to 1984, but are currently an important component in agreements on pricing and promotions between a manufacturer and retailer. They have been the topic of much discussion because some say that they are illegal and leading us to a monopolistic market-structure.
Slotting allowances can be traced back to the 1980’s. The grocer industry first started giving retail grocers more power to control their suppliers while manufacturers had overwhelmed their grocers with new products. This is when grocers had required some of their manufactures to make cash payments if they wanted access to the stores shelf space to display their new product. It was in 1987 that the estimated trade promotion budget of grocery manufacturers was $6-9 billion. (Cannon) According to the FTC report (2003), the average amount of slotting allowances per item per retailer and per metropolitan area range from $2,313 to $21,768 depending on the retailer and the area. As far back as 1987, Advertising Age claimed that some large retail chains charge “upward of $100,000 for each product stocked.” I thought we lived in an oligopoly? Obviously businesses have the authority to begin the stages of converting our oligopoly to a monopoly.
Looking at the power that slotting allowance has on retailers and manufacturers, these private negations create barriers for small manufacturers compared to larger ones. It has been discussed that these negations between retailers and large manufacturers make it more difficult for smaller manufacturers to obtain shelf space because they are unable to pay slotting allowances. The retailers can then exclude the smaller manufacturers which only end up monopolizing the overall market. Not only can slotting allowances lead to monopolization of the market but it can create a more distinguished outline of price discrimination, which would favor the large and dominant buyers over smaller ones. Slotting allowances gives large grocery chains the ability to take the funds they have obtained from the large manufacturers and finance competitive behavior that could ultimately kill small retailers. If these things were to take place because of slotting allowances the consumers would end up suffering the most. Grocery prices would increase or the inventory of goods within each store would greatly diminish.
Even though slotting allowances create a fear that these negations will lead to a monopolistic economy, they do however create positive aspects for retailers. Slotting allowances help to locate and fill scarce shelf space, balance the risk of product failure between the retailer and manufacturer, allow the manufacturer to gain private information about the impending success of their new product and help to expand a manufacturer’s retail distribution by alleviating any retail competition. All of these aspects, which have been inspected by the Federate Trade Commission, were considered in the FTC’s decision on whether or not to completely ban slotting allowances. Much to my surprise slotting allowances are being used in numerous categories; including, dry groceries, household maintenance products, snacks and beverages while deli, product and fresh meats and fish are only using “light” slotting allowances. This is shocking when the entire industry is comprised of these few categories. We think about a retail environment that encompasses one to two manufacturers that produce a single product each and one to two retailers that may carry one, both or neither or these products. The desire to be the most shopped at retailer and most bought out manufacturer create a great need by retailers, and manufacturers to participate in slotting allowances.
After reading the background and legality of this practice, I had found that this system is almost “black market” type. There is a little systematic data that can be found on Slotting Allowances because these transactions between manufacturer and retailer are negotiated privately and the firm involved does not report these transactions. I don’t find this system to be legal in anyway. Retailers can require large payments by manufacturers for shelf space, large manufacturers can out-buy small manufacturers for shelf space, small retailers diminish because they can’t compete with the slotting allowances by large retailers and the consumers’ are the ones who end up suffering. If we want to continue to live in an oligopoly market structure then sooner or later we must regulate slotting allowances.
The question that one might ask about these agreements taking place is do they violate the antitrust laws? The answer is no. Since the FTC has semi-regulated the negations which, by law, makes slotting allowances legal. From an outsider's view I find that slotting allowances needs to be reexamined as to if it truly does not violate antitrust laws before our market has gone monopolistic. The people and decisions that make up a successful economy are the consumers and smart business practices. If the retailers and manufacturers are not participating in ethical business practices (charging one manufacturer for shelf spaced based on their size compared to charging another manufacturer a different price based on size) then the consumers end up being able to purchase these retailers good ultimately causing the economy to suffer. Next time you are at a grocery store and you pick up an item off the shelf think about how much a manufacturer just paid to have their product sitting on that shelf.
If you are looking for a great article on the controversy of slottign allowances I attached one below.
http://www.ftc.gov/bc/slotting/comments/009christopherjmacavoy.pdf
Happy Shopping!
Tiffany
Sources:
Kuksov, Dmitri, Pazgal, Amit. "The Effects of Costs and Competition on Slotting Allowances" Washington University in St. Louis. July 2005.
Are Slotting Allowances Legal under the Antitrust Laws?
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