Shelf Space: Imagine the customer’s mind as a crowded supermarket shelf. Where does your retail brand sit? Are you front and center? Do you take pride of place at eye level? Are you next to the market-leading brand? Or are you an also-ran, relegated to a dusty spot near the floor? This is one way to think about ‘positioning’, a concept popularized by Al Ries and Jack Trout in their best-seller book–‘Positioning: The Battle for Your Mind’… According to Ries and Trout; positioning is not what you do to a product. Positioning is what you do to the mind of the customer– that is, you position (place) the product in the mind of the customer… According to Jon Bird; positioning is often a two-horse race; that of the market leader and the aspirant (or in less well-defined category, the market leader and the rest)… To position a brand well, you need to know who you are targeting, and you require absolute clarity about what you stand for vis-à-vis the competition… Shelf space may very well be the most precious real estate in the consumer-retail value chain; in some categories, as much as 80% of all purchase decisions are made at the point of sale. Regardless of how much effort went into– product design, promotion… the ‘shelf’ is the point where the consumer meets– the retailer, the brand, the product…
Yet, very little is known about the interaction between the — retailer, brand, consumer… In fact, many crucial shelf space questions are still difficult for many retailers and vendors to answer other than just on the basis of gut instinct, e.g.: How much is the store’s shelf space worth? What products and brands would make the most profitable use of the space? What products and assortments drive the greatest growth at the shelf? How do I make sure that these are the products that customers want? According to Simon Harper; better data about product performance enables retailers to make better stocking decisions. Better stocking decisions, in turn, make it easier to build a strong relationship not only with vendors but also with consumers, as well. Stocking the right products in the right places is a good way to engender consumer loyalty toward both the store and the brand. Everyone wins with good shelf space profitability metrics, e.g., store earns a reputation for carrying a strong assortment of goods that are always available, and vendors can focus on stocking product lines that are recognized as winners…
Economics of Retail Shelf Space Practices: Slotting fee, slotting allowance, pay-2-stay, pay-4-space… is a fee charged for product placement on retail shelves. The fee varies greatly depending on the product, vendor, market conditions… For a new product, the initial slotting fee can vary substantially, e.g.; for regional cluster of stores– it could be several thousands of dollars, whereas in high-demand markets– it could be several hundreds of thousands of dollars… In addition to slotting fees, retailers may also charge promotional, advertising and stocking fees… According to a Federal Trade Commission (FTC) study; the practice of slotting is ‘widespread’ in the retail industry. Many business earn more profit from agreeing to carry a vendor’s product than they do from actually selling the product to retail consumers; although, there are disagreements, for example: According to some retailers; fees serve to efficiently allocate scarce shelf space, they help balance risk of new product failure between vendors and retailers, they help vendors signal private information about potential success of new products, and they serve to widen retail distribution for vendors by mitigating retail competition… However, according to some vendors; slotting fees are a move by retailers to profit at vendors’ expense. Some experts argue that slotting fees are unethical, since they create a barrier to entry for small business that don’t have cash flow to compete with large companies… Slotting fee arrangements have become increasingly important and common in many retail sectors, such as; supermarket, drug stores, bookstores, music stores… In addition to payments for stocking products, slotting payments are made for special displays or preferred locations, such as; end-of-aisle displays in supermarkets, placement of books on tables in bookstores, promotion of particular songs at listening posts in music stores…
Some industry experts say that these allowances raise consumer prices… more important, small vendors are being crushed by the practice. But the Federal Trade Commission (FTC) says it has not challenged slotting allowances because it lacks evidence that they are anti-competitive in a universal sense or harmful to consumers… According to Greg Shaffer; slotting allowances, include a broad range of expenditures, e.g., ‘slotting fees’ for new products, pay-to-stay’ fees to remain on shelves, ‘facing allowances’ to increase space or improve position and ‘street money’ for aisle displays… No one knows precisely how much retailers collect in slotting allowances, but some estimates range between $6 billion and $18 billion a year… According to Marianne M. Jennings; this practice is sort of under the table and sort of not, but the practices seems to be growing… Some retail chains have flat fee, e.g., $5,000 for product introductions and other retailers may have a graduated fee schedule tied to location with ‘eye-level’ slots costing more than ‘knee-or ground-level’ spots. Spaces at ‘end-of-aisles’ bring high fees because they guarantee attention… Retailers argue that the allowances are necessary to manage the 20,000 or more new products that compete every year– among 50,000 or more items carried by some retailers… According to Edie Clark; about 90% of new products fail or get withdrawn every year, so the issue is who absorbs the cost of failure…
In the article Shelf Space Payments, Retail Bargaining Power by Josh Wright writes: Contrary to the ‘retailer bargaining power’ theories, slotting payments are consequence of the competitive process between vendors and retailers to create highly profitable sales through– the allocation of premium shelf space… This competition between vendors for promotional shelf space is expected to have two main effects: (1) increased shelf space relative to the space they would have without the payment.. (2) change in the distribution of products on the shelves themselves… The data support the theory that shelf space allowances are increasing retail shelf space demand despite the fact that fee sizes have increased over time… The data also suggest these practices are part of robust competitive process, and typically the payments are passed on to consumers. Also, the data shows that large vendors make shelf space payments not only to large retailers, but also small retail niche players with trivial market shares, which is inconsistent with the ‘retailer bargaining power’ theory of slotting… In fact, slotting practices provide retailers with more flexibility to limit shelf space thereby increasing competition between vendors, and thus enabling retailers to increase fees… For example; retailers may grant vendors– exclusive or partial exclusive contract– for committing 85% of a select space for a specific brand in exchange for increased slotting fees. Also, the exclusivity arrangements are an important mechanism for retailers for promoting a specific vendor brand, which can increase the value and base price of the retailers’ shelf space…
In the article Shelf Management and Space Elasticity by Xavier Drèze, Stephen J. Hoch, Mary E. Purk write: Indeed, one of the many challenges facing retailers is how to properly allocate shelf space to the multitude of products they sell. A typical large retailer can carry more than 45,000 different items or ‘stocking keeping units (sku’s)’ on an everyday basis.. A typical chain may take on one-third of these new items each year. Each new product adoption is accompanied with uncertainty regarding the most appropriate location for its display and the optimal amount of shelf space to allocate. Retail shelf space is valuable real estate… Most vendors are willing to pay significant premiums to obtain preferred retail locations on both a promotional and everyday basis. And retailers are more than willing to accommodate vendors for the right price. Vendors spend 45-50% of their promotional dollars on trade promotion, and the vast majority used to secure feature advertising and display space in the form of– front-walls, end-caps, wings, in-aisle gondolas… In many, but not all product categories, retailers routinely charge slotting allowances when taking on new products. Although these fees help to defray costs of adding (and deleting) an item from the system, they also cover the retailer’s opportunity costs for allocating shelf space to one item over another. Some retailers supposedly even charge slotting fees to keep existing items on the shelf… Vendors want to maximize sales, profits… of their products and, as such; always want more and better space to be allocated to their brands. Retailers also want to maximize category sales, profits… regardless of brand identity; and they must carefully allocate a fixed amount of shelf space in the best possible way…
Some of the hottest real estate in the country these days is on retail store shelves. Shelf space allocation is a serious issue in retail business. It’s an important tool for attracting customers’ attention, but getting a product on the shelf is no guarantee that it will sell… According to Daniel Lohman; product placement is key; once you get on the shelf the goals should be to gain optimal product placement, and increase holding power… it’s critical to protect your shelf presence, strengthens the brand image, create additional holding power for future growth... According to Steve Holland; slotting allowances have become commonplace in the retail industry. Right now it’s just part of the way that business is done… Retailers say they need these fees to offset the high failure rate of new products… Also, a retailer or wholesaler can’t afford to tie up a warehouse slot or shelf space on items just because the vendors introduced them to see if they’re going to sell, or not…
According to Bob Schmitz; most of the so-called product introductions that retailers see, frankly, aren’t truly new at all. They’re a new flavor, new size, or new form of a similar product... Behind the deluge of new products is insecurity, i.e., companies introduce more products because there is less likelihood that any one of them will be a success. The idea is to get the product funnel very big on the early end, and do a lot of test marketing and evaluation, hoping that low percentage of success will not work against you… According to a FTC study; a rough estimate of the slotting allowance required for a nationwide introduction of a new product– assuming that a nationwide introduction would require distribution to 85% of retail outlets and 85% of these outlets would receive a slotting fee– the data suggest that cost could range from a little under $1 million to over $2 million, depending on the product category…
Credits: This Article War for Retail Shelf Space; Battle for Shelf Placement; Fight for Slotting Fees: It’s All About– Pay-4-Space, Position, Leverage… Originated From WebSite BizShifts-Trends.