Slotting, and other "food industry" practices

[phaelon56]

There is a fair amount of "sure we can drop off a keg for the next crawfish boil at your house, we'll just leave it in the cooler at the store" and other small favors involving product.

It's a known fact in my area that beverage distributors who don't "offer" some free beer for grocery store employee picnics etc. often find themselves with reduced amounts of cooler space a few months later.

I'm not condoning or condemning the practice but I am curious as to why it's so widelly practiced, accepted and considered as legal yet radio industry payla was a huge scandal and the practice was outlawed (I'm well aware that industry play lists are still "influenced" in many ways but outright payola is in fact against the law).

[Mayhaw Man]

I work at Central Market in Austin, Texas. It is probably the best grocery store in the USA, in terms of fresh product and choice ( check out the website, centralmarket.com). I work in the Specialty Foods department. Our 7 aisles of specialty foods has about 150,000 products, including 125 olive oils.I am the product and customer service expert.

We carry lots of local lines of product: Hudson's on the Bend, One World, Austin Slow Burn, Texas Texas, Stubbs, Hell of a Relish, Alberto's, New Caanan Farms, Fischer and Wieser, Bee Cave Honeys.....

We carry lots of American products and lots of European: our out-of-state products mostly come in through brokers. The brokers ( Tree of Life, Gourmet Awards, European Imports, to name the largests) present new product to our procurement team on a monthly basis. Once the product is tasted and compared, and once it is determined that it will contribute to our mix, it is ordered.

When the product arrives, we get the opportunity to place it on the shelf. It will usually get one skew per flavor. ( As in a line of bbq sauces)The vendor then has the option to pay for demos. (Sometimes I will do a demo if I think the product will sell: the product I use in the demo is credited out to the vendor.) The fee is minimal, in my opinion. If the demo is successful after a period of time, that product will be in demand ( case in point, Soy Vay Teriyaki Sauce) and it gets a side stack....maybe even an endcap.

Local vendors who rep their own product reap what they sow. I don't care how wonderful their stuff is, if they don't offer it to be sampled, it won't sell. The aggressive vendors are welcomed in our store. We love to have their product sampled, and are happy to give them prime real estate on the shelf, if they have earned it. There will be anywhere from 4 to 8 vendors sampling on weekends.

Basically, our goals are the same....to sell product!!

Central Market (the main store in Austin anyway) is the greatest grocery store in the history of the Western World. I love that place.

[fresco]

Slotting fees are one thing, but there have always been whispers about payola and kickbacks to buyers in retail, including the grocery business.

Wal-Mart, I believe, fights this by prohibiting their buyers from so much as having lunch with vendors. Think the setup is they meet across a table or desk in a grim little room at headquarters in Benton and the conversation consists of the buyer asking how much less the vendor can supply an item for than he did last year.

[Moopheus]

(I'm well aware that industry play lists are still "influenced" in many ways but outright payola is in fact against the law).

I get the impression that in most businesses, the main difference between legal and illegal payola is whose pocket the money ends up in and the route it takes to get there. But it's still pay for play no matter what you call it.

Toliver said:

How many products are in the average suburban US supermarket? 10 or 20 thousand? More? I hardly think lack of choice is a problem.

Of course, it's about choice. How many cable channels do you have and yet how many suck?

So what if there's 20,000 items in the grocery store?

When I go into a supermarket, it seems like most of the boxes on the shelf contain some mixture of sugar, hydrogenated vegetable oil, and corn starch, extruded into various shapes and colors. Can hardly buy anything in there any more.

I have to give my local Key Food some credit, though, since partly due to the presence of a fair number of British ex-pats in the neighborhood, they are relatively well-stocked with UK imports.

[Mayhaw Man]

Wal-Mart, I believe, fights this by prohibiting their buyers from so much as having lunch with vendors. Think the setup is they meet across a table or desk in a grim little room at headquarters in Benton and the conversation consists of the buyer asking how much less the vendor can supply an item for than he did last year.

My understanding is exactly the same as yours.

I have a couple of friends who live in Fayetteville (including my brother, as well), these two guys sell for Makita Power Tools and Wilson Sporting goods respectively and their ONLY customer is Wal Mart. Period. They call on no other accounts. I believe that if you start hitting the North Arkansas Phone directory and typing in a search for any major brand in North America, you will pretty much find a local listing. They all do business the same way as you described it.

How many can you sell us and how much cheaper will it be than last year?

Can't blame them for asking , I guess.

[Fat Guy]

Costco, Sam's Club, and BJ's don't only stock items from the major manufacturers. They're often more receptive to small brands than supermarkets. Every Costco I've ever been to -- and that's probably 50 or more Costcos -- has space set aside for local products with limited distribution. At the Costco in Yonkers they're often sampling kosher cheesecakes or whatever from local area producers. It's well established in the food business -- I've heard this from at least a dozen producers -- that the warehouse stores are great places to go with new products in order to establish market share. That market share can then be parlayed into shelf space and lower slotting fees at mainstream supermarkets.

[Mayhaw Man]

Costco, Sam's Club, and BJ's don't only stock items from the major manufacturers. They're often more receptive to small brands than supermarkets. Every Costco I've ever been to -- and that's probably 50 or more Costcos -- has space set aside for local products with limited distribution. At the Costco in Yonkers they're often sampling kosher cheesecakes or whatever from local area producers. It's well established in the food business -- I've heard this from at least a dozen producers -- that the warehouse stores are great places to go with new products in order to establish market share. That market share can then be parlayed into shelf space and lower slotting fees at mainstream supermarkets.

From my above post

Thankfully it kind of snowballed from there and we ended up in most of the other chain stores, including Wal Mart (they called us, which was apparently a good thing because getting stuff in those stores is very, very difficult) which led both the root beer and the beer lines into the Sam's Wholesale chain and they eventually became our top retailer in the area.

Exactly. It serves them to have local stuff (here in South Louisiana they are usually one of the first places to have satsumas and navel oranges from Plaquemine Parish. We were a very small company and only dealt

with them on a regional level and it was always a very simple transaction to make deliveries and pick up the dough.

(they use a system of giant regional warehouses that facilitate their just in time delivery strategy-ever notice that there is virtually no backstore space in those giant markets? That stuff is delivered on demand. When the army was changing their antiquated supply chain of command they went to Wal Mart for lessons on how to do it right).

On the other hand, if you are selling weedeaters or power drills you are going to Arkansas and you are going to sell cheap.

[phaelon56]

Central Market (the main store in Austin anyway) is the greatest grocery store in the history of the Western World.

That's a strong statement. I have long since accepted the fact that Austin is the best music town anywhere anyplace.... now I discover I have to do my grocery shopping there too? Let's add in the fact that Little City Roasting has an espresso blend that totally rocks and is on sale once a week at under $7 per pound (I think you even get a free drink when you buy a pound). It's as good as the stuff I roast at home and when all things are accounted for (weight loss when roasting beans, time etc) it's as cheap as doing it myself.

I think I need to move to Austin.

[Fat Guy]

I get the impression that in most businesses, the main difference between legal and illegal payola is whose pocket the money ends up in and the route it takes to get there. But it's still pay for play no matter what you call it.

I think the distinctions are pretty straightforward. It's like the difference between me paying Barnes & Noble $20 for a book and me paying a Barnes & Noble employee $10 to steal the book from Barnes & Noble on my behalf.

[jhlurie]

Assuming we accept the concept that slotting fees are legitimate business, what about regulation? Are they regulated or controlled in any way, or is it assumed that the forces of competition--the fact that another store nearby with lower fees probably exists--are enough to negate the need?

I do know, thanks in part to that recent Washington Post article on slotting ( http://www.washingtonpost.com/wp-dyn/artic...-2004Jan17.html ) that the FTC has largely accepted slotting fees as legitimate, but knowing that doesn't answer the question of whether they've placed any limits on them. The article suggests not...

[fresco]

If competing grocery chains collaborated to set slotting fees, I would think this might be subject to regulatory action.

[Mayhaw Man]

I could of course as always, be wrong, but I do not believe that slotting fees are regulated at all. The stores are (as Steven said above) selling real estate and looking for the most money per square inch and to that end try to get as much as they can for each inch of shelf front. I pretty much assume that it varies store by store (even differing with individual stores in the same chain) as chains do not carry all of the items as duplicates in each store.

Another thing is that not everybody pays. Some products just have to be there. I do not believe that Ron Zappe of Zapps Potato Chips pays. That product has very strong demand here in South Louisiana and the stores would be hurting themselves if they did not carry them. He may pay now that he has grown, but at the outset they made it very clear they were not playing that game.

I will email him and see if he would like to weigh in on this discussion. Who knows? He might be interested.

[Moopheus]

It's like the difference between me paying Barnes & Noble $20 for a book and me paying a Barnes & Noble employee $10 to steal the book from Barnes & Noble on my behalf.

No, it's the difference between the sales rep paying the buyer to get the book on the shelf, and the publisher paying the chain to get the book on the shelf. Now all the buyer gets is a pile of worthless chotchkes printed with the name of next season's failed bestseller.

[jhlurie]

While I largely buy Steven's logic that the system works (because groceries ARE cheap in the U.S.), I'm not sure I completely buy the comparison to real estate. Even if you are talking about the version of real estate which has to do with the rental of commercial space--the closest analogue I can think of--there's a consistency to real estate which doesn't seem to be present in slotting.

Also, with real estate, there's a far more direct punitive penalty to the landlord if he or she gets too greedy--their space can remain unrented and beyond that can lose it's core market value or desirability if this goes on for too long. I'm not sure that I see a direct analogue to that in the grocery store.

Edited January 20, 2004 by jhlurie (log)

[Mayhaw Man]

I kind of like the real estate comparison.

When price gets too high for one individual to purchase a space, someone else will be willing to step in and purchase. Coke will always buy whatever Pepsi doesn't pay for ( as long as the property is in a valuable neighborhood and the resale value holds up) and I think that would hold true for brands down the line.

If the store is handling the rental of shelf space properly by selling the right amount at the right price for the correct amount of time (as is the case most of the time with Coke and Pepsi-which has been pretty well documented) they will maximize the money they can garner off of each inch of space.

As far as damage to the renter goes, I believe that there is a consistency there. Stores located in desirable areas that draw well heeled patrons who freely spend money are going to be more valuable in terms of shelf space than stores that draw bargain shoppers on limited budgets. As long as the stores are realistic about prices for shelf space as compared to the shoppers ability to purchase, I don't see that there is much chance for damage.

[jhlurie]

Brooks, I made a typo and corrected it above. I meant damage to the LANDLORD--it SHOULD be present and I'm not sure it is in the slotting situation. In the real estate model, a landlord has to risk a consequence to excessive greed--they have to balance a need to maximize their profit with that risk. If you remove the consequence, you remove some of the self-regulative elements of real estate. In the slotting system, the store as a whole is a large enough pool, that I don't think there's much "risk" involved in getting greedy. There will always be another willing vendor, a potential quick change in shelf-space, or something else to absorb the consequences. I'm basically saying that there should be risk, there should be "damage" (only when merited), there should be consequences, and that's what I don't see.

[Mayhaw Man]

Well then we agree.

Nevermind

[ronnie_suburban]

Costco, Sam's Club, and BJ's don't only stock items from the major manufacturers. They're often more receptive to small brands than supermarkets. Every Costco I've ever been to -- and that's probably 50 or more Costcos -- has space set aside for local products with limited distribution. At the Costco in Yonkers they're often sampling kosher cheesecakes or whatever from local area producers. It's well established in the food business -- I've heard this from at least a dozen producers -- that the warehouse stores are great places to go with new products in order to establish market share. That market share can then be parlayed into shelf space and lower slotting fees at mainstream supermarkets.

This is true of Costco in our area too. OTOH, I remember a story not too long ago about Sam's Club making a knock-off of Teva sandles when Teva wouldn't allow themselves to be leveraged by Sam's after the sandals became a popular seller. Pretty sure it ended up in court with Teva winning, but I can't remember for sure. I suppose that risk is present for the manufacturer whether the product is carried at a huge chain or not.

=R=