From mid-1980s, it became normal practice for grocers to charge grocery manufacturers a slotting allowance for keeping products on the retail shelf. It is Estimated that the annual cost on slotting allowances range from 6 to 9 billion US dollars, accounting for about half of product promotion expenditures by manufacturers As a proportion of product introduction costs, slotting allowances represent 16%, which is almost the same percentage spent on research and development.
The amount charged per new product is negotiated on an individual basis and may range from a few thousand to a million dollars, depending on the product, the size of the manufacturer, retail chain, and whether the chain is regional or national (Pyle, 1995). To manufacturers, the allowances represent evidence of retailer market power. Smaller manufacturers, in particular, consider them as a surrogate for retailer price discrimination in favour of their larger rivals, and as a cost-raising strategy by larger manufacturers to “muscle out” the smaller ones.
To retailers, the allowances are compensation for the risks associated with adding new products to inventory. (Source:http://digitalcommons. unl. edu/cgi/viewcontent. cgi? article=108&context=ageconfacpub) 1. 1 Case Study: China, Year 2003 Conflict between the Shanghai Seed and Nut Roasters Association & Carrefour in China. Slotting allowances that Carrefour demanded from the roasted seed and nut manufacture (SSNRA) caused discontent to the extent that it was officially declared that manufacturers of the association would stop selling to the 34 stores of Carrefour.
Later the issue was resolved secretly, and according to the Chinese media report slotting allowances of Carrefour paid by the SSNRA, included payments for French Holiday celebration, Chinese holiday celebration ,entrance fee for new items, store maintenance fee ,shelf space management and many more. Slotting allowances helped to raise Carrefour’s profit, at the cost of manufacturers and small retailers, benefiing the consumers of Carrefour.
But raising small retailers cost ,and making customers of small retails pay more. Source: 1. 2 Why are slotting allowances used? Slotting allowance are used to cover the considerable costs to introduce a product, to remove item that previously occupied the shelf space and to recover some of the investment in the likely event that the new product fails. Depending on how a new product is defined, the failure rate ranges up to 80% per year.
Supermarkets pay for products and presume the risk that consumers will buy them. When a new product fails, the cost includes the dollars lost from the item that had to be dropped to make room for the new product. According to a study of 1995 by market research firm Linton, Matysiak and Wilkes food retailers spend an average of $956800 per store on new products that fail. The major reason for failure being is lack of market research, thus manufacturers are using retailers to test new products.
Thus through slotting allowances manufactures are having the retailer conduct a live market trial instead of paying for test market research. 1. 3 Why are new product introductions so costly? According to a 2000 paper published in the Journal of Marketing (“Slotting Allowances and Fees: Schools of Thought and the Views of Practicing Managers,” by Paul N. Bloom, Gregory T. Gundlach and Joseph P. Cannon). The first or “efficiency” school, say the authors, believes that slotting allowances: • Signal product quality and help retailers screen products.
• Allocate the costs and risks associated with product introductions more equitably between trading partners. • Help retailers allocate shelf space more effectively. • Offer shelf space opportunities for valuable new products. • Facilitate lower retail prices. “Market power” school of thought argues that slotting allowances: • Enable retailers to exercise market power. • Undermine trading partner relationships. • Provide a mechanism for price discrimination. • Foreclose competitive opportunities for certain manufacturers and retailers.
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