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Interesting reactions to the ongoing debate about slotting allowances.

One MNB user wrote to respond to another MNB's missive decrying slotting fees:

With regard to the Byerly's/Lund's Buyer's comment about slotting fees... if he/she would check their SUPERVALU retailer statement they would find that when there are slotting fees available from the manufacturer on new items SUPERVALU passes those monies through to the stores that order the new items as a "first-time" buy. The slotting money is prorated on a per case basis to provide a lower cost of goods incentive for stores to order the new item for the first time.

Without knowing the specifics, it would appear that these details at the very least are not being effectively communicated with at least some buyers.

Another MNB user wrote:

Re the response yesterday, where someone said "We should not be so naive to think Wal-Mart and Costco don't "have them." They may not call what they get "slotting allowances," but you can bet they get similar (or larger) funds in lieu of them."

I can only say this - Wal-Mart and Costco DO NOT have slotting. I have had multiple clients selling both of these retailers over many years, and slotting has never been charged. They merely ask that you net out the trade funding (not all marketing support) held back for these purposes for other customers.

As for 'similar (or larger funds)', our experience is simply this - Wal-Mart charges NOTHING else once you agree on a dead-net price and promotion levels and frequency. At that point, an item is 'sink or swim' at Wal-Mart. If it sells, it stays; if not, it goes. Manufacturers may choose to run media in Wal-Mart markets to support sales, but Wal-Mart requests nothing more from a trade fund perspective. Costco, after agreeing to a dead net price per item, will request the manufacturer 'build back' some funds for introductory demo's at store level to get the product selling. If, after demo, the product doesn't sustain sales growth, it is deleted. Both of these customers are incredibly fair to deal with, having virtually no hidden charges after the sale, and no 'strong-arming' of additional funds after a deal has been struck. They will resist price increases unless it can be shown that there was a real increase in the cost of goods or transportation.

It appears to me at least, that they make their money by selling items at a fair price and deleting items that fail to sell, replacing them with new items regularly.

Slotting is the 'poop in the punchbowl' in our industry. It's the 'Emperor's New Clothes'.....everyone except Wal-Mart, Costco and a handful of other retailers seem to see it for what it is, or if they do see it, they refuse to tell the truth about it. Let's tell the item sold to Wal-Mart for $1.00 sells to 'slotting' customers for $1.20 or more. Why? So inefficient retailers and wholesalers can buck up their bottom lines and underperforming stores and warehouses while ignoring stagnant topline sales strategies, and manufacturers and brand marketers can 'buy' distribution for items that consumers eventually reject. Let's "JUST SAY NO" , people.

MNB user Andy Gromen chimed in:

A little further "Clarity" on your comment that Wal-Mart and Costco focus on making their profits on the "sell", not slotting allowances.

The general tenet of Sam's Club and Costco is that it costs them roughly 10% of sales to operate ... their profit margins, all categories combined, are roughly 10% ... (Obviously, some items/categories bring low single-digit margins and others make up the difference.) ... their profit is to be derived from membership fees. When their profits exceed their cost of operations, clubs are urged to reduce prices to their members. Buyers, DM's, Club Mgrs, etc., can actually be reprimanded for being too profitable on the "sell" side.

MNB user Ken Fobes added:

When will the industry learn that until a customer buys the product, it is all "funny" money. I am still amazed at the number of category managers and buyers who boast of all the "money" they made for their chain through their buying prowess. What happens when these new products don't sell? I question whether chains generating income of their buying, truly understand their true COS.

One of the key competitive advantages companies like Wal-Mart and Costco have is that "they take the garbage out" of their purchasing decisions, while most traditional retailers continue to "put the garbage in!"

Here's the deal.

There are a lot of CEOs on the retailing side that read MNB every day. When will one of them stand up and say, for example, "Effective January 2005, our company no longer will charge slotting allowances. We will make money on what we sell, not how we buy it."

Because until someone breaks down that dam, it is hard to take seriously the complaints by so many retailers that they are not competitive with Wal-Mart. It isn’t just the cost of labor…it is because they have created Byzantine financial structures that are out of touch with reality.
KC's View: