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NEW HAVEN, Conn. -- For years, retailers, manufacturers, and regulators have debated the impacts of the controversial practice of slotting allowances -- the fees manufacturers pay to retailers in exchange for shelf space to stock new products in warehouses and stores -- with little consensus. Now, a pair of academics has come down on the side of slotting.
While some, especially in the manufacturing community, argue that they are anti-competitive, other industry players contend that slotting fees enhance efficiency by helping to allocate scarce shelf space, for example.
In what they claim is the first empirical investigation to test the rationales behind both camps, researchers at the Yale School of Management and Cornell University concluded that slotting allowances do support efficiency in the marketplace.
The authors of the report, "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?", said they obtained a unique data set consisting of all new products that were offered to a large supermarket chain in a six-month period. It captures more than 1,000 product offers in 21 categories, from major manufacturers such as Kraft, General Foods, Procter & Gamble, as well as smaller manufacturers such as Seneca Foods.
The researchers, K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell, maintained that the lack of empirical research on slotting allowances prior to their project was due in part to the difficulty in getting retailers and manufacturers to part with information about these transactions.
Sudhir and Rao said their data offers both objective information about the new product introductions, including test market results, promotional support, and offers of slotting allowances; and how the retail buyer in question rated the manufacturers and the products.
In the study, they discuss the major arguments behind the pro- and anti-slotting rationales. Their findings support the rationale that slotting allowances help enhance market efficiency, by optimally allocating scarce retail shelf space to the most successful products; and that the fees do not thwart competition.
More specifically, they said the data shows slotting allowances help balance the risk of new product failure between manufacturers and retailers; help manufacturers signal private information about potential success of new products; and serve to widen retail distribution for manufacturers by mitigating retail competition.
"We find that when retailers perceive that a product is likely to be a sure hit, they don't seem to ask for slotting allowances; further, manufacturers don't offer slotting allowances when they perceive the product to be a sure dud, either, because they are unlikely to recover the money from sales," said Sudhir.
"It is in the unknown middle, when uncertainty about product success is greatest, that slotting allowances offer the maximum benefit to obtain retail shelf space," according to Sudhir, adding, "This flies in the face of arguments that slotting allowances are merely a form of extortion by retailers."
The authors suggest that the popular argument that slotting allowances shut out competition from small manufacturers does not have much empirical support. "Overall, we believe the FTC is correct in its reluctance to ban the practice of slotting allowances in the grocery sector," said Sudhir.
The complete study can be downloaded at: http://www.mba.yale.edu/faculty/pdf/slottingallowances.pdf