Most consumers who shop at a supermarket have no idea that the underneath the 42,000 items that are typically stocked is “real estate” that’s for sale to the highest bidder. That competition for shelf space creates a system that a nonprofit argues hurts consumers by thwarting new products from gaining a foothold in the market.
A recent report from the Center for Science and the Public Interest said some grocery real estate is more valuable than others, such as the candy aisle next to the checkout counters and displays at the end of an aisle. One sweet maker paid a chain $500,000 to place a single product next to its cash registers for a few months, according to a broker who was interviewed for the CSPI’s report. Another broker spent $17,000 for a one-time “event” at a 300-store chain, the CSPI said. An executive at a condiment company told the nonprofit that his firm pays between $5,000 and $20,000 per item in slotting fees.
All told, food companies spend more than an estimated $50 billion in fees that guarantee their products will get placed on grocers’ shelves and promoted in advertising circulars, among other things, according to the CSPI report. That $50 billion estimate comes from research done by University of North Florida marketing professor Gregory Gundlach and a group of academics.
According to the report, “Working with other academics, Gundlach and his colleagues in the mid-2000s used what he called ‘leakage’ -- tidbits included in the footnotes of public filings and stray data points found in trade publications -- to estimate the amount of money manufacturers pay retailers each year.”
None of the executives the CSPI interviewed would speak for the record about the practice, which former grocery industry executive Mark Heckman described to the nonprofit as a “deep, dark secret of the retailing world,” a characterization the industry disputes.
Gundlach’s research also found that food companies provide cases of free merchandise as part of these arrangements, which have gone on for years. In addition, chains have designated some products as a “category captain,” which enables them to dictate the layout of an entire food section where they already dominate. These arrangements are formalized in multiyear contracts.
For some grocery chains, these fees “are a large part of their profits,” said Howard Davidowitz, chairman of the retail consultancy/investment banking firm Davidowitz & Associates. He added that traditional grocery chains count on them to bolster their razor-thin profit margins. “The biggest food suppliers do this,” said Davidowitz.
John Stanton, a professor of food marketing at St. Joseph’s University in Philadelphia, noted that the big manufacturers pay slotting fees as a way to keep smaller producers out of the market. He estimates that 60 percent to 70 percent of grocers’ profits comes from these fees. In essence, he said, “They make more money when they buy food than when they sell food.”
The practice, though, isn’t universal. Walmart (WMT), the country’s largest seller of groceries, doesn’t take slotting fees to stock merchandise, though it does take payments for stocking new products for the first time. Newer entrants to the grocery story market such as Aldi, which is undercutting Walmart on price, don’t accept the fees either. But given the fierce competition in the grocery business, Davidowitz expects them to fade over time.
According to the Food Marketing Institute, a trade group representing the grocery chains, slotting fees vary depending on location, much like other costs such as wages and real estate, and were needed to help retailers facing an “explosion in the number of new products being brought to market.” The institute said these fees are legitimate.
“The way slotting fees was presented by CSPI was misleading,” the trade group said. “It is not a shadowy backroom deal cut, but an openly discussed agreement to facilitate manufacturers helping retailers recoup the labor, spacing and shelving costs entailed in marketing new product lines.”
The CSPI argues that the fees prevent new entrants from competing fairly for the attention of shoppers. Take entrepreneur Jon Gordon, who shelled out tens of thousands of dollars to get his Clemmy’s sugar-free and gluten-free ice cream stocked at some Albertson’s and ShopRite locations but balked at paying $500,000 to gain access to the more than 400 Stop & Shops, which is owned by Netherlands-based Ahold Delhaize.
Gordon unsuccessfully sued Swiss-based Nestle, whose ice cream brands include Edy’s and Dreyers, for abusing its market position by forcing his products to the bottom of the freezer case, making them difficult for consumers to find. Clemmy’s filed for bankruptcy protection last year.
“Between slotting fees and the category captain system, those two things alone make it almost impossible for a smaller manufacturer to make it,” Gordon said in a CSPI statement.
The Grocery Manufacturers Association declined to comment for this story. The CSPI called on the Federal Trade Commission to investigate the issue. An FTC spokeswoman didn’t respond to a request for comment.
Public health advocates have long argued that these fees result in less healthy food choices getting more promotion than healthier choices and are exacerbating the nation’s obesity epidemic.
“Study after study has shown us that it matters where food is placed, and matters a lot,” said Mary Story, associate director for Academic Programs at the Duke Global Health Institute, in a CSPI statement.