Study Sheds New Light on Role of Retail Slotting Allowances

New Haven, Conn., April 7, 2005    Retailers, manufacturers, and regulators have debated the controversial role of slotting allowances, the one-time fees manufacturers pay to retailers in exchange for shelf space to stock new products, with little consensus. While some argue that they are anti-competitive, others contend that they serve to enhance efficiency by helping, for example, to allocate scarce shelf space. Researchers at the Yale School of Management and Cornell have conducted the first empirical investigation that tests the rationales behind these two schools of thought and conclude that slotting allowances do support efficiency in the marketplace.

The study, "Are Slotting Allowances Efficiency-Enhancing or Anti-Competitive?" was conducted by K. Sudhir of the Yale School of Management and Vithala R. Rao of Johnson Graduate School of Management at Cornell.

The lack of empirical research in studying slotting allowances to date is due in part to the difficulty in obtaining data from retailers and manufacturers about these transactions. Sudhir and Rao 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 data offers both objective information about the new product introduction, including test market results, promotional support, offers of slotting allowances, and how the retail buyer rated the manufacturer and the product.

In the paper, the authors discuss the arguments behind the alternative rationales for slotting allowances and provide evidence from their research in support of or against each one. The findings support the rationale that slotting allowances help enhance market efficiency by optimally allocating scarce retail shelf space to the most successful products, rather than thwart competition.

More specifically, the data shows that 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. This flies in the face of arguments that slotting allowances are merely a form of extortion by retailers."

This finding is true for both large and small manufacturers and suggests that the popular argument that slotting allowances are a means to eliminate 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 Yale Center for Customer Insights at the Yale School of Management is a research center devoted to studying the behavior of customers. The Center welcomes inquiries from organizations interested in research partnership and sponsorship opportunities. For more information contact Eugenia.hayes@yale.edu.