Slotting Fees

Advertising is paid messaging to promote a company and/or its products. We're all aware of conventional advertising and experience it daily. Some transactions straddle the boundaries of the definition and are worth consideration.

Slotting fees present an interesting example of pseudo-advertising. There is a complex balance between retail stores (e.g. Target) and the companies whose products they sell (e.g. Tide). Target's primary objective, like any for-profit company, is maximizing its net income over time. At first glance, this might mean maximizing the number and price of the products it sells. Key drivers of profitability for a retail store are (among many other things) what the customer pays and what the store paid for that item.

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The more powerful a retail store is, the more it can impose its will on the Tide's of the world. This is through price, volume and other negotiations. Tide, after all, depends on Target for a meaningful piece of its revenue. Slotting fees are a much less transparent form of leverage where the store charges the brand simply to have its product stocked on the shelves. The slotting fee may change by the type of product, new product introductions, the store's foot traffic, the prominence of the location, whether it needs to be refrigerated etc. This means that Tide is actually paying Target a certain amount for the right to sell its products.

Slotting fees may either be thought of as pricing pressure on Tide or as marginal advertising. To take the latter view, you can view the store somewhat like a web publisher. It's not in a publisher's interest to only show the ads that the customer might want to see and it's not in their interest to serve only the most intrusive, expensive ads - there's a balance where the publisher achieves the most yield while retaining the most users. A retail store may not make the most money selling only the products their customers want. Instead, they will optimize their yield by stocking the mix of products that pay for placement - guaranteed revenue and higher margin for the store - with those that a customer might organically want, at a level that will maximize sales, profitability, and customer retention. The practice can be more directly considered advertising if you think of a retail store as simply one of many channels where a brand can try to sell its goods. The brand could compare costs between slotting fees with online or any other form marketing, especially where the product is sold online and does not require it be purchased in a retail store.

This is a very widespread practice to the degree that some supermarkets make nearly all of their margin on slotting fees as opposed to product sales. It creates structural inefficients throughout by making larger stores more profitable and allowing large brands retain more prominence. The inverse position is that slotting feel allow Target to take more risks. It might actually be willing to take on new inventory if its risk is mitigated, which might help the little guy that would otherwise never even be considered.