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Belch: Advertising and
Promotion, Sixth Edition
V. Developing the
Integrated Marketing
Communications Program
16. Sales Promotion © The McGraw−Hill
Companies, 2003
stocking allowances, introductory allowances, or street money, are fees retailers
charge for providing a slot or position to accommodate the new product. Retailers justify
these fees by pointing out the costs associated with taking on so many new products
each year, such as redesigning store shelves, entering the product into their
computers, finding warehouse space, and briefing store employees on the new product.
53 They also note they are assuming some risk, since so many new product introductions
fail.
Slotting fees can range from a few hundred dollars per store to $50,000 or more for
an entire retail chain. Manufacturers that want to get their products on the shelves
nationally can face several million dollars in slotting fees. Many marketers believe
slotting allowances are a form of blackmail or bribery and say some 70 percent of
these fees go directly to retailers’ bottom lines.
Retailers can continue charging slotting fees because of their power and the limited
availability of shelf space in supermarkets relative to the large numbers of products
introduced each year. Some retailers have even been demanding failure fees if a new
product does not hit a minimum sales level within a certain time. The fee is charged to
cover the costs associated with stocking, maintaining inventories, and then pulling the
product. 54 Large manufacturers with popular brands are less likely to pay slotting fees
than smaller companies that lack leverage in negotiating with retailers.
In late 1999 the Senate Committee on Small Business began taking action against
the practice of using slotting fees in the grocery, drugstore, and computer software
industries because of the fees’ negative impact on small business. 55 The committee
recommended that the Federal Trade Commission and Small Business Administration
take steps to limit the use of slotting fees because they are anticompetitive. A recent
study by Paul Bloom, Gregory Gundlach, and Joseph Cannon examined the views of
manufacturers, wholesalers, and grocery retailers regarding the use of slotting fees.
Their findings suggest that slotting fees shift the risk of new product introductions
from retailers to manufacturers and help apportion the supply and demand of new
products. They also found that slotting fees lead to higher retail prices, are applied in a
discriminatory fashion, and place small marketers at a disadvantage. 56
Problems with Trade Allowances Many companies are concerned about the
abuse of trade allowances by wholesalers, retailers, and distributors. Marketers give
retailers these trade allowances so that the savings will be passed through to consumers
in the form of lower prices, but companies such as Procter & Gamble claim
that only 30 percent of trade promotion discounts actually reach consumers because
35 percent is lost in inefficiencies and another 35 percent is pocketed by retailers and
wholesalers. Moreover, many marketers believe that the trade is taking advantage of
their promotional deals and misusing promotional funds.
For example, many retailers and wholesalers engage in a practice known as forward
buying, where they stock up on a product at the lower deal or off-invoice price
and resell it to consumers after the marketer’s promotional period ends. Another common
practice is diverting, where a retailer or wholesaler takes advantage of the promotional
deal and then sells some of the product purchased at the low price to a store
outside its area or to a middleperson who resells it to other stores.
Forward buying and diverting are widespread practices. Industry studies show that
nearly 40 percent of wholesalers’ and retailers’ profits come from these activities. In
addition to not passing discounts on to consumers, forward buying and diverting create
other problems for manufacturers. They lead to huge swings in demand that cause
production scheduling problems and leave manufacturers and retailers always building
toward or drawing down from a promotional surge. Marketers also worry that the
system leads to frequent price specials, so consumers learn to make purchases on the
basis of what’s on sale rather than developing any loyalty to their brands.
The problems created by retailers’ abuse led Procter & Gamble, one of the country’s
most powerful consumer-product marketers, to adopt everyday low pricing
(EDLP), which lowers the list price of over 60 percent of its product line by 10 to 25
percent while cutting promotional allowances to the trade. The price cuts leave the
overall cost of the product to retailers about the same as it would have been with the
various trade allowance discounts.
549
Chapter Sixteen Sales Promotion