ARTICLE

The Market for Space in the Market

Shelf Fees Efficiently Allocate Risk to Producers

MARCH 01, 2000 by GARY M. GALLES

Gary Galles is a professor of economics at Pepperdine University in Malibu, Calif.

Slotting fees—payments by producers for space on retailers’ shelves—are under attack. According to Senator Christopher “Kit” Bond of Missouri, chairman of the Senate Committee on Small Business, which held hearings last fall, the practice “threatens competition, jobs and likely drives up the cost of putting food on the table for millions of American families” and is “fundamentally unfair and just plain wrong.”

The core argument against slotting fees is that larger producers harm consumers by using their financial “deep pockets” to outbid smaller and newer competitors for prime shelf space, pushing them out or denying them entry into the market. This is alleged to restrict consumer choice and to give large firms the power to raise their prices in an anti-competitive manner.

Despite the surface plausibility of this argument, it fails to grasp the realities of grocery retailing. Rather than representing some anti-competitive restriction, shelf fees, which have been around for two decades, are an efficient response to the proliferation of food products and the resulting increasing scarcity of supermarket shelf space.

Decades ago, supermarkets were growing and had the space to carry most available items. Grocers needed to fill their shelves, so they charged no slotting fees. But that changed with the explosion in new products and variants of existing ones, particularly in the frozen-food, snack, and beverage sections. Now there are far more products (more than 100,000 grocery items) than space to carry them (a typical supermarket carries 30,000), and 15,000-20,000 more come out each year, making shelf space a scarce commodity. Slotting fees have arisen to allocate store space that is now far more valuable than before. Fees are the result of supply and demand, which is why more “productive” placements, which reflect more valuable locations, require larger fees; it’s not an abuse of small producers and consumers.

Retail Risk

Because four out of five new products fail, new grocery items are inherently risky for retailers as well as producers. Shelf fees efficiently allocate such risks to producers. Since products that fail displace others that consumers would have valued more (retailers are just the agents of consumers), this is where that risk belongs. Why should retailers bear the cost (including the value of the lost traffic that other items would have generated) if a product flops with shoppers? Fees restrict large-scale introductions to items whose makers are willing to “bet” the value of the necessary shelf space on their success. Rather than reducing valuable consumer options (there are no fewer slots available as a result, and higher profits may lead stores to expand available shelf space), this system may more quickly fill stores with the products consumers prefer by encouraging producers to do more and better market research before introducing products and by weeding out failures faster.

Senator Bond says his hearings “clearly indicate that competition is something less than free and open at the comer supermarket.” However, all that the complaints against slotting fees really indicate is that some producers would prefer to use something valuable—supermarket shelf space—as if it were free. Being forced to pay for scarce shelf space is costly, but so is being forced to pay for workers, advertising, transportation, and anything else that is valuable. That some firms fail to receive scarce shelf space for free may frustrate them, but that does not reflect an anti-competitive abuse. And it’s certainly not a reason for ham-handed government restrictions that would interfere with the efficient use of valuable resources and the more rapid discovery of those products consumers most desire.