Living Economics

If you own a grocery store or supermarket, how do you select which items to stock among the hundreds of thousands available? And how would you display them in order to get the maximum profit out of the real estate? Don't worry. The suppliers already have a solution for you.

After paying the storeowner "slotting fees," the big suppliers offer to take over whole sections of the store and promise to keep them supplied and organized. Of course, the highest bidders get the best positions and hopefully generate the biggest sales. Slotting fees are commonly used now and sometimes represent 20% to 40% of the profits of some supermarket chains.

The big companies that refuse to pay slotting fees are spending billions on direct advertising to keep their goods on the shelves. It is true that slotting fees grow out of competitive environment. Actually, every company is trying to discover the answer to the same question--how do I get consumers' attention interest in buying my products? With new products entering the market every second, consumers' attention and interest become scarcer. The suppliers are paying big money to put their products where consumers can easily see and find. Some argue that consumer choice is being reduced because small independent labels cannot afford such expensive promotion, but the truth is that the prices for major labels are being lowered which is exactly what consumers want.

The record stores are following the grocery stores' footsteps. They are leasing the windows, walls, and whatever that is helpful in promoting the music record for a big fee. For example, Time Warner Inc. and Sony Corp. pay $200,000 a window a year in a record store in Manhattan. The purpose is to draw more customers. In order to break new records or introduce new artists, spending money on price discounts and promotion is the only way to create interest other than making MTV. A big display up front has a better chance of getting more buyers.