Tag Archives: slotting fees

Why Whole Foods Matters (or Why Safeway Hurts Innovation )

I’m sorry, did I miss the memo saying that we need to dog pile on Whole Foods? First we had Julie Powell’s article equating shopping at Whole Foods with classism, then we had a post at Chicagoist equating Whole Foods with Wal Mart (full disclosure, I write for Chicagoist’s sister blog Seattlest).

Let me explain, in clear language, why Whole Foods is revolutionary (and i DON’T use that word lightly).

In short, your old-school, massive grocery store chains are addicts. What they are addicted to is something called “Slotting fees”. “slotting fees” are money, specifically money paid to grocery store chains from the largest food producers in the nation. The results of this addiction include a lack of innovation in a majority of food products being sold in our country, and a near monopoly on our food supply by companies such as Conagra, Coca-Cola, Kraft, Pepsi, and other mega-corporations.

Here’s how slotting fees work: There is only a finite amount of shelf space available in any given supermarket. Each supermarket only allots a specific amount of space for any given food item. For example, with soda, any given supermarket will have 5-10% of it’s shelf space dedicated to soda.

Coke and Pepsi both understand how valuable that shelf space is. To their way of thinking, it’s essentially real estate. So Coke will go to the Supermarket chain and say “I will pay you x amount of dollars for 35% of your available soda space.” Pepsi will then say “I too, will pay you x amount of dollars for 35% of your shelf space”. Dr. Pepper/7up will then say “Since I don’t have the resources of Coke or Pepsi, I will pay you a little less than x for a smaller percentage of soda shelf space”.

What this means is that for a new soda company, there is somewhere between 0 and 15% of shelf space for which they can put up a new product. Since these are often new companies, they can afford little or no money for these slotting fees. This puts them at a tremendous disadvatage within the supposedly free market.

And if a new brand gets a little too popular? Well Coke, Pepsi and/or Dr. Pepper can increase their slotting fees in return for more space, leaving less space for the newly competing brand.

This activity doesn’t just happen with soda. It happens with chips, candy, cereal, frozen foods, pickles, you name it.

So where does Whole Foods come into this picture? They’ve essentially told the major food corporations “We don’t want your money. We’d rather give you space only if you adhere to our food standards.” To which the food corporations said “Screw you”. This is why you rarely see the major food corporations represented at Whole Foods.

What Whole Foods has done is changed they way food is supplied to their customers. Instead of the major food corporations dictating which products get put on the shelves, Whole Foods does. The choices that Whole Foods makes are based not only which product gives the best profit, but what the demand for each product is, and if the food product is adhering to their food philosophies.

That’s not to say that Whole Foods is perfect…they’ve got issues with unions than make me uncomfortable. They also may be putting foods on their shelves that may not deserve to be there. But at least there’s a Supermarket company that is not putting profits as it’s sole purpose for existance. Few (if any) other supermarket chains can make the same claim.

This is why I don’t get the recent slams against Whole Foods. Are they being targeted simply for doing something different? Or is it because there’s a level of paranoia against companies that get fairly successful in a fairly short period of time? I can’t answer these questions. What I do know that it’s best to fully understand a company before you start criticizing them.

Oh, and just so we’re clear. Slotting fees are BAD! Learn it and repeat it to all who care to hear it.

The Supermarket is Dead, Long Live the SuperMarket!

If you’re interested in Supermarkets, and the hows and whys of their business, there is an absolute must read in this month’s Gourmet magazine that talks about Wal-Mart and their influence within the Food industry via their supermarket division.

It’d be easy for me to slam Wal-Mart and their practices, but I’ll save that for another day. However, I do want to touch upon a hypothesis I developed that the article helped fueled.

In reading the article, it became clear to me that the supermarkets we grew up with in the 70′s and 80′s are dying a slow death. The article agrees by quoting food-marketing consultant Gary G. Kyle, who stated “I think in that in the next five years you’re going to see the elimination of one or two of the major supermarket chains”, referring to Krogers, Safeway, Albertsons and Ahold.

The reason for this is clear in my opinion. Consumers consider two variables when it comes to purchasing foods: Price and Quality. The old-school supermarkets (best represented by Safeway and Krogers) provide little in ensuring that their consumers receives either. Every product on their shelves are determined, not by consumer preference nor market analysis, but by bribery in the form of “slotting fees”. For those of you unfamiliar with the term, “Slotting fees” are fees that companies pay in order to ensure that their product is not only displayed, but displayed in the best possible way, often at eye level. Take a look at the soup section or the cereal section, and you’ll see this practice in all of it’s glory. Those products you see at eye level? Chances are good that they were put their because companies paid to have them their.

The end result of this is that many products of cheaper value or of better quality are often regulated to the lower or higher shelves. The mega-corporations are often the only folks who have enough money to enure that their product is seen at the same level throughout the country.

There are two supermarket chains at the moment who do not practice slotting fees…Wal-Mart and Whole Foods. I do not think it’s coincidental that these two companies are increasing their market share while the old-school supermarkets are losing. What else do these two new-school supermarkets provide consumers?

Wal-Mart: Low prices
Whole Foods: Quality Products

Each of these companies recognized a segment of the marketplace that had not been realized to its fullest potential and they are both now reaping the benefits of these different approaches.

I’m of the belief that unless the old-school supermarkets adapt, they will continue to lose market share in the retail food industry. Other lesser supermarkets have taken notice of these new-school approaches and are adapting. Larry’s Market, based here in the Seattle area combines both and old-school approach with a Whole Foods approach in many aspects of their product choices. Larry’s the only supermarket in the area that actually sells imported British food products as well as selling higher quality pastas, meats, cheeses and fruits and vegetables. They too have increased their market share, at the expense of QFC and Albertsons.

Slotting fees aren’t the only issue with old-school supermarkets, nor are the new-school supermarkets perfect (Seriously…Wal-Mart has issues that I cannot even begin to list here). But if the old-schoolers wish to maintain their presence in the market place, they will need to adapt to some of the practices of either Wal-Mart or Whole Foods. What better place to start than removing the slotting fees and letting the marketplace decide which products deserve to be on the shelves. Isn’t that what a free-market system is all about?