FDBuyer: Menu Fees, ‘Over Easy’
A long-time Harris Teeter executive, Mr. Harris is a former chairman of the National Frozen & Refrigerated Foods Association and a member of the Refrigerated Foods Hall of Fame. Through a special arrangement, presented here for discussion is a summary of his current article from Frozen & Dairy Buyer magazine.
My introduction to merchandising money was back in the late ’70s when I asked a manufacturer to pay $200 for an item. I really didn’t want to add the item and almost fainted when he said "okay." Today, allowances are often more than 1,000 percent of that.
It took me a long time in my career to convince myself that there was only one bucket of money that manufacturers have to spend with you. I believe your company should have the flexibility to choose how they want to spend the money.
I also always felt that if you are going to charge merchandising fees, then a three-tiered program would be appropriate. Why should a case of yogurt be the same as a case of cheese? A tiered program would give you more promotions on the lower-cost lines and drive sales, in my opinion.
But it’s an unfortunate fact of life that merchandising fees prevent a lot of great items from small and start-up companies from ever getting on the shelf. I remember years ago when a manufacturer came in and his first words were, "I cannot pay your merchandising fees."
Well, I took the time to review his items and they were unique. I took the line anyway and a few years later he came back in with a check. He said to me "Mr. Harris, thanks for believing in my items — here are the merchandising fees I owe your company." You know who you are, so I thank you!
Ad fees can also be a problem. I believe retailers should make sure the items being promoted deserve an ad. If they don’t, I believe money from that manufacturer bucket is being wasted. All manufacturers love seeing their items in print no matter what the volume is. I think some of them wallpaper their offices with circulars! But some retailers may be spending twice the case cost on an ad, when an analysis of movement shows it’s not a good spend.
I’ll say only one thing about scan fees: How many more promotions could retailers have if they eliminated these?
On the other hand, I confess that I’ve always been a fan of "error fees." You would not believe the errors I’ve seen from both brokers and direct sales forces on their paperwork. These charges should not come out of the "money bucket" but from the broker or manufacturer. They need to take the extra time to proof their work. Likewise, I think that costs for UPC, pack and size changes should come from the manufacturer’s money and not the retailer’s.
Discussion Questions
Discussion Questions: What are the benefits and drawbacks of merchandising fees for both vendors and grocers? Which types of programs work well and which ones don’t?
All the different fees and all the different buckets of money. How is the consumer being served by this? Are new, innovative products able to get to market? Do consumers need, or even want, 15 different line extensions of toothpaste or deodorant? Why should the big manufacturers be able to keep their competitors off store shelves through slotting fees? Consumers are not being served by these practices.
The real loser in all these fees is the consumer. The manufacturers build the fees into the cost of the products, which are then passed on to the consumer. Even worse is the fact that, as noted, start-up manufacturers who can bring new and exciting products to the market and enable localization are shut out. Over time, all retailers have the same assortments and can only compete on price.
It’s an ugly practice that is, in different forms, in all areas of retailing.
I am not sure the history is quite right. I stared in the business in 1970 and already we were talking thousands of dollars for major accounts across the country for various merchandising fees.
There are two issues here. The first is that the retailer has something the marketer wants. Be it ads, shelf space, displays. If the marketer is willing to pay, then that is the value. Nobody is twisting anyone’s arm.
But, the bigger concern is on the retail side. Much too often the retailer gets the “fee” mindset. The retailer ends up focusing on the fees and not the products. And, as a result, poor decisions are made. I have seen this in food, mass and drug. And, what has become clear to me is that when this mindset sets in, it signals the decline of the retailer.
Merchandising fees are the industry’s bargaining talk: retailers have something manufacturers badly want and there is a fee to get it. What’s so new about that?
Like many government programs that are too costly to taxpayers, merchandising fees can be too costly to consumers since they can raise shelf and case prices.
Perhaps that’s because mankind doesn’t listen well.
Once you hear the details of a victory, it can be hard to distinguish it from your constituency’s defeat.
The inherent inefficiencies built into the brand-retailer “financial relationships” have been the subject of books, white papers, and good old fashion rants. While the altruistic initiatives like ECR (Efficient Consumer Response) and the more contemporary efforts of Shopper Marketing lay the groundwork for a more efficient and empirical based relationship, brands and retailers continue to divert product, ask for mindless slotting allowances, and still leave the office at the end of the day thinking the other is holding back.
Mr. Harris has lived through all of the above and is justifiably cynical about any significant progress being made towards improving the efficient flow of merchandising monies from brand to retailer to consumer. He has learned how to best lever the current complex inefficient system to the benefit of the retailer.
Those that have made progress in improving the retailer-brand experience involve retailers who are ready and able to share customer data and comply with conviction their responsibilities relating to merchandising the brand’s items. Brands that have enjoyed success have gained the retailer’s trust by working on behalf of the retailer’s category, (not just their brand), dealing evenhandedly with all retailers across geographies and retailer size, and using the customer data to build both the brand and the retailer’s business.
Eventually, the “territorial” mindset of retailer will likely be mitigated by the growing need for brand resources and partnership to compete with the behemoths. On the other hand, brands understandably will continue to allocate more resources to the retailers who can enable the most efficient and measurable growth in their business. Hope springs eternal!
This process is a self-fulfilling prophecy. Retailers drive huge revenues from these fees, and CPGs continue to pay them willingly. One hand washes the other. Other challenges arise, however, when these fees drive CPG/Retailer relationships that affect how stores are ultimately merchandised, as in the case of what we used to call “category captains.” That is, one CPG holds responsibility for the shelf plan-o-gram for certain categories. When that happens, I have always felt that is akin to the fox watching the chicken coop.
While such fees can be an excellent revenue source for retail merchandisers, or certainly one a category manager can go to the boss and say “look what I got,” and be assured of an “attaboy,” these fees do in fact distort the merchandising process in a not particularly beneficial way. It has happened in the past (and probably will in the future) that retailers’ merchandising groups grew increasingly dependent on the fee to make numbers. Before long, the goal of the merchandising staff became focused on these funds, as opposed to making profit by reselling product to consumers. And in many cases where this happened, it has spelled the end of the retailer. Economic health for a retailer stems from devising stores, product mixes and promotions that bring customers into the store to puchase, not from making it off the suppliers.