For suppliers working with retailers for the first time, the costs and charges they face can come as a nasty surprise. One recent study in the U.K. found that supermarkets make as much as a third of their profits each year from the fees they charge their suppliers. And this is an international issue: suppliers around the world face similar problems.
Therefore, it is crucial that producers hoping to sell their products through retailers understand the kind of charges they may face. Armed with this information, you can begin to factor these costs into your business model. For example, you may need to offer your products to retailers at a higher price to ensure their profitability. It may even be that you change your mind about which products are viable to sell through retailers.
In practice, retailers have different names for the charges they levy, and their methods vary slightly from country to country. But the potential fees you may encounter include:
- Slotting fees. Sometimes known as shelving or listing fees, producers levy charges to stock a new product on their shelves. The fee will vary according to the product and the size of your contract, and could cost anything from a few hundred dollars for each stock-keeping unit (SKU) to several thousand. It is typically payable for a fixed period of four to six months. Retailers justify the charge by pointing out that shelving space is limited and that the sales performance of a new product has yet to be established. Emerging brands are likely to face these charges.
- Pay-to-stay fees. These charges are less common than one-off slotting fees, but are payable on an ongoing basis. Effectively, the retailer is asking you to rent out some of its shelf space—perhaps in a unique location, or a chilled unit, where space is at a premium.
- Fees for promotions. If a retailer wants to promote your product, that could be good news for sales and the visibility of your brand. But you can expect to be asked to meet some of the costs of that promotion, such as through a discounted supply price or through payments towards the cost of marketing campaigns. Think carefully about this, because while there may be long-term benefits in such a promotion, a recent study of international markets by Nielsen found producers very often lose money on retailers’ promotional campaigns.
- Product placement fees. Retailers know that products placed in certain areas of their stores—particularly on the end of the aisle—tend to sell better, often dramatically. If you want your product to be stocked there, you can expect to pay a fee for the privilege.
- Rebates for higher sales. Your initial contract with a retailer may include target figures of the amount of your product they expect to sell. Don’t be surprised if these provisions include a rebate for the retailer if it exceeds this target; this will potentially lead you to pay the retailer if sales prove to be successful.
- Returns fees. The flip side of fees for targets being hit is that retailers may try to make you responsible for the cost of unsold goods. You may be asked to supply on a “sale or return” basis, where you are only paid for the goods that the retailer is able to sell, or charged a fee for disposal costs.
- Wastage fees. Make sure you check wastage fee provisions in contracts carefully to understand what you’re liable for. It’s not unreasonable for retailers to charge you a fee to cover the cost of wastage that you are responsible for (directly, or through your logistics providers), but they shouldn’t try to pass off their failures on you.
The good news is that regulation and competition law does give producers some protection from retailers that try to abuse the system. In the U.K. and Australia, for example, there are strict rules on what retailers may and may not do, with independent regulators to police disputes and investigate any wrongdoing. New Zealand is investigating whether to introduce a similar system.
In practice, however, the law may not always give small suppliers all the help they would like. In the U.K., for instance, the Groceries Code Adjudicator has rules banning retailers from directly or indirectly requiring suppliers to pay for better positioning on their shelves. But there is nothing to stop suppliers from offering these payments. That gives the bigger suppliers with deeper pockets an advantage—unless smaller rivals are prepared to pay too, they may find their products relegated to less attractive positions in stores.
Similarly, the European Union agreed to a new regulation in 2019 that covers retailers across all its member states, including the Netherlands and other key markets for international suppliers. It includes a list of prohibited practices, including requiring suppliers to pay for product placement or to meet the cost of product promotions; but as in the U.K., there is an escape clause—these practices are acceptable if both sides agree to them.
Still, even in the absence of regulation, you may be able to take some steps to protect yourself from retailers’ charges. At the very least, discuss what is possible. For example, you may be able to reduce the cost of slotting fees by offering sample products to prove there is customer demand for your products; figures on your track record of sales in smaller stores, or sales in other markets, could also be useful.
The bottom line is that you must understand all of these potential fees before agreeing to supply a new retailer. There may still be plenty of room to make a profit and to build a long-term relationship, but you’ll need to do your sums.