WASHINGTON — A food-industry study designed to resolve a growing controversy between supermarkets and food manufacturers may only aggravate the quarrel over who should bear the cost of stocking grocery-store shelves with the thousands of new food products introduced yearly.
For the past decade, the shelf space has remained relatively constant. However, more than 10,000 new food products are introduced annually--creating such a fierce battle for this shelf space that many retailers have been demanding special fees just to accept the new items.
Manufacturers contend that the fees, which can run from $1000 to as much as $30,000 for each new flavor of a product, are unfair and unreasonable. Even so, eager to get their products into the store, many pay the high price.
The new study--a joint undertaking by six trade associations that represent retailers and manufacturers--was designed to determine if these controversial fees, called slotting allowances in the industry, are justified.
But the findings may only stir up the controversy, with each side using them to defend its case for or against the allowances.
What's more, the study could well end up creating an additional fee in the increasingly competitive store-admission process. For the first time, the study shows that supermarkets bear significant costs when they discontinue an item--a step that must be taken to make room for a new product.
As a result, some food-industry officials predict grocery chains may start imposing a failure fee for which manufacturers would have to pay retailers if a new product is dropped because it doesn't meet sales projections.
Some supermarket executives, estimating that 80% of all new products fail within the first year, had been waiting for this study to determine if they should impose failure fees.
After surveying 20 new products that were introduced in 1988, the study found that across the entire food chain--from manufacturer to broker and wholesaler and finally to retailer--it costs an average $252 to bring a single new product to one supermarket. With nearly 31,000 supermarkets in the country, the cost of introducing a new product nationwide could amount to close to $8 million.
The manufacturer, understandably, bears the brunt of the cost--an average $222.12 per item per store. Of that amount, nearly half--or $103--is used to promote the product directly to consumers through advertisements, coupons, etc.
Research and development accounts for less than 7% of the total, or an average of $15, while more than twice that, an average of $36.34, is allotted for special deals and allowances given to retailers, wholesalers and food brokers.
On the retailing side, the costs of bringing a new product to market are, as to be expected, considerably less--an average $13.51 per new item. However, based on a survey of 21 discontinued products, it costs the stores considerably more to delete an old product to make room for the new one.
Including the loss incurred from marking down a discontinued product to move it quickly off the shelves, it costs a store an average of $16.11 to eliminate an item.
Manufacturers, on the other hand, bear a relatively small cost in removing a product--only an average of $3.94 per item per store.
"As a result of this study, people will stop questioning whether retailers have significant costs" in introducing new products, said Tim Hammonds, senior vice president of the Food Marketing Institute, which represents the supermarket industry and was one of the associations undertaking the study. "We now have documented there are significant costs of putting in a new product," he added.
What's more, he said, "retailers are at the end of the fire hose," as they review thousands of new products yearly. "Prior to 1981, the average number of new products introduced was 2,500 a year. This year more than 12,000 items of dry groceries (that's not including the increasingly active dairy and frozen-food cases) are expected to be introduced, and dry-grocery shelf space hasn't increased," he said.
As a result, Hammonds said, the costs of accepting new products add up quickly and can be substantial. Per store, the cost comes to an averaged total of $29.62, according to the study. If there are 100 stores in the chain, that amounts to almost $3,000 per item for the entire company.
"The main thing that the study does, as I see it, is that it eliminates the cost justification for slotting fees," said Frank Dell, president of Dellmart & Co., a management consulting firm to food companies. "They are not cost-justified, nowhere near the $30,000" that is being charged by many retailers, he said.
In fact, he added, supermarkets "are more than compensated" for their costs by the special introductory deals that come with a new product. Manufacturers "offer very lucrative promotions or incentives for the distributor, wholesaler or retailer to bring a new product in."