Shelf life

Rennhoff.
Photo courtesy of Adam Rennhoff.

If you’ve ever read a consumer-advice story about saving money on groceries, you know the best deals might be found on the lower and higher shelves. Eye level is reserved for the higher-ticket name brands.

There’s a surprising reason for that. Grocery manufacturers pay what’s known as a slotting allowance to get the most prominent space -- and maybe the most space -- on the aisle.

Adam Rennhoff (PhD, Economics ’04), who taught undergraduate economics courses while he was a graduate student at U.Va. and is now an assistant professor of economics at Drexel University’s business school, researched slotting allowances for his dissertation.

The allowances are mostly in grocery stores, said Rennhoff, “but it’s becoming incredibly prevalent elsewhere,” in software and computer game sales, for example.

“Almost nothing you see in a store isn’t very carefully planned,” he said. Those cardboard displays of DVDs you see when you walk into an electronics store? “It didn’t happen by accident -- someone paid some sort of allowance.”

The amount of allowances is a closely guarded secret. The retailers don’t want rivals -- or the public -- to know how much they are charging for shelf space. $5? $5 million?

“There’s a bit of controversy because some people find this to be a great, very efficient idea,” he said. “The other side is -- ‘Whoa whoa whoa; these things can be highly anti-competitive; they favor the firms that are really big; they make it more expensive for a start-up brand to get space.’”

Because he’s from Pittsburgh, home of the H. J. Heinz Company, Rennhoff picked ketchup for his research. Heinz is the market leader (and, said Rennhoff, the best ketchup), followed by Hunt’s and Del Monte.

He created a computer model that infers how much a payment should be and then predicted what might happen if allowances were prohibited.

“What I really tried to do was see if I could predict how much are these payments, which brand is most likely to make the payments, what are the brands likely to get the space,” he said. He used information on markup and performance from other studies of the ketchup market.

“I found that Heinz is the market leader and they make the biggest payment.”

He also found that the effect of slotting allowances on price is minimal.  “Most consumers actually pay a lower price because of slotting allowances,” Rennhoff said.

“It’s intuitive. If you got rid of the allowances, the retailer would choose which brand to give the best spot to -- and that would be the best seller. With allowances, you could be the number-three brand, but if you give the retailer some money at least a certain percentage of the time the retailer is going to pick you.”

The alternative, according to Rennhoff, is that the best seller will get the best shelf position. In theory, “if Heinz knows that and there’s less competition for that spot, you’re going to see Heinz not so worried about keeping the price down.”

If the store brand were in the best spot, you’d still see Heinz charge a higher price because of taste and preference, he said. “Heinz would still sell well.”

The analysis wouldn’t necessarily hold true for other industries, Rennhoff cautioned. “As far as ketchup is concerned, it has helped the consumer -- maybe not by much, maybe one cent per family.” Multiplied by all the households that have ketchup in the fridge, that’s not peanuts.

His is the first paper to study the issue of slotting allowances with empirical rather than theoretical evidence. “It’s a step to getting a handle on something everyone knows exists, but doesn’t know much about.”