Business

Critics of “Big Weed” Fret Over Retail Cannabis Slotting Fees

avatar Dan Mitchell / Jul 22, 2020

There are still more independent bookshops than many people realize, but their numbers are surely diminished from a couple of decades ago. One of the main things customers miss about them is the personal attention the shopkeeps can offer. Individual managers and clerks can decide to prominently display books they like best.

The rise of mall bookstore chains like B. Dalton and Waldenbooks, followed by superstores like Barnes & Noble and Borders, and then Amazon, sapped book buying of this personal touch. Critics of “Big Cannabis” are increasingly worried that the same thing will happen to the weed business.

The big book chains felt impersonal not only because they were gigantic and all looked alike, but also because in the 1980’s, they started stocking and placing books based on how much publishers and distributors paid them for prime shelf space. In 1996, The New York Times published an examination of this trend that opened with an author literally crying because her book had been shoved into an obscure corner of a Manhattan Barnes & Noble. She thought it reflected the manager’s low opinion of her work. But it turned out it was because her publisher hadn’t paid Barnes & Noble for prime placement.

A Touchy Subject

It’s impossible to say how widespread such arrangements — called “slotting fees” or “pay to stay” deals — are in cannabis. Among big, mainstream retail chains, the fees can reach into the hundreds of thousands of dollars in the biggest stores. So far, cannabis retailers are charging between $1,000 and about $50,000 for prime real estate, according to various reports. This development has boutique brands worried.

Both sides of slotting fee deals are reluctant to talk about the practice. One dispensary owner in the San Francisco Bay Area, who asked not to be identified, said he would rather make money from sales than from slotting fees, but he has little choice. “If I weren’t competing with the black market, I could decide what to stock and where to put it based on my personal preferences,” he said. He likes to highlight small, unique products when he can. But most often, he said, those products are made by companies that either can’t or don’t want to pay slotting fees. He said he has to take the fees “just to break even.”

Slotting fees have existed for decades. They are used heavily in supermarkets and department stores, particularly among the larger chains. Often, suppliers pay not just to be on the shelf, but to be at eye level, pushing competitors to the bottom or top of the rack. 

In some cases, grocers actually make more money from slotting fees than from sales. It’s common practice, and in most cases perfectly legal, but the arrangements have also attracted criticism. In a 2016 investigation for the Center for Science in The Public Interest, journalist Gary Rivlin showed how slotting fees can be anti-competitive, even outright unhealthy. The practice, he learned, tends to give the most preference to junk food. That’s why you don’t see a lot of tofu towers in the middle of the aisle at the supermarket. You see stacks of soft drinks and piles of cookies.

A Question of Competition

The legality of slotting fees in the cannabis business is murky. California law doesn’t specifically address the issue for cannabis, as it does for liquor, where the Alcoholic Beverage Control Act forbids the practice. Cannabis regulations simply forbid “anti-competitive” behavior.

Since the fees are legal for supermarkets and other retailers, the presumption is that they’re legal for cannabis, but it’s not entirely clear. The fact that the legal weed market is so young means we can’t know yet whether, in practice, the fees are anti-competitive or not, noted cannabis lawyer Hillary Bricken in a 2018 blog post. “The bigger cannabis brands,” she wrote, “may not even face the prospect of these contracts from retailers because the retailers desperately want to carry them on their shelves anyway.” That raises the question of “whether slotting-fee agreements and pay-to-stay contracts are actually anti-competitive,” Bricken wrote.

That’s true for the very biggest brands, but it still leaves the question of whether smaller product companies are being squeezed out by better known or larger brands that are better able to pay their way into the best store real estate. The Bay Area retailer cited above said that is just what is happening in his store: some mid-tier brands are crowding out some smaller ones.

It’s not just shelf space that’s for sale. Some retailers offer whole suites of marketing services. Planet 13, the big retailer in Las Vegas, charges $10,000 per month and up for packages that include prime shelf space as well as promotional events and social media posts, according to an executive at one of the dispensary’s largest suppliers, who asked not to be identified. Several months into the promotions, the outlay has been worth it, according to the executive. “Sales zoomed” in the first month of the promotions, and have held steady.  Planet 13 did not respond to a request for comment.

It’s hard to know for sure how this will all play out, but it’s easy to imagine a bifurcated market emerging, as exists in other industries. There are lots of gourmet grocers around, after all, and those are largely supplied by small makers of unique products. Slotting fees are rare among those retailers, and in fact independent grocers are among those hurt most by the fees that fuel the big supermarkets.

While there was a long spate of closures of independent bookshops, they have bounced back a bit in recent years, because readers missed the personal touch and the unique experience they couldn’t get from Barnes & Noble or Amazon. There is clearly demand for bespoke weed products, and for the personal service offered by knowledgeable budtenders. There will likely always be some retailers willing to meet that demand.

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Dan Mitchell
Business columnist