Cannabis Dispensary Slotting Fees: What You Need To Know
Michigan is the latest state to adopt cannabis retail slotting fees, a practice that’s slowly but surely gaining traction as the market experiences unprecedented growth. As new medical and recreational markets open and established markets expand, slotting fees are expected to become part of the norm. But is that a good thing for the cannabis industry? It’s a hot topic of debate, and for most cannabis entrepreneurs, the whole practice may seem a little murky. In this post, you’ll learn the basics about slotting fees, why they matter, and how they might benefit your cannabis-related business (CRB).
What Are Cannabis Slotting Fees?
Slotting fees are the cost a retail store charges manufacturers and brands in exchange for premium displays and shelving space. Slotting fees dictate the product’s shelf position, total linear shelf space, and for multi-store retailers, the number of stores where the product will be featured. The objective of slotting fees is to boost short-term sales and attract new customers to a brand.
This practice has been common in traditional retail businesses like groceries and bookstores since the 1980s. In cannabis markets where slotting fees are increasing, the fees can range anywhere from $500 to $15,000, and in some cases, even upwards of $50,000. Slotting fees are on the rise as cannabis products skyrocket in an oversaturated market that’s also competing with black-market cannabis sales.
How Are Cannabis Slotting Fees Calculated?
Shelving fees vary from market to market. They’re usually based on the product, the local market, and the manufacturer. The main reason behind the rise of slotting fees is that cannabis products are booming, but there aren’t enough dispensaries to keep pace with popularity and demand. That means that shelf space is limited, and, by extension, valuable.
Typical slotting fee contracts are three to six months long. They can be levied as a flat fee, including agreements for minor store renovations and build-outs in exchange for floor space, or in-kind service and product tradeoffs. Slotting fees can be charged for shelving spaces, promotional or seasonal displays and end caps. Slotting fees sometimes lead to follow-up contracts, like pay-to-stay fees for underperforming products to keep them on the shelves.
Why Do Cannabis Retailers Charge Slotting Fees?
Michigan is the most recent state to adopt cannabis slotting fees. The reason? Plummeting cannabis retail sales in an oversaturated market. Michigan is following the lead of states like California, Colorado, Nevada, and Washington. With uncapped business licenses in these states, more cultivators are entering the market, leading to price cuts on consumer products and intense competition for customers in-store. While many CRB owners view slotting fees as anti-competitive, supporters of the practice argue that it’s an additional stream of guaranteed revenue for dispensary owners. Let’s take a look at the arguments for and against cannabis slotting fees.
Benefits of Cannabis Slotting Fees
Slotting fees give CRB entrepreneurs more leverage and guaranteed income. They also allow CRBs to build more equal, symbiotic relationships with retail partners, because both businesses take on an equal amount of risk where slotting fees are levied.
Here’s an example:
Without slotting fees, if a dispensary picks up a new product, they pay for the product in full, whether or not it sells. If the product underperforms and is close to expiration, the dispensary would have to have a sale to move them, losing money on the product.
With slotting fees, both the dispensary and the manufacturer take on equal risk. The slotting fee guarantees revenue to the dispensary, whether or not the product sells. Underperforming products may purchase a “pay-to-stay” extension, or the manufacturer may opt to pull them from the shelves. Either way, the risk to the dispensary is offset by the slotting fee.
Supporters of slotting fees argue that they can improve brand distribution, normalize cannabis in mainstream retail markets, and give cannabis brands more control over how their products are displayed and marketed in-store.
Disadvantages Of Cannabis Slotting Fees
So, what’s the downside? Opponents of cannabis slotting fees argue that it’s a predatory practice that prices out smaller operators – especially social equity licensees and minority-owned companies. For this reason, many CRBs and cannabis brands don’t view slotting fees as a sign of industry maturation. An oversaturated market and thriving black-market competition give some CRBs unprecedented leverage. However, smaller women-owned brands, POC-owned brands, and brands built in Black and brown communities don’t have the financial ability to compete with “Big Weed” companies who have more cash to spend on slotting fees.
Another disadvantage is that when a brand pays a premium for shelf space, they may expect more service on their investment. Cannabis slotting fees may come with the expectation (or contractual clause) that the dispensary’s sales team will be brand advocates too, pushing customers toward the product and promoting it in-store.
Finally, cannabis slotting fees come with a host of tax issues. Unlike mainstream retail businesses, CRBs can’t deduct slotting fees from their taxes, so slotting fees cut into profit margins if they’re not built into the budget from the start.
Tax Issues For Cannabis Slotting Fees
Under Section 280E of the IRS tax code, cannabis businesses may not take federal tax deductions for expenses related to selling federally illegal products. This makes cannabis slotting fees different from mainstream retail business, where these expenses are deductible. What does that mean? Larger, corporate dispensaries with multiple locations are more likely to charge slotting fees, edging out competition from independently-owned cannabis brands and shops.
Are Cannabis Slotting Fees Legal?
That’s an issue that’s up for debate, especially by opponents. In most legalized states, regulations simply forbid “anti-competitive” behavior, without any guidelines as to what constitutes “anti-competitive” behavior. Because of the disconnect in legality at the state/federal level, even states where cannabis is legalized, such as California, don’t have any cohesive guidelines for cannabis businesses.The assumption is that since slotting fees are legal for grocers and comparable retailers, it should be legal for cannabis retailers as well.
But many argue that cannabis retailers aren’t the same as grocers, and should therefore have standards aligned with retailers in a comparable industry, such as alcohol. For example, in California, the Alcoholic Beverage Control Act forbids slotting fees for alcoholic products.
Should Your CRB Charge Slotting Fees?
While slotting fees become more common in the cannabis industry, they’re not right for every retail shop. Whether or not to charge (or pay) slotting fees depends on your CRB and the market you’re trying to capture. Slotting fees can be a significant opportunity to increase revenue – or an expensive marketing gamble.
Before you decide whether slotting fees are right for your business, consider these questions:
- How big is your brand or dispensary?
- Does your dispensary have multiple locations?
- Do you have the budget to pay slotting fees?
- Would charging slotting fees help your dispensary stay profitable?
- Who is your customer base, and what do they want?
- Does your shop sell more boutique, artisanal products or larger cannabis brands?
Paybotic: Your All-In-One Solution
As your local market expands, you may find yourself facing the question of whether to pay or charge slotting fees – which leads to the next question: How will you pay or receive these funds? Whatever you choose, Paybotic empowers your business to reach its full potential.
Move funds with ease, without the need to risk large sums of cash in-store, and make it easier for customers to pay for their purchases, online or in-store. Paybotic’s full suite of banking and financial tools ensures that whatever size your CRB, you’ve got the financial tools to maximize sales and stay ahead of the competition, no matter what the future brings.
Apply today and give your cannabis brand the competitive edge it needs for long-term success!