Competition for shelf space in cannabis retail stores has many brands forking over big bucks to secure prime real estate.
Known as slotting fees, the practice is common among mainstream retailers and has been a topic of hot debate since it was first introduced in the mid-1980s. One school of thought is that slotting fees can be used as a tool for improving distribution of a brand while others consider the fees a mechanism for limiting competition in the marketplace.
As usual, the situation is more complicated for cannabis companies. While mainstream businesses can deduct expenses like slotting fees, marijuana businesses can’t. Under Section 280E of the IRS tax code, cannabis companies are barred from taking federal tax deductions for expenses that are related to selling federally illegal goods.
But many retailers in cannabis-legal states continue to charge for prime space on their shelves, and the expense is clearly worth it to some brands. Las Vegas-based Planet 13 offers packages starting at $5,000 a month to brands that want to be in its superstore, said David Farris, vice president of sales and marketing for the company. If a brand chooses a premium package that includes promotions, digital signage, or blasts on social media, it costs an additional $3,000 to $7,000 a month. There’s also a “launch” package for $4,000 that includes samples and training to get budtenders excited about the product.
It’s a system that helps Planet 13 better manage the SKUs in its store. For example, a brand may produce vapes, concentrates, flower, and edibles, but Planet 13 might not want to stock all of those products, so it charges a monthly fee for each category. That helps to create more of a partnership with the brand, Farris said.
“They need to believe in the brand and take the risk with us,” he said. “In the past, if they wanted us to pick up their gummies and they didn’t sell and were close to expiring, we’d have to have a fire sale and lose money. Now, they pay and we share the risk.”
Building symbiotic relationships with its retail partners is key for Colorado-based edibles maker Wana Brands, said Eric Block, the company’s chief revenue officer. Wana works with retailers to develop co-branded marketing opportunities that benefit both brand and retailer. In Block’s view, slotting fees are a way to gain greater access to budtenders and consumers through education.
“It’s not just real estate; it’s education,” Block said. “The value is in building deeper relationships, not just on the financial side but on the education side.”
That said, slotting fees have never been part of the program for some retailers.
Oregrown, a vertically integrated cannabis operator based in Bend, Oregon, doesn’t charge other brands slotting fees in its shops nor does it pay shops that carry its brands for space, said Kevin Hogan, the company’s co-founder and president. That’s because Oregrown is focused on mostly local craft cannabis businesses, and smaller brands typically find slotting fees onerous–if not impossible.
“We’ve been propositioned about slotting fees,” Hogan said. “They usually come from big groups with a lot of money. But our shelf space is really curated to attract a different kind of consumer so those guys aren’t really options for us.”
Paying for space on the shelves of other retailers also isn’t in the cards for Oregrown, though the company did look into it a few years ago.
“It was kind of scary for us because we’re a small business, and we can’t compete with people who want to pay ten grand a month for shelf space, and the people who can afford to do that at our retail stores probably aren’t candidates to be on our shelves,” Hogan said. “Our products are really high end, and we’re not built to be in all 680 stores and run specials and take losses.”
Oregrown’s model may be gaining resonance, even in California, where slotting fees seem to be most prevalent. Vince Ning, co-founder and CEO of the Oakland-based distributor Nabis, said he’s seen some retailers pull back on charging slotting fees since 2018 when they were charging thousands of dollars a month for shelf space.
“There was so much capital in the market it made sense for a lot of people — it was growth at all costs,” Ning said. “But in 2019 and 2020, frill-type services like slotting fees started to go away. People realized that what lasts is true value, not just what you can pay for.”