Are exclusive promotions an antitrust issue?

Ad Age ran an interesting article on News Corp.’s in-store promotion division offering deals in which suppliers can buy exclusive rights to in-store promotions -- preventing rivals from running promotions even during time periods when the supplier is not promoting.

The deals, offered by News Corp.'s News America unit, run as high as eight figures and have been bought by top package-goods marketers, including Procter & Gamble Co., Kimberly-Clark Corp., Johnson & Johnson, Unilever and General Mills. Some of the so-called category buyouts can effectively lock out competitors from in-store advertising for their duration -- even if the marketer is not advertising at that time -- and confer an edge in crucial retail territory described by marketers as the 'moment of truth.'

News America sells in-store promotion (shelf talkers, floor ads, coupon dispensers, etc.) on behalf of about 35,000 retailers -- they control about 90% of the market.

Under the terms of the deals it has been selling, marketers pay News America for media and a minimum production expense for in-store ads across multiple four-week cycles whether or not they use the space or services, according to the documents. In weeks they choose not to use the space, competitors can be blocked from using it.

And people are being shut out:

One package-goods marketer competing with Unilever said he was told when he inquired about buying a shelf-sample dispenser program that the category had been sold out to his rival for a year for $1.8 million. But the marketer said he hadn't been asked to bid on the category-exclusive deal beforehand and wasn't informed of the full scope of Unilever's buyouts across multiple categories.

According to the employee newsletters from News America for November and December, category-exclusive deals with Unilever covering all or most weeks of 2006 in hair care, deodorant and hand-and-body lotion total $14.6 million as part of an overall in-store relationship of $19 million for the year. The hand-and-body deal alone was worth $9 million, according to the documents.

So is it legal?

It's an interesting case. You could argue that this is just an exclusive advertising arrangement, no different from Coke, for example, buying exclusive rights to an event like the Super Bowl and preventing Pepsi from buying time on the game.

But given that this is in-store, you could also make the case that such arrangements prevent competitors (generally the smaller ones) from promoting their products at the point of sale, which would mean that they could be seen as restraint of trade.

However, that’s my decidedly inexpert opinion. I passed the question by Veronica Kayne, former Assistant Director of the Bureau of Competition at the Federal Trade Commission and now an antitrust partner at Haynes and Boone LLP in Washington. Veronica says that there might be a case, but not a strong one:

I would phrase the antitrust market definition question as follows: If one manufacturer controlled all the advertising and promotion in all the locations at which its products were sold, would it be able to raise the price of those products or eliminate competitors?

If the answer is "no," then in-store advertising would not be considered a separate antitrust market; it would be part of a much larger market for advertising (direct mail, newspaper, TV, radio, Internet). Once it is part of that big a market, it's hard to see how exclusives in a small segment of that market could hurt competition in the overall market.

My guess is the answer is "no." Manufacturers denied access to the retailers would be likely to increase their advertising and promotion through other channels, proving they are substitutes for in-store activities. Enough people would see advertising on TV or in newspapers that if they went to a store and saw high prices or an absence of products they wanted, they would shop elsewhere. Or the retailer would be forced to drop prices or carry new products. But of course, if I'm wrong about the facts, or if the facts change, then the market definition can change too.

For products to be alternatives, or "substitutes" in an antitrust sense, and thus in the same "market," they don't have to be perfect substitutes. They just have to be substitutes. You'd rather have whole cashews, but if the price goes up enough, you switch to cashew halves, or if the price keeps going up, cashew pieces or even peanuts.

So, pushing the point, I asked how bad a substitute has to be before it makes a difference.

In the world of trade promotion marketing, we are getting to the point where we can assign values to different sorts of promotion, in terms of their relative costs and effectiveness in moving product. Let's say it can be proven that, for grocery products, coupon dispensers in supermarkets are 50% more effective than newspaper/radio/TV ads in ROI terms. The argument is that if Bob's Canned Vegetable Company is prevented from using couponing, I can use the newspaper instead. In the marketplace as economists envision it, newspaper advertising, being less effective, should reduce in price to a point where it's in rough parity with coupon dispensers in value terms.

However, that might not happen in this instance, because newspapers are not selling only to grocery marketers, but to a variety of other products and services, for many of whom it is an excellent medium. Therefore, newspaper advertising rates will probably remain fairly constant in terms of the overall media marketplace, and thus will always remain less cost-effective to BCVC. If Del Monte buys up all the coupon dispensers in the country, we cannot effectively compete because our advertising/promotion costs will go through the roof (if Del Monte's trade promotion costs are 20% of sales, BCVC would be forced to spend 30% in order to achieve parity -- which might be a financial impossibility).

Veronica was unimpressed with that argument as well:

How big does the difference have to be before it's meaningful? I'm going to take refuge and be legalistic: determining the relevant market is a question of fact for the jury, so the standard is could a reasonable jury come to whatever conclusion this jury came to?

Antitrust doesn't guarantee you the best distributors or advertising channels. It just, on a good day, guarantees that no one will pre-empt so much that you can't get to minimum efficient scale. Think about setting up a network of pharmacies to offer an insurance company. The first guy gets the best pharmacies. The second guy to set up a network may have to reach deeper into the array and have more pharmacies to get the same sort of coverage because these don't have quite the right geographic dispersion or the right hours or don't have enough delivery. But you can still set up the network. Only if the first guy has gotten exclusive contracts with so many pharmacies that the second guy can't build a competitive network is there an antitrust problem, under current antitrust jurisprudence.

So it sounds like, if the FTC and the Justice Department are thinking along the same lines as Veronica, which is probably fairly likely, they might look into this question without taking action. So how about an ambitious state Attorney General? Eliot Spitzer made his name in New York with stuff like this. The problem there is that this is only indirectly a consumer issue (there might be fewer coupons available to consumers), which is how AGs get headlines. They don’t get excited about defending a big corporation from a bigger corporation.

So the only likelihood for legal action on this issue is private litigation. Conwood showed that this can be a very big deal, collecting a billion from U.S. Tobacco for antitrust violations – but it’s an expensive path to take, and it’s questionable if this issue could engender damage settlements big enough to make it worthwhile.

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Veronica Kayne can be reached at Veronica.Kayne@haynesboone.com.