Is MSRP OK?

The Supreme Court handed down a ruling Thursday overturning a precedent that had stood for almost a hundred years, and has opened up the possibility that manufacturers could have more freedom in crafting price maintenance programs.

The ruling, in the case of Leegin v. PSKS, overrides the Court’s 1911 Dr. Miles decision, which had established a per se standard in vertical price maintenance cases, and replaces it with a rule-of-reason standard. Translated from the legalese, this means that under the Dr. Miles standard, any manufacturer-imposed price plan was a violation of the Sherman Act, but now such a plan is a violation only if it can be proven to have anti-competitive effects.

I won’t go into too much detail on the case, both because I’m not qualified to do so, and because the legal fine points are not necessary for a marketer-level understanding of the implications. Those implications will become clearer as time passes, but we’ll try to get an early start on it here.

To summarize the case very briefly, Leegin sold its Brighton line of fashion accessories through boutique outlets, which were required to price the products at a certain level. PSKS was one of their customers, but was cut off after they reduced prices below the specified levels. PSKS sued Leegin for damages and won at the lower court level. Leegin tried to introduce expert testimony that their suggested price program was not anticompetitive, but they were not allowed to do so, because the courts held that such testimony was irrelevant, given the per se rule established in the Dr. Miles case.

The new ruling allows the case to be retried including Leegin’s expert testimony. If they can show that their program did not damage competition, they can win the case.

In their decision, the Court listed some of the ways in which a price-maintenance program can be pro-competitive. It seems likely, therefore, that if you can show that your program is crafted in such a way as to achieve these goals, you may be on solid ground.

The Court argues that reducing intrabrand competition (the competition among retailers selling the same product) can enhance interbrand competition (competition among manufacturers).

The promotion of interbrand competition is important because “the primary purpose of the antitrust laws is to protect [this type of] competition.” … A single manufacturer’s use of vertical price restraints tends to eliminate intrabrand price competition; this in turn encourages retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s position as against rival manufacturers. Resale price maintenance also has the potential to give consumers more options so that they can choose among low-price, low-service brands; high-price, high-service brands; and brands that fall in between.

They go on to argue that price maintenance programs promote higher levels of service to consumers by eliminating free-riding.

Or consumers might decide to buy the product because they see it in a retail establishment that has a reputation for selling high-quality merchandise. … If the consumer can then buy the product from a retailer that discounts because it has not spent capital providing services or developing a quality reputation, the high-service retailer will lose sales to the discounter, forcing it to cut back its services to a level lower than consumers would otherwise prefer.

They also believe that other services might be provided by retailers who are confident of their margins:

Resale price maintenance can also increase interbrand competition by encouraging retailer services that would not be provided even absent free riding. It may be difficult and inefficient for a manufacturer to make and enforce a contract with a retailer specifying the different services the retailer must perform. Offering the retailer a guaranteed margin and threatening termination if it does not live up to expectations may be the most efficient way to expand the manufacturer’s market share by inducing the retailer’s performance and allowing it to use its own initiative and experience in providing valuable services.

In addition, the Court believes that price maintenance can facilitate entry of new brands, thus increasing competition.

“[N]ew manufacturers and manufacturers entering new markets can use the restrictions in order to induce competent and aggressive retailers to make the kind of investment of capital and labor that is often required in the distribution of products unknown to the consumer.” … New products and new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price maintenance there is a procompetitive effect.

In a final section, the decision lists some of the things that would indicate an anticompetitive effect:

For example, the number of manufacturers that make use of the practice in a given industry can provide important instruction. When only a few manufacturers lacking market power adopt the practice, there is little likelihood it is facilitating a manufacturer cartel, for a cartel then can be undercut by rival manufacturers. … Resale price maintenance should be subject to more careful scrutiny, by contrast, if many competing manufacturers adopt the practice.

The source of the restraint may also be an important consideration. If there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer. … If, by contrast, a manufacturer adopted the policy independent of retailer pressure, the restraint is less likely to promote anticompetitive conduct. … A manufacturer also has an incentive to protest inefficient retailer-induced price restraints because they can harm its competitive position.

As a final matter, that a dominant manufacturer or retailer can abuse resale price maintenance for anticompetitive purposes may not be a serious concern unless the relevant entity has market power. If a retailer lacks market power, manufacturers likely can sell their goods through rival retailers. … And if a manufacturer lacks market power, there is less likelihood it can use the practice to keep competitors away from distribution outlets.

Although this case dealt with price maintenance rather that minimum advertised price (MAP) programs, it would seem that the Court has indicated a more-lenient attitude toward manufacturer involvement in pricing generally, and that MAP programs might be allowed more latitude as well. This would allow manufacturers to put more teeth into co-op/MDF policies forbidding payment for advertising below specified prices.

These policies can of course be enacted only by those manufacturers who have the appropriate brands and the channels (independent resellers and smaller chains) to implement and enforce pricing rules.

If your company has products and channels for which price-maintenance programs are appropriate, you should bring this decision to the attention of your counsel. Here’s where to direct them:

• A short write-up on the background of the case is here.
• The decision is here.

More bad news for the media

Another update -- the bad news continues for the "old media" companies:

• The New York Times Company reported that ad revenues declined 8.5% in May, with national, retail, and classified all declining.
• Bear, Stearns offers some thoughts on the possibility that NYT might be the next takeover target.
• Ad Age asks the question, "Where's the money moving?" and answers themselves, "Out of media." Much of that movement, we know, is into trade promo.
• Car dealers are saying "bye-bye" to the classifieds. Revenues for automotive classifieds dropped 12.8% in 2006, and another 20.1% in the first quarter of 2007. Ouch!

Can it get much worse?

Yeah, it probably can. And will.

Wal-Mart slows it down

I need to bring some things up to date, so the next few posts will be updates of ongoing issues – the first being the ongoing questions about what appears to be a floundering Wal-Mart.

The most interesting thing has been Wal-Mart’s recent announcement that they will seriously cut back on their rate of expansion.

At Wal-Mart’s annual shareholder meeting here this morning, executives surprised investors by announcing that they would reduce the number of new supercenters to be opened this year by 35 percent, or roughly 70 stores, to hold down the chain’s mounting expenses.

It was the second such cutback in the past year and suggested that Wal-Mart, whose staggering growth has produced hundreds of new stores a year, is at a turning point in its 40-year history.

The first thing to note about this is that, even with the reductions, Wal-Mart will still be growing at a rate faster than the total size of all but a few other chains in the world. Wal-Mart will open about 200 new stores this year, instead of the planned 265-270. At about $100 million per store, that’s growth of $20 billion (about equal to the total sales of J.C. Penney). In the next few years they plan about 170 stores per year.

But the change does reflect an awareness that the chain has matured and needs to emphasize growing profits over volume.

Opening fewer stores will also ease some of the criticism about “comp store” figures – part of the reason Wal-Mart has done poorly in this measure is that all those new store openings were cannibalizing sales at the existing outlets.

The change in Wal-Mart’s direction raises a difficult question for their suppliers, however – they are going to have to look elsewhere to get their own sales increases, rather than depending on riding Wal-Mart’s growth.

Private equity and TPM

Over the past year or so, I’ve noted with increasing wonder the number of acquisitions of major brands by private equity and hedge funds, including both major retailers and their suppliers. I won’t bother with a list here, but I imagine you’ve been noting the same thing.

The question I’ve had (not surprisingly, given my focus) is what effect this will have on trade promotion practices. Here is an article in Brandweek that addresses the issue from a related marketing point – is such a buy-out good or bad for brands?

Although the tone of the article seems to me somewhat biased against private equity, nonetheless it seemed to come down to the classic non-answer: “It depends.” In this case, it depends on the reason for the buy-out and the strategy of the buyers.

Unsatisfying as that answer always is, I suspect it probably applies equally well to trade promotion. As many buy-outs as are happening, it’s safe to assume that they are happening for a variety of reasons and will therefore have a variety of effects.

Where I think buy-outs will have an effect on trade promo practices is in taking some emphasis off short-term results. I know I’m not alone in criticizing business for short-term thinking – it is, in fact, a bit of a cliché – but it has led to some of the worst abuses in trade promotion. Ahold is, of course, the poster child here, but we all are aware of many similar (though less egregious) cases from similar experience – a great many companies have used trade promotion funding to pad quarterly figures, to stuff the channel, and to hide problems in a variety of ways.

Being allowed to do more long-term thinking might also allow channel marketers to focus some funding on building up promising smaller accounts, rather than directing everything toward the largest accounts, who can often provide the greatest incremental lift in the shortest time. I've advocated such practices for years, in the belief that suppliers need to keep smaller channel players healthy as a defense against the effects of consolidation. My pleas have generally fallen on deaf ears, however.

All this, of course, presumes that private equity investors are willing to build a company up before making their profit on a resale, and that’s where the “it depends” comes in. Some will take that view, and some will just want to provide some quick fixes in a “buy and flip” operation – they’ll be no more interested in trade promo best practices than the antsiest Wall Street analyst.

Kellogg won't advertise sugary cereals to kids

I read a number of articles on Kellogg's new guidelines for advertising nutritionally-questionable products, which I think most people probably approve of.

I couldn't help, however, having two non-nutritionally-correct thoughts on the subject:

One is that this is just what the TV industry needs these days -- losing another billion or so in advertising. (Actually, I don't know how much Kellogg spends or how much the net effect will be in lost advertising -- I'm just guessing it will be significant).

The other is that I wonder whether some of the money will simply move to in-store and other trade promo funding.

Old news: Dell being sued for Intel payments

My apologies for posting about something that happened several months ago, but I just learned about this and since I haven't heard it discussed, I'm guessing some of my readers are equally in the dark.

Back in February, a group of Dell stockholders filed a lawsuit against Dell and Intel, alleging that volume rebates the company had received from Intel had not been disclosed, causing the stockholders to not understand fully the importance of such payments to the company's profits.

"Intel secretly paid very large end-of-quarter cash rebates to PC (manufacturers), like Dell, that purchased all or virtually all of their microprocessor/chip requirements from Intel," the amended lawsuit states. "These rebates, which were, in fact, kickbacks, were not traditional volume-based discounts and the monies paid were separate and apart from and in addition to certain publicly known, co-marketing funds which Intel made available to certain of its customers to assist in product advertising."

The amount of the payments, according to the suit, was about $1 billion annually.

Although this is specifically separate from co-op/MDF and other such payments, as noted in the last sentence quoted, I've often argued that retailers should be required to reveal the amount of trade promo funds they receive, since the funding is often well in excess of profits. The SEC has thus far ignored my suggestions, however.

This lawsuit has some relationship to the AMD-Intel lawsuit and investigations of Intel in Europe and Korea, which involve some of the same payments.

Intel strongly denies any wrongdoing: "We conducted a preliminary review of the complaint. At first glance, it appears that some of the allegations with respect to Intel appear to have been completely made up."

The Times They Are A-Changin'

Bob Dylan didn't have channel structures much in mind back in the sixties when he wrote that famous song, but the music reference is apropos: What has happened is that one group of channel interlopers has been passed by another in the music biz.

I've posted on the destruction of the music retail channel before -- the death of stores such as Wherehouse and most recently Tower, killed off by mass merchants. But now we're seeing another whole channel, or two, taking a big piece of music retailing.

According to NPD Group, ITunes has moved past Amazon and Target to take third place in music retailing. The top five are:

1. Wal-Mart - 15.8% market share
2. Best Buy - 13.8%
3. ITunes - 9.8%
4. Amazon - 6.7%
5. Target - 6.6&

Just for old-times sake, I think I'll listen to Subterranean Homesick Blues on my Ipod.

Can you define "market"?

If so, the government wants to hire you.

Two recent merger cases have raised the question of how markets are defined. Normally, this blog doesn't care much about the merger and acquisition part of antitrust law, and I'll admit that I know practically nothing about it. But these particular cases are of some interest to marketers.

The one that's getting the most attention this week is Whole Foods/Wild Oats. The purchase of Wild Oats by Whole Foods would combine #1 and #2 in the high-end organic food market -- if you consider that a market. If you do, then you would oppose such a merger, as the Federal Trade Commission has announced it does. Alternatively, you could describe the merger as the combination of two small supermarket chains, minnows compared to Kroger and Super Valu, and say that there's no reason for the FTC to oppose it.

The two chains have said they'll take the FTC to court:

"The FTC has failed to recognize the robust competition in the supermarket industry, which has grown more intense as competitors increase their offerings of natural, organic, and fresh products, renovate their stores and open stores with new banners and formats resembling Whole Foods Market."

Personally, although I'll reiterate that I know nothing about the law, I think I side with the stores. There is no "natural food market", there's a niche within the grocery market that these two stores have successfully exploited. But now all the big chains are jumping in, and the only way for the niche players to survive will be to combine and grow. As an example, here's the Basha's chain in Arizona announcing their entry into the niche a couple weeks ago:

Bashas' will open its first Ike's Farmers' Market grocery store this weekend in Oro Valley, company officials announced Wednesday.

Ike's Farmers Market is a new concept for the privately held, Chandler-based chain that operates Bashas' Supermarkets, AJ's Fine Foods and the Food City grocery stores.

Ike's features organic breads, an extensive offering of bulk food items such as nuts, grains and coffees, organic wines and health-oriented products including supplements and natural body care items.

Ike Basha, by the way, was one of the founders of the chain.

This is just one of dozens of entries into the category by existing supermarkets, who are either opening new stores under new names, as Basha's is doing, or vastly expanding their natural food selections (e.g., Wal-Mart).

The other case is the merger of the XM and Sirius satellite radio companies. This one raises the question of whether satellite radio is a distinct market from broadcast radio. If it is, then the only two providers are merging; if it isn't, then the merger is no big deal, because the two represent a fairly small portion of the radio market.

The thing I enjoy about this one is watching the National Association of Broadcasters twist themselves into pretzels trying to make a logical argument against the merger. The NAB is the principal opponent and has been lobbying Capitol Hill assiduously. The problem is that the NAB's actions undercut their argument: If satellite radio is not competitive with the broadcasters, then why does the NAB care?

UK Competition Commission publishes working paper

The Competition Commission investigating practices in the UK supermarket channel has released a working paper that finds numerous areas of concern. According to a British law firm, Cameron McKenna, the commission identified forty-two practices that they categorized under eight headings:

• Requiring payments or concessions in return for access to shelf space in relation to both new and existing products
  
• Imposing conditions relating to suppliers’ trade with other retailers
• Applying different standards to different suppliers’ offers
• Imposing an unfair imbalance of risk
• Imposing retrospective changes to payment or contractual terms
• Restricting access of suppliers to the market
• Imposing charges on or transferring costs to suppliers
• Requiring suppliers of groceries to use third party suppliers nominated by a retailer

Many of these practices are familiar to those of us on this side of the pond. In addition, "The Commission also voiced concern about possible barriers to market entry for small suppliers and the consequent impact on innovation and product choice for consumers."

The article also suggests that the working paper "has prompted speculation that the Commission may impose tough guidelines on retailers."

It seems to me possible that action to halt the growing power of huge retailers might present an example to the FTC in the US. Combine that with the cool reception given by Congress to the Antitrust Modernization Commission's recommendation that Robinson-Patman be repealed, and perhaps there might be an environment developing in which steps might be taken to control retailer power.

Or maybe not. But it will be interesting to watch. Provisional findings are due from the Competition Commission in September -- so that's when we'll get the next clues on how the winds are blowing.

This reminds me that I said several weeks ago that I would put forth my recommendations for reforming rather than repealing R-P. I promise to do so -- someday soon.