The invention of the supermarket

An interesting story in Forbes on the founding of King Kullen supermarkets in 1930 and its effect on how we live. They describe the way people bought groceries before self-service stores were invented, with a clerk picking out the individual items customers wanted (with few or no brand choices).

The process was erratic, labor intensive and costly. In 1930, Americans spent 21% of their disposable income on groceries. By 1940, that percentage dropped to 16%. Today, that figure is less than 6%--thanks to innovations in food distribution, mass merchandising and price competition that began in the 1930s.

"Supermarkets made it possible to achieve economies of scale at a lower cost to consumers," says Leslie G. Sarasin, chief executive of the Food Marketing Institute. "Americans were able to spend more of their disposable income on cars, education, clothing. They effectively created America's middle class."

A sidelight not mentioned in the story is that supermarkets spread so fast and destroyed the existing small retailers so quickly that only six years later, in 1936, congress felt it necessary to try to save the small retailers by passing the Robinson-Patman Act. Didn't work, did it?

Possibly big price discrimination decision

Time will tell how big this is, but a food distributor in Pennsylvania won a Robinson-Patman suit against a supplier for discriminatory pricing and against Sodexho for inducing discriminatory pricing.

Feesers filed its complaint against Michael Foods and Sodexho on March 17, 2004, alleging price discrimination in violation of the Robinson-Patman Act. A three-week bench trial took place in early 2008 before Judge Sylvia Rambo in the federal district court in Harrisburg, which resulted in the April 27, 2009 decision.

At trial, Michael Foods and Sodexho argued that Feesers and Sodexho were not in "actual competition" for purposes of the Robinson-Patman Act because Sodexho provides food management services to its customers, whereas Feesers is a food distributor. The court found, however, that both Feesers and Sodexho procure and distribute food for the same institutional customers and, thus, are in actual competition for the same food dollar.

Although the injunctions issued by the district court are binding only as to Michael Foods and Sodexho, it is now clear that price discrimination by food suppliers against distributors such as Feesers and in favor of large-volume food management companies and GPOs such as Sodexho will not be tolerated by the courts.

This law blog quotes attorneys for the two sides, who disagree (no surprise) as to the importance of the decision:

Kessler [Feeser's attorney] told us Wednesday that the decision could have a major impact on the food distribution industry. In recent years, he explained, food management companies like Sodexo--which provide procurement and management services for cafeterias at schools, hospitals, and prisons--have used their large client base as leverage to extract better pricing deals from suppliers. That's hurt distributors like Feesers. "Sodexho [said to its clients], 'We don't compete with distributors so you can give huge discounts,' " Kessler told us.

Peggy Zwisler of Latham & Watkins, who represented Michael Foods at trial, disputed Kessler's view of Judge Rambo's opinon. She told us it's "very fact specific" and does not have broad implications. She also said that Michael Foods has "strong grounds for appeal" and it intends to do so.

The decision is here.

I am not an attorney, so take my opinions with several grains of salt, but it seems to me that the most significant point in the decision is that no proof of competitive harm is required, that harm can be assumed from the size of the price differential. My understanding is that this interpretation, if upheld, would make such suits easier to win in the future.

“Competitive injury” is established prima facie by proof of “a substantial price discrimination between competing purchasers over time.” In order to establish a prima facie violation of section 2(a), Feesers does not need to prove that Michael Foods’ price discrimination actually harmed competition, i.e., that the discriminatory pricing caused Feesers to lose customers to Sodexho. Rather, Feesers need only prove that (a) it competed with Sodexho to sell food and (b) there was price discrimination over time by Michael Foods. This evidence gives rise to a rebuttable inference of “competitive injury” under § 2(a). The inference, if it is found to exist, would then have to be rebutted by defendants’ proof that the price differential was not the reason that Feesers lost sales or profits.

Independent grocers ask for R-P enforcement

The National Grocers Association sent President-elect Obama a wish list that includes a request that he push the Federal Trade Commission and Justice Department to enforce antitrust laws against their bigger rivals:

Consistent and balanced enforcement of our nation’s antitrust laws, including the Robinson-Patman Act, is especially important to ensure a level competitive playing field for entrepreneurial businesses. N.G.A. encourages you to appoint a Chairman of the Federal Trade Commission and Assistant Attorney General for Antitrust that will enforce the law in a consistent and balanced manner. A level playing field provides the appropriate marketplace environment where diversity thrives and consumers are well served with an abundance of choices.

I have mixed feelings on R-P enforcement: I agree with the NGA that there are serious abuses in trade promo and other channel practices, but I have doubts about R-P itself, which surely ranks among the most poorly-written major pieces of legislation ever (in the famous Fred Meyer decision, the Supreme Court wrote, "Conceding that the Robinson-Patman amendments by no means represent an exemplar of legislative clarity ..."). It's tough to comply with a law that no one quite understands.

An overhaul of R-P would be the ideal solution, but I have a hard time foreseeing that happening.

Are slotting allowances anti-competitive?

A law firm's blog, Consumer Goods and Retail Industry Litigation, has an interesting post about a recent study by a couple Norwegian economists: Do Slotting Allowances Harm Retail Competition? Since I let my subscription to the Scandinavian Journal of Economics run out, I can't access the full article (which is probably way over my head anyway), but here's the abstract:

Slotting allowances are fees paid by manufacturers to get access to retailers' shelf space. Both in the USA and Europe, the use of slotting allowances has attracted attention in the general press as well as among policy makers and economists. One school of thought claims that slotting allowances are efficiency enhancing, while another school of thought maintains that slotting allowances are used in an anti-competitive manner. In this paper, we argue that this controversy is partially caused by inadequate assumptions of how the retail market is structured and organized. Using a formal model, we show that there are good reasons to expect anti-competitive effects of slotting allowances. We further point out that competition authorities tend to use an unsatisfactory basis for comparison when analyzing welfare consequences of slotting allowances.

It sounds like the authors are arguing that slotting is anti-competitive. The blog entry summarizes briefly the arguments generally advanced by both sides, but I was pleased to see their conclusion, because it adopted a view that I've long held, that paying slotting fees is probably, in most cases, a violation of the Robinson-Patman Act, because it results in discriminatory pricing (and/or discriminatory allowances):

Price Discrimination - While substantial attention has been devoted to assessing the antitrust implications of slotting fees, commentators and the government often focus on the relatively simple antitrust issues associated with slotting – i.e., whether the fees are a result of collusion or impede entry of new products – but fail to grapple with a much more complicated issue: whether slotting fees give rise to price discrimination concerns under the Robinson Patman Act. Not all retailers and wholesalers charge slotting fees. Price discrimination concerns arise when a vendor pays slotting fees to one retailer, but not the retailer’s competitor. If the vendor does not reduce its product pricing to the retailer’s competitor by the amount of the slotting fee given to the retailer, paying the retailer’s slotting fee may violate the Robinson-Patman Act. For this reason, we believe that, in assessing the legality of slotting fees under the antitrust laws, the fees must be considered along with other discounts and allowances vendors give retailers and wholesalers.

I know of few manufacturers who make slotting payments on anything resembling a proportional basis. OK, let's be honest: Nobody pays them on a proportional basis. Now, some might compensate by offering larger payments of other types to those retailers who get little or no slotting, but I'm pretty sure this seldom happens. Also, since slotting payments are by definition (per FASB 01-9) price reductions rather than marketing allowances, other problems might be created by giving trade promo funding to offset a slotting payment.

When I've posted recently on the possibility of increased regulation of trade promotion in the next administration, I probably should have mentioned slotting fees -- it's one of the few areas of channel marketing that the FTC has paid attention to in recent years, and one that gets some consumer and media attention, and might therefore be an area for action.

Maybe it really could happen here

Back in March, I did a newsletter and blog entry titled Could it happen here?, which noted an increase in regulatory activity related to trade promotion in several places around the world (most notably, investigations of Intel’s channel practices in Korea, Japan, and Europe and repeated investigations of the grocery chains by the UK’s Competition Commission and by the EU). The question, as indicated by the title, was whether similar action might be forthcoming in the US – specifically whether the Robinson-Patman Act might be dug up from wherever it’s buried, dusted off, and actually enforced.

The conclusion I arrived at in March was:

Six months or a year ago, I would have said absolutely not (in fact, I think I did say so in my book). Now I’ll still say “absolutely not” in the short term, but modify it slightly to “probably not, but maybe” in the medium- to longer-term.

Now that another seven months have gone by, I think we’ve moved much closer to a point where there might be serious regulatory action involving trade promo. But I hedged a bit last time, and I’ll continue to hedge now. The current economic turmoil increases the likelihood that the next congress will include a substantial majority favoring populist legislation and strong regulatory oversight of business practices – which pretty much summarizes R-P.

But R-P has so faded from the scene that it might be beyond resuscitation. When I discussed this question recently with a couple knowledgeable observers, Rob Hand of Oracle and Mike Kantor of TPMA, Rob’s comment was, “How many members of Congress even know Robinson-Patman exists?”

As we discussed the question, the three of us came to the conclusion that the phrase “populist legislation and strong regulatory oversight of business practices” applies equally to other legislation – most notably Sarbanes-Oxley – and that a more likely result (somewhere near certainty) is increased enforcement of Sarbox and tighter scrutiny of accounting practices such as those dealt with in FASB 01-9 and 02-16. Those who were hoping for revisions that would weaken Sarbox can kiss that dream goodbye.

Whatever form the regulation takes, I’d be willing to bet my house (not that it’s worth anything at present), that there will be increased regulation of trade promotion in 2009-10. How long the increased pressure will last is another issue, but marketers would be well advised to take a look and see if there are any embarrassing pieces of paper lying around.

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.

Conyers doesn't want to repeal R-P

While John Conyers, the chair of the House Judiciary Committee, was polite about the Antitrust Modernization Commission when they presented their findings to the committee recently, it doesn't appear that he was in the least impressed with their recommendation that the Robinson-Patman Act be repealed:

Other recommendations, such as repeal of the Robinson-Patman Act, I am skeptical of ...

In its recommendations, the AMC suggests repeal of Robinson-Patman, claiming that it is not performing its intended function and that it conflicts with the goals of modern antitrust law. I am not in full agreement with the AMC on this point. Admittedly, the Act has its flaws; it is structurally complex and hard to administer, and it is not often used as an enforcement tool. But these problems don’t mean we should repeal the law altogether. Instead of repealing the Act, I believe we should be finding ways to make it work.

This is in line with my prediction six or so weeks ago.

AMC recommends repeal of Robinson-Patman

As expected (we reported it here a month ago), the Antitrust Modernization Commission has recommended to Congress that the Robinson-Patman Act should be repealed.

The commission, which has been meeting and deliberating for three years, said lawmakers should put an end to the Robinson-Patman Act, which bars suppliers from engaging in anticompetitive price discrimination.

"The act has really outlived its usefulness and is better put to rest," said Jonathan Jacobson, an antitrust lawyer with the firm Wilson Sonsini Goodrich & Rosati and a member of the commission.

The Washington Post provides the arguments against R-P, which has never been popular with econmists.

When it came to the Robinson-Patman Act, however, the commission recommended repeal. Congress passed the act in 1936 with the idea of leveling the playing field between small businesses and chain discount stores.

Enforcement of the Robinson-Patman Act has been in decline since the 1990s as the statute has come under increasing criticism from economists, who say it works against the interest of consumers by discouraging legitimate discounting.

Critics say the act actually hurts small businesses because some suppliers choose to avoid selling to them altogether to avoid running afoul of the law. "It makes price competition more difficult and complicated," Jacobson said.

I very much question the last paragraph -- a "problem" I have literally never even heard of in more than three decades in this business. But, nonetheless, I agree that R-P is a far-from-perfect piece of legislation (I presented a short form of my proposed fixes in the previous post, and I think I will flesh out the argument a bit more in the next few days).

It seems to me, though, that given the importance of this issue to our trade, that this is something on which we should present a group position to Congress. Even if there are differing opinions within the TPM community (as there surely will be), we can present to Congress our collective wisdom and experience, complete with differing views.

I've suggested to Mike Kantor that this is an appropriate issue for TPMA to take a leadership role.

Note: The full report is here (warning: it's 540 pages -- if anybody bothers to read the whole thing, please let me know).

Repeal Robinson-Patman?

In 2002, Congress created something called the Antitrust Modernization Commission. The commission was asked to look into antitrust laws and recommend changes.

The final report from the commission is due in April but tentative recommendations have been released, including the following:

ROBINSON-PATMAN ACT
44. Congress should repeal the Robinson-Patman Act in its entirety.
45. [Note: Discussions at the July 26th deliberation meeting proposed this tentative
recommendation.] Until Congress repeals the Robinson-Patman Act, courts
should interpret the Act to require plaintiffs to make a showing of injury to
competition similar to that required under the Sherman Act.

Full text of tentative findings are here.

I doubt very much that the new congress, which is very different from the one that crearted the AMC, will do as the commission asks. I also wonder how much it matters.

My own opinion, since you asked, is that Robinson-Patman, flawed as it is, should not be repealed. It should be revised to reflect the realities of the marketplace, however. The most important of these is that market power exists more with the retailer than with the manufacturer, and that R-P should therefore be directed at stopping retailers from demanding market-distorting allowances, rather than at punishing manufacturers for giving into such demands.

I have often argued that R-P is written backward, and is comparable to a bank robbery law saying that it is illegal for banks to allow themselves to be robbed, and that the bank president will be jailed if it happens.

Electoral effects on marketing

The big news in the past week was, of course, the mid-term elections. The Democrats taking control of both houses of congress will presumably have some major impacts on the nation as a whole, but how will it affect marketers?

Advertising Age offered some speculation, opining that there will very likely be an effort to limit marketing, especially of fast-food, directed at children. There could be curbs on prescription drug advertising as well.

The article being in Ad Age, it paid no attention, of course, to trade promotion or channel marketing; which is just as well, since on the rare occasions when they address channel marketing, they usually get it all wrong.

To be fair, though, there probably will be little effect on channel marketers, so Ad Age is probably justified this time in ignoring the subject. Though congress has oversight responsibility relative to the Federal Trade Commission, it’s unlikely they will use it to press Robinson-Patman enforcement.

It used to be a truism that Democrats were more enthusiastic about R-P than Republicans, which made sense because both Robinson and Patman were Democrats, as was the president who signed the law, FDR. But that was a long time ago, and recent history indicates that any difference between the parties on R-P is muted at best. The FTC under the two most recent Democratic presidents, Carter and Clinton, was not noticeably more active than when Republicans were in charge.

The two most recent FTC actions relative to trade promotion show a split in regard to the parties. There was a Robinson-Patman case pursued in the Clinton years – a minimum advertised price case against the recording industry for price-fixing on CDs – and there was a (half-hearted) investigation of slotting by the commission in 2000-03 (I served on a couple panels at their hearings), undertaken at the direction of the Republican-controlled Senate commerce committee. The findings could be summarized as “this subject needs further study,” and that was the end of that.

Overall, the record of both parties over the past couple decades indicates that enforcement of R-P in any significant manner is not on their radar. The one exception to this might be the possibility that hostility toward Wal-Mart among some groups might spur action. This is unlikely, but possible.

There has been some talk about possibly restructuring Sarbanes-Oxley – my bet is that this is off the table for the next couple years.

A representative of the American Association of Advertising Agencies was quoted in Ad Age as saying, "All in all, with the first open presidential election in years looming in 2008, Democratic control of either house will be characterized by high-level debates on popular issues. In the advertising, marketing and communications category, that leaves a lot of room for grandstanding.”

Grandstanding being something both parties are good at, it’s something we can always anticipate. But there’s little reason to expect much real action in the area of trade promotion.