Category Captains and Antitrust Issues

Introduction Over 65 antitrust policymakers, business and legal advisors and academics debated the antitrust implications of the recent but increasingly widespread retail business practice known as category captains (CC) at a roundtable forum on June 23. The American Antitrust Institute (AAI), the Journal of Public Policy & Marketing, Cornerstone Research, and the Coggin School of Business at the University of North Florida jointly hosted the forum at the National Press Club in Washington, D.C. Objectives: The workshop's objective was to bring together knowledgeable stakeholders from antitrust, marketing, retailing and category management to: Examine antitrust questions around category captains; Enhance understanding of the antitrust implications of category captain arrangements; Develop an informed approach for assessing these implications; and Chart a course for further understanding. Topics: Overview of category captains Practitioner, consultant and trade association perspectives Antitrust case developments Enforcement agency and legislative activities Academic and applied research Antitrust concepts and theories EXECUTIVE SUMMARY The Forum's Rapporteur, Gabrielle Herderschee-Hunter, created the following executive summary with the intent of providing a relatively succinct but comprehensive forum overview for a broad audience. It does not purport to represent the policy views of the AAI or any other sponsor of the Roundtable. Definition and Outline of Concerns RaisedCategory Management (CM) refers to a distributor/supplier process of managing individual product categories as strategic business units. CM is designed to enhance business results by focusing on delivering consumer value, according to the Food Marketing Institute. To date, most examples of CM are in the food and drug distribution sector, although CM and CC's do appear in other retailing fields, such as bookselling. Retailers often assign to various leading manufacturers in individual product categories the (often-exclusive) privilege of advising them on, and sometimes even physically managing, the shelf space for the respective market categories where the supplier is well established and often dominant. Thus, the term Category Captain (CC) (or Lead Resource) refers to the leading supplier who advises a retailer on how to manage individual categories as strategic business units. Manufacturers who act as CCs often pay for the privilege both in terms of allocating human resources to the task of managing the shelf space and also by paying retailers for the right to be the CC. Captains can play pivotal roles in terms of helping retailers to: Determine prices for all category brands, Decide which products are shelved where and for how long in their respective product categories, and Market individual categories to consumers. Retailers' growing reliance on leading suppliers as CCs grew out of category management by retailers in the mid 1990s and business trends are now reportedly moving towards whole aisle captains (leading suppliers who advise retailers on how to manage shelf space for entire aisles) and segment captains (leading suppliers who advise retailers on managing shelf space for product segments). The exclusivity and extent of the category captain's role varies, depending on the relationship and/or agreement between the captain and retailer. According to the FTC Slotting Allowances Report [February 2001], there are two major competitive concerns in retail CM. First, a dominant manufacturer could use its role as CC to exclude rival suppliers or significantly increase their costs of competing. Second, a category captain could use its role to facilitate collusion among the competing category manufacturers or retailers. (For FTC Report, see Related Articles below.) Consumers greatly benefit from expert market leaders in narrow product areas advising widely generalized retailers about trends in respective products categories, according to CM advocates. CM generates efficiencies for retailers -- such as the timely ordering and stocking of appropriate and desirable seasonal products -- which are passed on to consumers, CM supporters argue. Many leading manufacturers believe that they need to adopt a CM regime in order to stay competitive, according to a recent survey (see summary of session one). Likewise, many larger but not behemoth retailers reportedly believe that CM is necessary in order for them to able to compete effectively against mega-store rivals such as Wal-Mart. However, some industry observers expressed concerns that market leaders are being given considerable free rein to manage downstream distribution outlets for their rivals' products. For example, some forum participants endorsed the CM practice as beneficial to consumers because retailers benefit from the lead suppliers' expertise and knowledge of product category trends and stock their shelves more in line with consumer demands, but nonetheless they cautioned that retailers should not give CCs their rivals' confidential pricing data and other competitively sensitive information such as rivals' product development plans. One participant questioned the benefits to consumers by having the makers of long established and low-tech products such as ketchup and peanut butter advising retailers about product developments in those categories, and questioned whether the transfer of such information justifies retailers giving dominant category manufacturers access to rivals' pricing data or product development plans. One of the empirical issues (i.e., arguments requiring fact based research to validate positions taken) that was left open for further analysis is whether the efficiencies for retailers by having manufacturers use their own staff and resources to manage retail shelves are passed on to consumers. Some limited data to date suggests that prices may actually rise and consumer choices decrease among categories where CM is practiced.Some CM supporters argued that any antitrust concerns raised by CM business practices should be classified as raising strictly vertical issues (i.e. argument that CM does not raise antitrust concerns between direct or horizontal competitors but involves vertical 6 business relationships between suppliers and retailers). However, others argued that leading suppliers who advise retailers on what to do with their rivals' products would appear to generate horizontal antitrust concerns. Also, various experts such as the Economist Robert Steiner, pointed out that many retailers are also producers by making and selling their own proprietary home brands for many essential product categories. Research Most experts agreed that the research data to date is inconclusive and that further empirical studies need to be done. Consumer prices slightly increased in a narrow product area where CM was widely practiced. In addition, category sales volume and revenues decreased, and profits increased in a product category where CM was practiced and its effects on prices and sales measured [See Suman Basuroy, Murali Mantrala, and Rockney Walters study]. However it is not clear what role CCs played in those surveys. Another study based on retailers' perspectives found that the most influential or focal suppliers do not exert pressure upon retailers to give preferential treatment to their lines and that retailers benefit both directly and indirectly via improved supplier category management [see Neil Morgan, Richard Gooner and William Perreault study]. More than eight out of every ten manufacturers stated that they take part in CM in order to influence category decisions by retailers and stay competitive. [See Debra Desrochers study]. According to a trend identified in the study of 120 retailers and manufacturers surveyed between 1999 and 2002, the most effective in-class manufacturers also manage either: Day-parts (e.g., breakfast, lunch, dinner); Occasions (e.g., picnic, party, Christmas); and/or Aisles (e.g., beverage aisle, cooler section) rather than just categories. Hence, CM is reportedly moving towards aisles management. CCs manage specific product categories while "aisle captains" handle the set up of entire aisles such as those for beverages, cleaning agents, condiments/seasonings, and/or magazines & office supplies. "Daypart captains" deal with arranging shelf space for catering to different parts of the day such as morning, midday and evening meal needs. "Occasion captains" advise retailers on managing shelves for specific occasions such as summer picnics, birthday parties, Halloween, Christmas and Easter. The leading practitioners of CM are dominant manufacturers (P&G, Kraft, General Mills, and Pepsi) and dominant retailers (Wal-Mart, Safeway, HEB and Kroger). There is little evidence of negative consumer outcomes such as fewer choices and higher prices in increasingly concentrated markets that use CM as a managerial method/tool, according to Ravi Achrol's study. Since 1996 when the use of CCs in CM began to take hold, concentration among top retailer firms continued to increase as it has since the late 1960s. Theoretically, this would increase the chances for exclusion of competitors and anticompetitive price setting but the study found that CCs were not engaged in profiteering. The study did show a significant decrease in new grocery products between 1995 and 2,000 but overall items per store have significantly increased since1990. Further, the study suggested that the major retailers with the most innovative consumer marketing and merchandising also have the best category management/ buying teams. Relevant legal case developmentsThe Supreme Court recently refused to review a $1.05 billion antitrust award against the United States Tobacco Co. Conwood Co. filed the suit, alleging that United States Tobacco unfairly dominated the smokeless tobacco industry through its category captain arrangements. The damage award is possibly the largest verdict ever upheld under antitrust law, and it marked the first time an appeals court condemned as an antitrust violation a system that gives a company some control over merchandise displays of its own and competitors' products. (For the Sixth Circuit opinion, click on icon at right.) R.J. Reynolds, Brown and Williamson and Lorillard filed a case against Philip Morris that also challenged category captain conduct. (For the opinion, click on icon at right.) The case was recently dismissed. Other category captain cases in the tortilla, carbonated beverage and cranberry product sectors are pending. Suggestions for Best Practices GuidelinesA number of experts either advocated for, or agreed with, the notion that there is a need for CC Best Practices guidelines for both industry members and antitrust practitioners. Business consultant Paul Christman strongly supports the CM and CC practices but argued that abuse is more likely in the absence of unambiguous and well-written best practices guidelines for industry members. He suggested that such guidelines could include: Implementation of strictly-enforced firewalls between CCs and Retailers to prevent leaking of competitively sensitive information such as price data of rivals; Prohibitions on monetary payments for the right to be CC; Competition for the right to be CC or the retailer's 'lead resource' should include other major manufacturers who may only rank 2nd, 3rd, 4th or lower in terms of market share but that may have more dynamic, and innovative approaches to moving their product category forward (however they would need to be sufficiently established and large so as to have developed expertise in their product category); Use of lead resources or CCs should not preclude all major and minor suppliers from having an opportunity to offer their advice to retailers at any time; and The Retailer, rather than the CC, must own the CM process and be the true decision maker.Similarly, Irving Scher of Weil Gotshal & Manges LLP recommended that Guidelines for Antitrust Practitioners could clarify that: Category management is a legitimate sales management function so long as CCs present objective accurate factual data to retailer; Retailers should make all final decisions; CCs should not provide data that favor CC's brands or SKUs; CCs may suggest retail price points so long as retailer independently makes the actual pricing decisions; Co-CC arrangements should be avoided because of the likelihood of co-ordination; CCs should not see rival's product development plans; CCs should not share competitive information among competing retailers whether or not the CC acts in that capacity for both retailers; and CCs should respect the confidentiality of any information considered by the Retailer customer to be proprietary. Future Directions The forum's moderators invited the expert participants to proffer their insights into many practical questions around category management such as:The implications for Retailers, Suppliers, Legal Counselors, Law enforcers, and Legislators; Appropriate information sharing between category captains and retailers in areas such as retailers' prices and promotions and retailer's proprietary brands; Safeguards against collusion between CCs and rivals, and/or retailers; Appropriate formal written contracts between CC and retailers; Propriety of suppliers paying for the right to be a CC; Analyzing efficiencies; and Appropriate antitrust remedies. Many practitioners agreed that CM represents a two-edged sword with many potential consumer benefits and business efficiencies coexisting side by side with considerable antitrust risks for collusion and subtle and perhaps even blatant disruptions to competition. Many legal counsel appeared to favor advising clients against inappropriate business relationships and communications containing competitively sensitive information while some economists and business consultants generally expressed more concerns about prematurely prohibiting or regulating innovative business arrangements before clear evidence of consumer harm is established. Academics identified specific areas requiring further empirical and/or analytical studies into CM. These include determining whether: A range of CM activities such as coordinated buying, pricing, promotions and merchandising of category brands affect retailer and manufacturer performance; There are different CM effects for retailers who seek to maximize category profits as compared to retailers who prioritize building store traffic; Trends towards whole aisle management and segment management have an impact on competition, consumer choices and prices; Manufacturers are influenced by retailer adoption of CM (i.e. suppliers' sales and profit performances pre and post CM adoption). Other questions raised by antitrust thinkers include: Why opportunistic focal supplier behaviors are (allegedly) uncommon (from retailers' perspectives)? Are counter-productive behaviors by focal suppliers overstated? Are antitrust concerns in CM primarily vertical or horizontal, and what standard of proof is required to establish competitive harm? Conclusion The forum stimulated informed debate about antitrust issues surrounding Category Captains and identified several critical areas where further thought and research is needed. According to experts, the use of Category Captains in the Category Management retail management method will continue to evolve into broader management approaches that also require close cooperation and communications between Retailers and leading Manufacturers such as whole Aisle Management and Special Occasion Product Management. Hence, further empirical evidence and fact based research is needed to help public policy makers, industry members, antitrust practitioners and thinkers understand whether and how CCs are changing downstream market dynamics. To read the full transcript from the forum,visit the American Antitrust Institute.

Category Captains and Antitrust Issues

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