The TTB Speaks on Category Management or, be Careful What you Ask for Because you might Get it!

BOOZE RULES SPECIAL EDITION

First the good news:  the TTB has made it clear today that there are some protected activities in the Category Management realm.  Namely, TTB (as specified in 27 CFR 6.99) does not object to furnishing retailers with shelf plans or shelf schematics, regardless of their complexity. [TTB Ruling 2016-1]

Now the bad news: While “Category management” has been a popular word in the world of large producers, wholesalers and retailers, it is about to get much less popular because of the apparent narrowing of the scope of the exemption in the Ruling.

For the last 20 or so years “Category Captains” (prominent industry producers and wholesalers in all three categories, wine, beer and spirits) have been selected (in an obscure process akin to a beauty contest) by multiple outlet (and multi state) retail store buyers to oversee the process of coordinating shelf sets, communicating with other suppliers and wholesalers and furnishing data that shows the most profitable arrangement of their categories products on a retailer’s shelves, or in a wine list for chain restaurants.

Category Captains are tasked with assisting retail chain buyers in making hard choices between competing products, usually through data analysis focusing on shelf turns and SKU profitability.  The Category Captains also coordinate implementation of final shelf sets and communicate and assist in organizing the shelf resetting activity that the retail chains require for every new approved schematic.

The retail chain buyers always retain final approval over all product selections. The position of the retailers is that all that is being furnished to them is sales data, that any supplier may send in sales data and that the process is permitted by Section 27 CFR 6.99 of the TTB’s tied house regulations (which specifically permits suppliers to provide schematics as sales tools, but nothing else). California has a specific statute, Section 25503.2, describing the permissible scope of supplier activities at retail premises. The TTB regulates suppliers and the California ABC (and every other ABC agency in the country) regulates both suppliers and retailers. Thus, while the allowable standards may vary from one state to another the fact that category management activity is typically conducted at chain headquarters means that the effect on out of state in-store activity is not usually transparent at the state level.

Of course the fact that there are thousands of products in each category (wine, spirits and beer) means that some brands are inevitably left out and not included in whatever new shelf set or schematic is initiated at the headquarters level. This leads to hard feelings among the brand owners whose products are not among the chosen, and a sneaking suspicion that the game is fixed in favor of the brands carried by the Category Captains. Many chains address this concern locally by providing local managers with discretion to select a percentage of local products for inclusion in their stores.

Two and half years ago (in September of 2012) the TTB reacted to the complaints and initiated an investigation that included massive record subpoenas to certain large brands, and to the largest chain retailers.  The targets of the subpoenas wondered why they were selected when the Category Captains were (for the most part) left alone.  That investigation went nowhere.  The retailers and producers all complained that the agency subpoenas were overly broad and wouldn’t produce useful information.  That investigation stalled but is technically still alive.

That brings us to 2015 and the Kroger’s and Southern initiative to manage the Kroger’s shelves through a venture paid for by the supplier’s whose products were submitted to the managers of the initiative for placement. [Kroger October 21, 2015 letter]  The permissibility of this initiative was questioned by every major trade association in the industry (wine, beer and spirits) and guidance from the TTB was sought. [NBWA letter, November 16, 2015, Beer Institute letter, December 2, 2015, Joint Trade Association letter, December 7, 2015, Discus and Wine Institute letter, December 8, 2015, WSWA letter, December 15, 2015].

The TTB responded to these requests for guidance today with Ruling 2016-1.

The TTB stated the following in their “special release” this afternoon:

CATEGORY MANAGEMENT AND "TIED HOUSE"
In response to industry requests for clarification, TTB has issued general guidance concerning promotional activities commonly associated with category management programs and whether or not those activities are lawful.
Specifically, TTB Ruling 2016-1, The Shelf Plan and Shelf Schematic Exception to the "Tied House" Prohibition, and Activities Outside Such Exception, clarifies what is and what is not permissible in terms of shelf plans and shelf schematics.
The beverage alcohol industry has been experiencing phenomenal growth with many new, often small, businesses entering the market.  Consequently, maintaining a level playing field has never been more important than today.  We are committed to enforcing our trade practice jurisdiction so that consumers can continue to enjoy a wide selection of products and industry members can compete for those consumers in a fair and open marketplace.

The TTB ruling, however, goes beyond the facts of the Southern/Kroger’s initiative in which, it has been reported, suppliers were funding an independent company organized and operated by Southern for the benefit of managing Kroger’s alcohol categories. This is what is called a third party initiative where the thing of value to Kroger’s, if there is one, is indirect. 

Rather, the TTB appears to be directly aiming at common category management practices that occur daily in the industry. In this regard, the Ruling raises as many questions as it answers.

For example, the following is from the Ruling and is followed by our commentary.

The Ruling clarifies that suppliers are prohibited from:

(1) Assuming, in whole or in part, a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s products. Comment: does this mean that Suppliers cannot argue for the inclusion or exclusion of specific products?  How active do retail buyers have to be in the decision making process? If they just sign off on a supplier’s suggestion are they allowing a supplier to “assume” the purchasing or pricing decision?

(2) Receiving and analyzing, on behalf of the retailer, confidential and/or proprietary competitor information. Comment: what kind of confidential or “proprietary” information may the supplier analyze?  Does this mean that competitors pricing information (which is publicly available but certainly “proprietary”) cannot be furnished to a retailer?  That would seem to knock out most sales presentations.

(3) Furnishing to the retailer items of value, including market data from third party vendors. Comment: this is a hard one. Everyone uses market data form reporting services (such as IRI Nielsen) in making presentations.  This is a common sales tool. The data is unquestionably valuable but is it unlawful?

(4) Providing follow-up services to monitor and revise the schematic where such activity involves an agent or representative of the industry member communicating (on behalf of the retailer) with the retailer’s stores, vendors, representatives, wholesalers, and suppliers concerning daily operational matters (such as store resets, add and delete item lists, advertisements and promotions). Comment: this is what Category Captains (and good salespeople) do every single day. They monitor performance, stock movement and make recommendations for managing the inventory, including by communicating with other suppliers who are included in the various product sets.

(5) Furnishing a retailer with human resources to perform merchandising or other functions, with the exception of stocking, rotation or pricing services of the industry member’s own product, as permitted in § 6.99(a) of the TTB regulations. Comment: every supplier actively merchandises the retail accounts in its territory.  This includes set up and stocking of displays (legal in California). Where is the line drawn here?

The TTB is certainly well-meaning in its attempt to be appropriately responsive to the Southern/Kroger’s initiative.  However in the process it has apparently mandated increased constraints on retail category management activity that has been occurring for over two decades with minimal regulatory interference.  If the state agencies (which, except for Ohio, haven’t been heard from yet) follow suit it is going to be a very interesting year in the world of the large producers and the large retailers who, we expect, will not appreciate the potential loss of efficient category management tools.

Stay tuned for the next chapter in this saga.  Whatever it is promises to be interesting.