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Thursday, June 07, 2007

Why it's all in the packaging - 1936 antitrust ruling comes under fresh criticism

Why it's all in the packaging - 1936 antitrust ruling comes under fresh criticism
By John Schmeltzer
Copyright © 2007, Chicago Tribune
Published June 7, 2007

Wander the aisles of Costco or Sam's Club and you enter a bizarre alternate universe of products for sale. Cereal comes in twin packs. Coke is available in cases containing 32 cans, not 24. And printer cartridges are sold in three-packs, not as singles or in pairs as at other stores.

These packaging oddities are a direct result of a 1936 antitrust law that was designed to keep a level playing field in American commerce but critics say has lost its usefulness. They contend the law actually costs consumers millions of dollars annually while forcing manufacturers to concoct wild, unnecessary packaging schemes.

The legislation -- the Robinson-Patman Act -- is such an ingrained part of the American retailing landscape that it gets little notice.

Now a Massachusetts lawsuit involving Ocean Spray Cranberries Inc. has cast a spotlight on the act at the same time that voices in Washington are challenging its relevance.

The basic question, raised by a Federal Trade Commission report in April, is who actually benefits the most financially from, say, the sale of a super jumbo-size container of crackers?

The initial answer might be consumers, because they save money by purchasing in bulk. But the FTC report -- written by a commission that calls for Robinson-Patman's repeal -- suggests that neither consumers nor Costco is the ultimate winner. Rather, the winners are less efficient competitors who, in effect, are shielded by Robinson-Patman, because the act puts restraints on the ability of big-volume retailers to aggressively undercut everyone else on standard-size products.

"This statute imposes significant compliance costs on U.S. businesses and, where applicable, operates as a deterrent to price competition," FTC commission member Jonathan Jacobson said in the report. "The harm it inflicts on U.S. consumers is great."

Not everybody agrees with this sentiment, and there is, as of yet, no rallying cry in Congress to adopt the commission's recommendation to repeal. But the logic of removing barriers to competition between warehouse clubs, big-box discounters and grocery stores, is easy to grasp.

Price the same -- unless ...

The act requires manufacturers to sell products to all retailers at the same price -- unless there is something significantly different, such as the way it is sized or packaged, said Herb Hovenkamp, an antitrust expert at the University of Iowa Law School.

The packaging requirement, of course, is what leads to warehouse clubs selling uniquely large versions of familiar brands. If the act were to go away, then all stores could compete on price for, say, regular-size boxes of cereal or pretzels, though it's true that warehouse stores define themselves by their distinctively-packaged offerings.

Big-box retailers with their tremendous sales volumes likely would be able to negotiate the steepest discounts, thus pressuring grocery stores.

Hovenkamp, who is critical of Robinson-Patman, said its repeal would encourage competition.

"I expect a large number of retailers would make changes and I think nearly all would benefit consumers," he said.

The government already has stepped back from investigating Robinson-Patman violations. The commission noted that the Justice Department has ceased active enforcement and the FTC has "rarely" enforced it in recent years.

But some see trouble if it's repealed. Big retailers already take advantage of their size to demand volume discounts.

Jim Prevor, editor of Produce Business magazine based in Boca Raton, Fla., said he believes "retail competition would become less vigorous" without the act. "It would make it very difficult for a small chain like Treasure Island to compete," he said.

The National Grocers Association agreed: "The law does, and should continue to, guarantee that those who elect to enter and compete in the market have a level playing field."

At the same time that businesses have been watching the FTC, the Ocean Spray lawsuit has become a closely watched focal point because it details how one large consumer products firm manages its way through Robinson-Patman's requirements. It isn't often that a company's pricing strategy gets disclosed to the world, which is why industry people like Prevor has not only been following the suit but blogging about it.

"People from Wal-Mart to Kroger are really watching this case," he said.

Rooted in contract dispute

The lawsuit actually isn't about Robinson-Patman but about a contract dispute between Ocean Spray and two wholesalers, James and Theresa Nolan, who sold Ocean Spray cranberries.

In 2000, according to the suit, Ocean Spray agreed to sell fresh cranberries to Costco for $18 per case for delivery in October and $23 per case for delivery in November, without offering the same price to other club stores. BJ's Wholesale Club, an East Coast club store, discovered the special deal in 2001 and demanded compensation. It subsequently stopped carrying Ocean Spray products for several years, according to the suit.

The lawsuit was filed after the cranberry giant refused to renew its contract with the Nolans' firm.

"Ocean Spray took the position that with Costco they were merely meeting the lower price of a competitor," said Richard LaFarge, who is representing the Nolans in their case against the cranberry giant.

But two years after the Costco pricing incident, the lawsuit alleges that Ocean Spray didn't even bother to claim it was trying to beat a competitor's price when it sold fresh cranberries to H.E. Butt Grocery Co., the largest grocery chain in Texas, for $19 a case compared to the $24 being charged other retailers including Costco, Sam's Club and even Wal-Mart, the world's largest retailer.

Costco and Wal-Mart did not return telephone calls for comment.

Chris Phillips, a spokesman for Lakeville-Middleboro, Mass.-based Ocean Spray, said: "This case has nothing to do with our competitive practices which abide with all laws and standards. It is a case of a disappointed former employee whose contract was not renewed," he said.

He was unwilling, however, to discuss the company's marketing practices outlined in the case.

Prevor said he was fascinated by the suit's depiction of the cutthroat nature of competition and what it means for business ethics.

"You just can't favor one customer over another when you are selling the same item and maintain any customer loyalty," he said.

He added in his blog: "This will wind up being a big story. Much of it turns on legalities such as the exact circumstances under which the Robinson-Patman Act are deemed violated. ... If this goes to trial, the lawyers will duke it out on these grounds."



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