Category Management
Decision
Implications
Comment
During the past decade category management has become a popular format for managing business in many product segments and retail outlets. Category management offers potential economic benefits to both retailers and manufacturers. It also has the potential to raise antitrust issues. The Sixth Circuit's recent decision in Conwood Co v United States Tobacco Co addresses, but fails to resolve, those issues in a manner that will require continuing caution by manufacturers and retailers engaged in category management relationships.
There are a number of variations of category management. In its basic form, a retailer first decides to manage its business on a product-category basis. It then makes decisions regarding product selection, placement, promotion and pricing on a product-by-product basis, with a goal of maximizing the profit of each category as a whole.
Effective category management requires expertise in marketing and in collection and analysis of data. In some instances, product manufacturers have greater access to the necessary resources than do the retailers in particular product areas. Therefore, retailers sometimes seek the help of manufacturers in category management.
One way that retailers may benefit from the assistance of manufacturers is by appointing a manufacturer as the category captain. A category captain, often the leading manufacturer in the field, collects information on all brands in the category and develops a category management plan to be presented to the retailer. Some retailers compare this advice with the recommendations of other manufacturers and with their own data, and develop their own category management plans. Others delegate virtually all category management responsibilities to the category captain and typically accept the category captain's proposed plan with minimal, if any, changes.
In its first slotting fee report, released in February 2001, the Federal Trade Commission (FTC) listed four ways in which category management can potentially raise antitrust concerns:
- The category captain might learn sensitive confidential information about rivals' plans and "take advantage of it in its role as a competing manufacturer";
- The category captain might hinder the expansion of rivals by "recommend[ing] that the retailer not carry a rival's product, or it might recommend that the rival's product be placed in a disadvantageous location";
- The category captain might promote collusion among retailers. If multiple retailers have the same category captain, the FTC cautioned, the category captain could "make identical recommendations to all of the retailers, and if each retailer were aware of this practice, there would be less incentive for any one of them to deviate from the recommendation"; and
- The category captain might facilitate collusion among manufacturers if "retailers encourage important manufacturers to confer and agree on a category management recommendation".
Conwood Company, a manufacturer of moist snuff, brought suit against the United States Tobacco Company (USTC) under Section 2 of the Sherman Act. It alleged that USTC, the leading manufacturer of moist snuff, used a variety of tactics, including abuse of its category captain status, to exclude competitors from the moist snuff market. The jury returned a verdict in favor of Conwood. The district court entered judgment for Conwood in the amount of $1.05 billion. USTC appealed to the Sixth Circuit, which affirmed the jury verdict and district court judgment.
In its analysis of Conwood's Sherman Act Section 2 claim, the Sixth Circuit stated:
"A claim under Section 2 of the Sherman Act requires proof of two elements: (1) the possession of monopoly power in a relevant market; and (2) the wilful acquisition, maintenance or use of that power by anti-competitive or exclusionary means as opposed to 'growth or development resulting from a superior product, business acumen or historic accident'. "
USTC did not challenge Conwood's claims that the relevant product market was moist snuff, that the relevant geographic market was nationwide, and that USTC had monopoly power in that market. Consequently, the only issue for the Sixth Circuit to decide related to the second, 'exclusionary conduct' element of the Section 2 claim.
Conwood alleged four types of exclusionary practices by USTC:
- exclusive agreements with retailers to place moist snuff sales racks in retailer stores;
- a Consumer Alliance Programme under which USTC provided discounts to retailers in exchange for providing USTC with sales data, participating in USTC promotion programmes, and/or giving the best placement to USTC racks and advertisements;
- unauthorized destruction or removal of Conwood sales racks and point-of-sale advertisements at retailer locations; and
- category management.
In doing so, Conwood emphasized that placement of sales racks and point-of-sale advertisements in a retailer's store are critical to a snuff manufacturer's ability to compete, due to legal restrictions on other forms of tobacco advertising.
Conwood did not contend that category captain status, even by a monopolist, is necessarily illegal under the antitrust laws. Instead, Conwood's theory was that the manner in which USTC exercised its authority as category captain was illegal. USTC argued that, because retailers retained the ultimate control over what racks and point-of-sale advertisements were used in their stores, USTC could not exclude competition. The Sixth Circuit accepted Conwood's argument, stating that:
"USTC used its position as category manager to exclude competition by suggesting that retailers carry fewer products, particularly competitors' products; by attempting to control the number of price value brands introduced in stores; and by suggesting that stores carry its slower-moving products instead of better-selling competitor products."
Based on this and other conduct it regarded as potentially exclusionary, the Sixth Circuit affirmed the damage award entered by the district court.
Discerning a precise holding with regard to category management from the Conwood decision is difficult. If read in the broadest sense, the decision could be of substantial concern to manufacturers acting as category captains because some of the activities the court cited as exclusionary (eg, suggesting that retailers carry fewer brands and promotion of the category captain's own brands) are common parts of category management. (The first two FTC antitrust cautions about category management raise similar concerns.) Such a broad interpretation could be of concern to monopolists, and to other category captains with market power short of monopoly power, under both Sections 1 and 2 of the Sherman Act.
A much more narrow reading of Conwood is also possible for several reasons. First, the Sixth Circuit appeared to be influenced heavily by its view that USTC, through various questionable practices, abused its authority in the category management relationship. The court did not state that category management is inherently exclusionary. Second, some of the conduct cited by the Sixth Circuit as exclusionary (eg, destroying or removing Conwood's sales racks and point-of-sale materials without the retailer's permission, and providing false information to retailers about relative sales of USTC and competing moist snuff products) do not appear to offer any of the traditional legitimate benefits of category management, and are contrary to the interests not only of competitors, but also of retailers. Third, the Sixth Circuit cited many other types of conduct unrelated to USTC's status as a category captain as exclusionary, including exclusive rack agreements with retailers and USTC's Consumer Alliance Programme. Therefore, a narrow reading of the decision suggests that all of USTC's combined conduct, not just its use or abuse of the category management relationship, was relied upon to find a pattern of exclusionary conduct sufficient to support the jury verdict. Stated differently, it is unclear whether USTC's category management-related conduct, standing alone, would have been deemed adequate to support the Sixth Circuit decision.
Shortly after Conwood was decided, it was reported that the FTC is reviewing the decision to consider its implications for the agency's ongoing slotting fee study. Exactly what impact the decision will have on the upcoming report is unclear
Category management can benefit both retailers and manufacturers, but the authority given to category captains must obviously be exercised with care. Conwood and the initial FTC slotting fee report identify some of the areas of potential antitrust concern and thus serve as important precautions to participants in category management relationships. Unfortunately, however, neither Conwood nor the FTC report provides definitive guidance for structuring category management arrangements. Some of the conduct the court discussed (eg, recommending that retailers carry fewer products or value brands) may be a regular part of category management. The result in Conwood does not necessarily condemn such conduct, and may instead turn on a variety of conduct that is not necessarily inherent in the category management relationship. The potential antitrust concerns the FTC has cited in its initial slotting fee report require attention in almost all category management relationships. As a result, category captains and the retailers with whom they deal will need to approach their relationships with renewed sensitivity to antitrust concerns, and take precautions to structure those relationships in a manner that achieves the legitimate benefits they offer without anti-competitive effects.
For further information on this topic please contact Philip C Larson or Richard S Silverman at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email ([email protected] or [email protected]).