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.

  1. National Conference of State Liquor Administrators – The Alcohol Industry gathers in Hawaii to figure out how to enforce the US “Highly Archaic Regulatory Scheme.”
  2. Founder John Hinman Honored with the Raphael House Community Impact Award
  3. ROUTE TO MARKET AND MARKETING RESTRICTIONS - NAVIGATING REGULATORY SYSTEM CONSTRAINTS
  4. Alcohol and Cannabis Ventures: Top 5 Legal Considerations
  5. ATF and TTB: Is Another Divorce on the Horizon? What’s Going on with the Agency?
  6. STRIKE 3 - YOU REALLY ARE OUT! THE ABC'S STRICT APPLICATION OF PENALTIES FOR SALES TO MINORS
  7. TTB Temporarily Fixes Problem with Fulfillment Warehouse Tax Credits - an “Alternate Procedure” for Paying Taxes & Reporting
  8. CUSTOMERS WHO HAVE HAD ONE TOO MANY - THE FREE TRANSPORTATION DILEMMA
  9. The Renaissance of Federal Unfair Trade Practices - Current Issues and Strategies
  10. ‘Twas the week before New Year’s and the ABC is out in Force – Alerts for the Last Week of 2017, including the Limits on Free Rides
  11. Big Bottles, Caviar and a CA Wine Strong Silent Auction for the Holidays!
  12. The FDA and the Wine and Spirits Industry – Surprise inspections anyone?
  13. NORTHERN CALIFORNIA WILDFIRES: UPDATED REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  14. NORTHERN CALIFORNIA WILDFIRES: REGULATORY AGENCY DISASTER RELIEF RESOURCES AT A GLANCE
  15. Soon to come to your Local Supermarket– Instant Redeemable Coupons of the digital age!
  16. The License Piggyback Dilemma – If it Sounds Too Good to be True, it Probably is
  17. A timely message from our Florida colleagues on the tied house laws, the three-tier system and the need for reform
  18. ABC Declaratory Rulings – A Modest Proposal Whose Time has Come
  19. More on FDA Inspections - Breweries, Distilleries and Questions
  20. WHY THE FDA IS INSPECTING WINERIES
  21. Senate Bill 378—The Proposed Demise of Due Process for Alcohol Licensees
  22. ABC Enforcement - Trends and Predictions
  23. The Corruption Chronicles – Volume One: A New Hope
  24. New Alcohol Delivery Oversight on the Horizon
  25. Michigan: Canary in the DtC Coal Mine?
  26. California ABC and Federal Credit Laws – Active Enforcement and Lots of Questions!
  27. Big Bottles For The Holidays - The Highest Calling Of The Winemaker's Art
  28. FINAL COMMENTS TO TTB NOTICE 160 DUE ON WEDNESDAY DECEMBER 7TH – WE ARE ASKING THE TTB TO EXTEND THE COMMENT PERIOD AGAIN TO ALLOW FOR INDUSTRY NEGOTIATION AND ALIGNMENT OF INTERESTS
  29. SONOMA COUNTY WINERY USE PERMITS, EVENT RESTICTIONS AND DTC
  30. New TTB Labeling Requirement Regulations: Out-of-State Bottling Is Not Created Equal and Consumers Right to Know Where the Grapes in their Wine Come from is Compromised
  31. Isn't A Written Agreement With A Distributor Worthless In A Franchise State?
  32. Crowd Funding for Alcohol Producers and Retailers – Down the Rabbit Hole with the Tied House laws
  33. Everything you ever wanted to know about the BPA Warning Statement but were afraid to ask
  34. AB 2082 - A Hunting License for Police and a Lethal Weapon for Politicians that Deprives Licensees of Currently Available Due Process Rights
  35. “Better Late Than Never”-- Judge in Illinois Dismisses 201 Sales Tax Cases against Retailers
  36. The Day the Music Almost Died: The Story of the BottleRock ABC Accusations, the ABC Appeals Board and a Victory for a Common Sense Interpretation of the Tied House Laws
  37. The Arsenic in Wine Class Action Dismissal – what it means
  38. Counterfeit or Artisanal Mexican Spirits? Pick your Poison, or your lime wedge
  39. Warning - CA ABC enforcement teams are on the prowl this weekend!
  40. RELIEF AT LAST! ILLINOIS MOVES TO FIX THE SALES TAX LAWSUITS AGAINST OUT-OF-STATE SELLERS BUT PROPOSES TO PENALIZE WINERIES AND RETAILERS THAT SHIP WITHOUT PERMITS
  41. The TTB Speaks on Category Management or, be Careful What you Ask for Because you might Get it!
  42. Hinman & Carmichael LLP Announces the Addition of Jeremy Siegel to its team of top beverage law lawyers
  43. 2016 LEGISLATIVE UPDATES: Part IV
  44. 2016 LEGISLATIVE UPDATES: Part III
  45. 2016 LEGISLATIVE UPDATES: Part II
  46. 2016 LEGISLATIVE UPDATES: Part I
  47. Hinman & Carmichael LLP is Hiring!
  48. John Hinman Presents NBI Webinar on Basics of Alcohol Beverage Law
  49. ABC DISMISSES SAVE MART GRAPE ESCAPE ACCUSATION BUT REFUSES TO ADOPT JUDGE’S DECISION FINDING NO STRICT LIABILITY FOR ABC VIOLATIONS
  50. Speakeasies are still with us, and proliferating!
  51. The War for the Soul of Sonoma County – the Winery Working Group Battle
  52. Santa Claus isn’t the only one coming to town this Christmas!
  53. Arizona's Direct to Consumer Shipping Rules - An Exercise in Complexity
  54. AB 780 - Social Media and the ABC: The California Legislative “Fix” that Fails
  55. Illinois Finally Offers Certainty and Relief for Victims of Sales Tax Lawsuits, but Prompt Action is Required in Pending Cases
  56. A Modest Proposal – Adopt the federal rule on Tied-House liability in California
  57. The Grapes Escaped - Why the First Amendment Matters
  58. Appellate Court Ruling Strikes Blow Against State’s Arbitrary Beer Label Ban
  59. Illinois Attorney General's Office Announces Intention to Dismiss False Claims Act Against Liquor Retailers
  60. Commercial Speech And Alcoholic Beverages - Part III
  61. Commercial Speech And Alcoholic Beverages - Part II
  62. Craft Beverages: Social Media Marketing the Effective and Compliant Way
  63. Commercial Speech And Alcoholic Beverages - Part I
  64. A LAYPERSON LOOKS AT ARSENIC IN WINE
  65. The Biggest Retailer in the World vs. the TABC
  66. Rebecca Stamey-White presents Emerging Issues in Wine Law
  67. Top Beverage Alcohol Law Firm Adds and Elevates Partners
  68. Illinois Qui Tam Lawsuits—Private Enforcement Of a State Claim: A Bonanza For A Plaintiff’s Lawyer And A Rip-Off Of Retailers
  69. BOOZE RULES OF SOCIAL MEDIA: The Retailer Right to Pay Exception
  70. LIONS AND TIGERS AND TWEETS, OH MY!
  71. AB 2004: Brewer's Incremental Parity with Wine Makers
  72. Expanding, Proud Of It, and Wanting to Tell the World
  73. DC Weighs in Strongly on Third Party Marketer Delivery Services
  74. “Visual Links” between Beer, Wine and Spirits Labels and Retailers Ruled Unlawful in California — the tied house laws run amok
  75. Hard Cider Legislative Update
  76. New Marketing Model for New York – Lot 18 and the NYSLA
  77. Sweeping Changes in Proposed NYSLA Bill Include Expansion for Craft
  78. Minimum Resale Price Policies - How to Control Price-Cutters
  79. AB 2130 – Gloves Off?
  80. “Gluten-Free” Labels for Wine, Beer and Distilled Spirits. We’re Still Waiting.
  81. AB 1252: Sanitation Overkill?
  82. Growlers: Not Just for Beer Anymore
  83. California Legislative Roundup 2014
  84. Build It and They Will Come: Craft Products Get New Privileges in CA and TX
  85. AB 1128: Veto of the “Serve a Minor” Felony Penalty Bill, or How to Lose a Winery in One Sale
  86. California Grocers Association v. ABC, Part 2: California Appeals Court Vacates ABC’s Adoption of a Trade Advisory That Correctly Guided Licensee Conduct
  87. California Grocers Association v. ABC, Part 1: California Appeals Court Prohibits Alcohol Sales at Self-Check Out Stands
  88. AB 1128: The “Serve a Minor” Felony Penalty Bill, or How to Lose a Winery in One Sale
  89. The New York SLA and Online Wine Sales: A Work in Progress
  90. California SB 635: What the 4am Bill Really Means for California Communities
  91. Electronic Invoices in California: Welcome to the 19th Century
  92. The History of Amazon and Wine: What Has Changed?
  93. Third Party Marketing Checklist
  94. BOOZE RULES – PROMOTIONAL APPEARANCES AND AUTOGRAPHS
  95. Washington State: Down the Rabbit Hole of the Tied-House Laws