New Ruling from TTB Categorically Manages Category Management

Daniel Kostrzewa
February 18, 2016

On February 11th, TTB issued Ruling 2016-1, clarifying that wholesalers of beverage alcohol may provide retailers with shelf plans and shelf schematics without violating tied-house restrictions—however, the real impact of Ruling 2016-1 is in what it seems to prohibit, rather than what it permits.

Federal tied-house rules prohibit industry members from inducing retailers to sell their products by providing “anything of value.” TTB had earlier exempted shelf plans and shelf schematics from tied-house restrictions, which Ruling 2016-1 underscores. But Ruling 2016-1 goes further, and explicitly calls into question the legitimacy of other activities carried out in the practice of category management—a practice where suppliers and wholesalers assist retailers in selecting, purchasing, and selling their goods, which has become standard in most markets.

TTB has been actively investigating the expanding use of category management in the beverage alcohol industry for many years now, specifically exploring how these practices fit with existing the tied-house rules; Ruling 2016-1 serves as the latest word on this ongoing issue. In this post, we will quickly describe what category management is, how this ruling relates to those practices, and what it may mean for certain planned wholesaler-retailer relationships.

What is Category Management?

Whenever I walk through a grocery store, I’m always overwhelmed when I get to the cereal aisle. I’m suddenly assaulted on both sides by dozens of products, all with splashy packaging proclaiming their great taste or health benefits. Frankly, it’s amazing that I can decide which box of bran or marshmallows (admittedly, more often marshmallows) that I’ll buy.

But it’s even more complex for the store to determine which cereals to stock and how to display them. Poor management of their selections can result in lost sales; whereas, with a little effort and skill, they can sell more boxes of a wider range of cereal types, generating more revenue both for themselves and their suppliers. For the last few decades, suppliers and retailers have realized the benefits that this practice–generally called, category management–can provide.

This has lead to a whole industry subset, where certain suppliers, or, often enough, third party companies set up by suppliers and retailers, serve as Category Captains, who compile and analyze market data to determine which competing products to purchase, and also how to arrange shelf displays to best market these products to the benefit of all involved parties. It is this latter activity–providing plans for product displays—that TTB has specifically permitted (but only this activity).

How do Tied-House Rules Restrict Category Management?

If beverage alcohol was a normal good, we could expect category management to already be a standard practice. However, as we all know, beverage alcohol is not a normal good—or, at least, it’s not sold like a normal good. Under the Federal Alcohol Administration Act (FAAA), normal business practices are often restricted, with TTB charged with regulating how these rules are played out. These rules include the category of “tied-house” restrictions.

Specifically, the FAAA prohibits providing retailers with equipment, supplies, services, or “other thing[s] of value” which may serve to induce retailers to purchase certain products instead of others (27 U.S.C. 205(b)(3)). TTB, through its regulatory authority, then determines what kind of provisions actually do serve as inducements under the FAAA’s restrictions.

The specific question in Ruling 2016-1 was whether an exception to tied-house restrictions, found in section 6.99 of Title 27 of the Code of Federal Regulations, would be permitted. Section 6.99(b) says that “The act by an industry member of providing a recommended shelf plan or shelf schematic for distilled spirits, wine, or malt beverages does not constitute a means to induce within the meaning of section 105(b)(3) of the Act.” The question was if this element of category management, providing assistance on displays and stocking is permitted, would other parts of category management also be permitted?

Ruling 2016-1 seeks to clarify TTB’s position on certain category management activities. Basically, TTB’s position is that section 6.99, “unambiguously exempts only the simple act by an industry member of providing to a retailer a recommended shelf plan or shelf schematic . . . .” Thus, TTB has made it clear that industry members may provide shelf plans or schematics to help retailers plan how they display and sell their products.

If Shelf Plans and Schematics are Permitted, What Isn’t?

While TTB did rule that shelf plans and schematics were permitted, in the above quote the word “only” should be bolded, for Ruling 2016-1 then goes on to describe many other elements of category management that are restricted under tied-house rules. Specifically, TTB highlighted five category management practices (in a non-exhaustive list—there could be others) which it would consider as clear violations of the FAA. They are:

  1. Assuming, in whole or in part, a retailer’s purchasing or pricing decisions, or shelf stocking decisions involving a competitor’s products;
  2. Receiving and analyzing, on behalf of the retailer, confidential and/or proprietary competitor information;
  3. Furnishing to the retailer items of value, including market data from third party vendors;
  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); and
  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.

As John Hinman, of the law firm Hinman & Carmichael, LLP, points out, this clarification by TTB actually leads to more confusion. That is because these five practices make up most of the basic activities in category management. While industry members may be permitted to supply retailers with shelf plans and schematics, it appears they would not be permitted to follow up on these plans by providing any assistance with their implementation or future development. Nor would they be permitted to provide sales analysis or any data on which products to stock–a vital activity for category management in other industries.

What Does This Mean Going Forward?

The motivation for Ruling 2016-1 came from inquiries made to TTB by several industry members, which largely related a planned arrangement between Kroger supermarkets and Southern Wine & Spirits. Under this plan, Southern would operate a category management service to facilitate sales of beverage alcohol in Kroger stores, which would involve Southern making purchasing and stocking decisions for Kroger, including decisions regarding products not distributed by Southern. Instead, Ruling 2016-1 seems to indicate that much of the Kroger/Southern arrangement would receive pushback from TTB. While Southern can provide Kroger with shelf plans and schematics, it appears that it cannot, for instance, provide Kroger with sales data on any products, which would normally be used to make stocking decisions.

But Ruling 2016-1 also serves as a preemptive rejection of other attempts to create category management relationships between retailers and industry members licensed by TTB. So, as wholesalers of beverage alcohol deal and contract with retailers, they should be aware of the myriad restrictions placed on the industry. We all know that selling alcohol and cereal are very different beasts. This latest ruling just underscores how complicated selling alcohol can get.

If you have specific questions about your arrangements with retailers and other business practices, we highly recommend that you consult and heed your personal legal representative. For other questions, please contact ShipCompliant Support.

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Author

Daniel Kostrzewa

Daniel Kostrzewa is a Regulatory Counsel at Sovos. Within Sovos’ Regulatory Analysis function, Daniel focuses on domestic sales tax issues. Prior to joining Sovos in 2018, he worked as an attorney in Boston. Daniel received his B.A. in Economics from Boston College and J.D. from Boston College Law School. He is a member of the Massachusetts Bar.
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