Advisory opinion letter to Mr. Helm: the manufacturer's and supplier’s products found in the store, as well…

Dear Mr. Helm:

By letter of April 28, 1970, addressed to Mr. Joseph W. Shea, we requested the opinion of the Federal Trade Commission as to the conformity of a proposed tripartite promotional plan with Sections 2(d) and 2(e) of the Robinson-Patman Act, on behalf of our client, Hall, King, Stanfill Agency, Inc. (Promoter) an advertising agency in. Memphis, Tennessee. .

Pursuant to a telephone conference this date with Mr. Henry N. Williams of your office, we submit herewith a revised request which we desire to be considered in lieu of the original letter request, which may be disregarded.

The proposed plan will include Promoter, various manufacturers and suppliers of retail grocery store type products, and the various participating retail outlets for such products. Promoter will contract with the manufacturers and suppliers, or their representatives, for the promotion of their products at the point of purchase, including audio and other types of promotion, merchandising aides to check and advise. on shelf layout, position and consumer response. Promoter will furnish to the participating retail outlets, in-store andio-advertising through the use of taped background music with interviittent commercial announcements regarding the manufacturer's and supplier’s products found in the store, as well as the assistance of merchandising aides.

It is anticipated that the program as constituted will relate primarily to grocery store type products such as bread, milk, canned goods, soaps, cigarettes, ete.

Promoter is not at the present time following the plan, and to the best of Promoter’s knowledge the same course of action is not under investigation and is not subject, and has not been the subject of a current proceeding, order or decree by the Commission. BASIC PLAN Promoter will contract with various retail outlets for the exclusive right to furnish all audio advertising in the outlet. The contract will be of indefinite duration, with the right of either party to cancel on 30 days notice. Pursuant to the contract. Promoter will install in the outlet a tape recorder and sufficient speakers to enable the contents of the tape to be heard throughout the entire shopping area of the outlet, or, if desired, only in that part of the store where the grocery type products are sold.

Promoter will supply the outlet weekly with a long playing tape containing instrumental background music for use on the tape recorder. The tape will be approximately four hours in length and capable of continuous play throughout the business hours of the outlet, without manual rewinding. The tape will also contain spot promotional announcements or advertisements of various products sold in the store. The announcements will usually be no longer than 15 seconds in length and no more frequent than one announcement every two minutes.

The selections of products advertised on any particular tape may easily be altered so that normally a tape furnished to a particular store will not earry announcements pertaining to grocery store type products not sold by the store, but may carry other advertising.

The store will be required to play the tape continuously during all open hours. The installation and maintenance of the tape recorders and speakers will be at no initial cost to the store owners.

The Basic Plan will be offered to all retail stores competing for the retail sale of any product handled by the Promoter.

Fach store desiring the Basie Plan will be required to pay a fixed monthly charge of $40.00 to defray the cost, installation and maintenance of the audio equipment and tapes, a monthly cost of $1.00 for éach speaker necessary in the store, and $5.00 per month for the music.

It is anticipated that Promoter will handle the promotion of numerous products and that each product manufacturer, or advertiser, will compensate the Promoter on the basis of the number of persons exposed to the advertising message. The Promoter will in turn compensate the retail outlet for the privilege of advertising in the store on a similar basis.

Compensation to each store or retail outlet will be a net cash sum computed on the basis of a formula composed of a fixed sum for each one thousand persons exposed to each promotional announcement, less a determinable portion of the expense for producing the promotional announcement, providing the merchandising aides, etc. The amount of the expense charged against the gross compensition to each outlet will be based on the percentage of time used for promotional announcements in each store and the number of persons exposed to the announcements in the store. (Attached hereto as Exhibit “A” is a scale of expenses based upon the presently anticipated expense unit of $5.00 per one thousand persons at a maximum use).

For example, it is anticipated at the present time that the Promoter will eredit each retail outlet: with the fixed sum of $1.1475 per announcement, per one thousand people reached, based on the traffic count in the particular retail outlet. Charged against this sum would be the expense factor computed on the basis of Exhibit “A” and using the presently projected cost unit of $5.00 per one thousand persons with 100% of the retail stores advertising time being utilized. Normally the fixed credit multiplied by the number of products advertised will be greater than the expense charge.

At no time would any store be required to pay advertising expense computed on the seale in excess of base remuneration credited. The only fixed expense to each outiet will be the fixed monthly charge equipment, servicing, tapes and music.

It is felt that both the base method of compensation to the retail ontlet, hased on store traffic, as well as the method of computing expenses, is fair and nondiscrhninatory for all outiets. large and smail. Both factors are based pen trafic count and not dollar volime. Experience shows however, that smaller outlefs usually baving less traffic, normally have a smaller dollar amount of purchuses per customer, ADVISORY OPINiUING wass. 2.

Based upon the expense scale (Exhibit “A’”) the outlets will also share expenses in proportion to store traffic, and therefore, both compensation and expenses axe offered to all stores on a proportionally equal basis. Attached hereto as Exhibit “B” is an example of the proportionate equality of the formula using two stores of varying volume of sales and traffic. It is apparent from the example that the smaller store having less than 1/6 of the dollar volume of the larger store but 3/5 of the traffic volume would receive about three-fifths as much from the Plan as the larger store. Attached as Exhibit “G” is a computation showing that, regardless of dollar volume, compensation at maximum advertising remains constant per one thousand persons. Promoter will offer two alternate plans, either of which may be selected by any retail outiet.

ALTERNATE PLAN #1 In the event any competing outlet already provides background music or desires to select a different system of background music, the Promoter will offer an alternate plan functionally equivalent to the Basic Plan. Under Alternate Plan #1 Promoter will provide the same electronic sound equipment to the outlet, and will provide tapes without background music, containing only intermittent promotional announcements similar to those on the tapes with music. The equipment will be capable of projecting the promotional announcements over the type of background music without otherwise interfering with the background music.

A retail outlet selecting the Alternate Plan will not be required to pay for the nusic, but all other expenses will be identical. ALTERNATE PLAN #2 In order te make the Plan functionally available to all competing retail outlets the Promoter will offer a second Alternate Plan designed to provide retail outlets with in-store promotional material for the same products advertised on the tapes, without the necessity of using the audio system. Such outlets will be furnished with promotional material such as window _ banners, posters, handbills and shelf displays, as well as the assistance of merchandising specialists, Retail outlets using the second alternative plan will be compensated by Promoter on the basis of the store traffic using the same base compensation rate for each product promoted as is used for outlets selecting either of the two other plans for audio advertising. That is, two stores of comparable traffic volume, one using Alternate #1 and the other using Alternate #2 would each be credited with the same base compensation per product advertised. There would of course be no cltarge for audio equipment, music or tapes to an outlet using the second alternate, however, there would be a fixed monthly service charge or cost to defray the cost of delivery equipment and personnel for the promotional material. This fixed cost is based on a reducing scale depending upon the volume of store traffic, starting with a minimum cost. of $4.00 per thousand persons. Attached hereto as Exhibit “C” is the proposed scale. The base compensation to a store selecting the second alternate plan would also be reduced by a portion of the expense of producing and distributing the promotional material. The expense factor for Alernate Plan #2 will be computed on the same scale, Exhibit “A”, as is used for the other two plans. Expenses charged against base compensation under the second alternative will be accounted for separately however, and will be expanded only on promotional materials, etc., used for such plan.

It is anticipated that the net compensation to outlets using the second alternate plan will be approximately the equivalent of the net income received by an outlet of comparable size using the audio system. Attached hereto as Exhibit “D” is an example of two outlets using the second alternate, which may be compared to the examples on Exhibit “B”.

Attached hereto as Exhibits “EH” and “F” are examples showing the relative net income to one store computed under each Plan, and using different amounts of advertising time filled.

Promoter will offer the Plan to all customers competing in the distribution of each manufacturer’s product handled by Promoter in selected trade areas. It is felt that the proposed plan and the alternates will provide a system which will be functionally available on proportionally equal terms to all such competing retailers of grocery type products, including those retailers using vending machines. For example, should Promoter enter into an agreement with a cigarette or soft drink manufacturer to use Promoter’s plan, the base plan would not be functionally available, however, under Alternate Plan #2 advertising and promotional material designed for display on vending machines could be furnished.

Promoter will require each manufacturer or supplier using the Plan to furnish Promoter with a list of all retailers of the manufacturer's product in the geographic area wherein the promotional plan is implemented, as well as retailers located on fringe areas and actually competing with those in the geographie area selected. Promoter will give notice to all such retailers that the promotional plan is available, either through direct mail, or through pubkcation in newspapers and trade publications reasonably ealeculated te reach or notify every such retailer.

Promoter will also inform each supplier and each retailer using the plan that even though Promoter is acting as an intermediary in the plan, it remains the supplier’s responsibility to take all necessary steps so that each of the supplier’s customers who compete with one another is offered an opportunity to participate in the plan on proportionally equal terms through use of the basic plan or one of the alternate plans.

Promoter requests that you review the proposed plan and alternates and advise whether or not the plan conforms to the requirements of Section 2(d) and 2(e) of the Robinson-Patman Act. In the event there is any question in regard to the proposed plan, any additional information needed, or in the event an adverse opinion is proposed, please notify the undersigned by collect telephone call, at Area Code 901, Number 525-5881.

Should it be determined that a conference with the Commission Staff would expedite an opinion on this matter, or be helpful in any manner, the undersigned will be available at the convenience of the

Commission.
Sincerely,
MARTIN, TATE, MORROW & MARSTON
Lawson IF. Apperson