Advisory opinion letter to Mr. Dufresne

March 4, 1974

Dear Mr. Dufresne:

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This wi1 supplement my submissions of December 20, 1973, January 7 and February 5, 1974, seeking an advisory opinion on behalf of Don Odessky, Inc. I want to thank you for arranging the meeting with Messrs. Tucker and Higgins and the following attempts to clarify some of the questions raised.

As our first letter of December 20 , 1973 , indicates, Don Odessky, Inc., is a service company whose primary function is to assist smal1 canners and packers , as well as other suppliers, in the promotion of their products. The Odessky Company contacts the retailer customers explains the various promotions available, insures proof of performance and is responsible for disbursing funds from the supplier to the customer. In all respects, Don Odessky, Inc. , acts as an agent for suppliers in insuring that promotional funds are , in fact, used for promoting suppliers goods rather than being pocketed as a "cash discount."

Various promotional vehicles arc available, such as newspaper advertising, flyers, !JOint-of-sale material , handbills, promotional contests and artistic displays. Since the artistic displays have raised most of the questions during our discussion, some further explanation appears in order, but we hope it is clear that the customer can select any number of promotions and is not limited to these displays. Further if he does choose an alternative to the basic plan, the customer is reimbursed for a total of 100% of the costs of the alternative chosen. Our original letter described these displays as similar to billboards or signs that are erected in windows or on wa11s to advertise merchandise. The payment for these displays should not be equated with the purchase of shelf space, because the displays are not like shelf space in that they are primarily designed to promote the product, and the fact that merchandise can be picked up by the customer is incidental. The product promoted in these displays is available on the shelves and the fact that it is available on the displays is ancillary and subordinate to the primary purpose of such displays, which is to promote the product. Under no circumstances will payment be made for shelf space. The advertising displays must follow certain basic designs, which in some cases involve "Disney" type drawing of animals, animated cartoons and other eye-catching devices. The displays exhibit the merchandise and in most instances the consumer can purchase the merchandise from the display. These displays should not be confused with so-called permanent ends where merchandise like soft drinks and potato chips stand permanently. The Odes sky displays are a form of bill boarding or displaying of a product for a one-week period. The costs of these displays have been accurately fi!,rured by having a member of Retail Clerks L'nion No. 77 in Los Angeles build various ADVISORY OPINIONS 142

designs using strict cost procedures. The costs involve the construction labor , sign painting, material and the cost of dismantling at the end of the week. The size of the display contributes the greatest factor in determining costs. In examining the cost in the smallest display which is required for a payment of $50.00 to the retailer, it has been determined that the labor involved amounts to $41.25. To this figure must be added the cost of art work and material which accounts for the balance of $8.75. In examining the costs of the most expensive displays using the same methods, it has been determined that labor costs amounted to $91.91. The difference between that sum and $125.00 is accounted for by the cost of sign painting and material. In some cases the cost of painting exceeds the amount budgeted in the larger displays because their desi,,"" involve much artistic work if the product is to be promoted successfully; however, no payments exceed $125. which is the cost to produce the most elaborate of the displays. With regard to the question raised at the meeting as to what happens if a customer does not earn enough under a supplier s program to pay for a display, he is offered alternatives previously referred to so that the money earned is expended for promotion. The Odessky Company does work with suppliers and fits the Odessky program into the supplier s overall program. The supplier is informed of the requirements of the Robinson-Patman P. ct and if the supplier decides to offer promotional assistance, the Odessky Company advises the supplier of his duty to have a plan for providing the assistance , to inform customers of the plan , to insure that it is proportional and available to all competing- customers , and to check to see that the services are furnished.

The means of proportionalization that the Odessky firm suggests is that the payments be based on the dollar volume of purchases of the promoted product or on the quantity of the goods so purchased during a specified period. This is the means which Guide 7 "Proportionally Equal Terms" of the Commission s Guides for Advertising Allowances indicates is the best method to calculate tho payments or allowances to be made by suppliers in providing promotional assistance. As a rule most packers and canners pay an allowance of four percent on purchases for advertising and promotions. The Odessky Company, however, docs not set or determine the precise allowance that wil paid and there is no uniform rate.

If the supplier agrees to participate in the Odessky plan he is biled by the Odes sky Company for his costs in providing the promotional assistance and the Odessky Company thereafter makes the necessary payments to the customers and furnishes detailed reports to the suppliers so that there is a proper accounting as to the promotional 1430 FEDERAL TRADE COMMISSIOK DECISIONS

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funds received by each customcr. This is a service to the supplier becausc he can be certain, as called for by Commission Guide Chccking Customer s Use of Payments " that he is receiving performance for the funds expended, and hc receives a detailed accounting so that thc proper deduction can be made from the retailer s promotional account.

In conclusion, we believe that this program insures that small suppliers will have an opportunity to promote and display their products in grocery stores. The fact that no supplier can purchasc more , pro-than 6 displays a ycar for a one-week duration is reasonable competitive and guarantecs that the Odessky plan will not prevent other suppliers who do not participate in the Odessky plan from having the opportunity to advertise their goods and to display their products in retailers' places of business. The plan has been carefully designed to assure that a reasonab1e and proper balance is maintained between instore display space which is available to suppliers who participate in the Odessky plan in providing promotional assistance to the retailers and other non-participating suppliers who wish to provide in-store promotional assistance to thc retailers, but do not choose to do so using

the Odessky Company plan.
With kind regards, I am
Sincerely yours
/s/ Basil J. Mezines

Second Sl1pplemRntal Lelt€r Relative to ReqU€st

February 5, 1974

Dear :vr. Dufresne:

Odes sky, Inc., for This is in furthcr reference to the request of Don an advisory opinion pursuant to Sections 1. 1.4 of the Commission Rules and procedures. This request for an opinion was filed by my letter dated December 20, 1973, and by supplemental letter of January , I have had several , 1974. Since these two letters were filed conferenccs with you which seem to indicate that further clarification is necessary.

When the Commission announced that it had revoked 12 Advisory Opinions dealing with promotional allowances, it stated that the action was taken because the prevjous opinions approved compensation schemes based upon, for example , bJTOSS sa1es or customer counts as detcrmined by cash register transactions. In addition , the Commission referred to footnote 2 in Example 1 of Guide 9 which states "Also the purchase of display or shelf space, whether dircctly or by means of so- ADVISORY OPINIONS 1431

caJled allowances, may be considered an ' unfair method of competition in violation of Section 5 of the Federal Trade Commission Act." The request for an Advisory Opinion indicates clearly that thc Don Odessky company wiI base an payments made for the services furnished on the prccisc donar volume of goods purchased during a specified period. In short, the company is in comp1etc agreemcnt with the Commission that the customcr count method or gross receipts method of proportionaiization is not a proper basis for assuring that payments made arc on proportion any equal terms. Basing the payments on a percentage of the donar volume of purchases assurcs that such payments are proportional and fair to an customers who compete in the resale of the sencr s product. Guide 5 states that window and fJoor displays are included in the hst of services or facilities eovercd by the Act where the sener pays the buyer for furnishing them. Of course, if a customer seeks to buy an unreasonable amount of floor space, this could result in a restraint on trade which is obviously the reason why the Commission cautioned promoters in footnote 2 to be careful that the purchase of display or shelf space does not result in "an unfair method of competition " in violation of Section 5 of the Federal Trade Commission Act. This footnote was designed to cover situations wherehy a sener has, or may, monopolize shelf or display space in grocery stores to the detriment of competitors. The request filed on behalf of Don Odessky, Inc., dated December 20, 1973, provides, on page 2, a limit on the number of displays anyone supplier can contract for during the course of a year in order to prevent one supplier from purchasing an available promotional space in the store. Specificany, the letter of request states that "during any calendar year, no single supplier can contract for more than 10 displays in one store. Since each store can usuany set up 5 displays, at the end of each ais1c, this means that it is possible for a store to contract for at least 260 a year." It was beheved that if a supplier could contract for a maximum of 10 displays out of a possible 260, there was no likelihood that any restraint of trade would take place. Since discussing this matter with you and Mr. Odes sky, I have come to the conclusion that the maximum number of displays that can be purchased should be reduced to 6. Thus, the maximum number of displays a supplier can contract for during one week represents a little over 2% of the space avai1abJc in a grocery store during the course of the year.

I strongly believe that limiting the maximum number of displays to 6 for a one-week period wiI guarantee that there wiI be no monopolization of the display space and there is not even the remotest possibility that any restraint of trade win take place. Moreover, the

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Odessky company will certify that all competing suppliers wil be provided with display space in order to insure that no supplier of the no supplier wil begrocers receives a competitive advantage. Thus, foreclosed from promotional display space in a store. We also be1ieve that the method of payment based upon the precise cost of the displays or on costs that are figured on the hasis of designing and constructing one display will also insure that payments made are not in excess of the actual or approximate cost of providing the promotional service. Under the Odessky plan proof of a performance is guaranteed since it is their responsibility to inspect the displays for suppliers in order to be certain that they are erected for the stated period and the design of the display is in accord with the agreement that has been reached with the customer. When the FTC revoked these Advisory Opinions it offered the parties an opportunity to modify their methods of operations so that the Commission could consider the issuance of a new Advisory Opinion. Mr. Odessky has followed this strong suggestion from the Commission believes theand has modified his program to comply with what he makeCommission has requested. If we are incorrect in our assumption, any other modifications that you feel necessary. We would appreciate the advice of the staff so that we can submit a program to the Commission that meets its requirements in complying with the Guides.

With kind regards, I am
Sincerely yours
/5/ Basil J. Mezines

First SuppLementaL LeUer Relati.ue to Request