Advisory opinion letter

ADVISORY OPINIONS l;)

SEPARATE STATEMENT OF ACTING CHAIRMAN CLANTON

While I am in agreement with the Commission s advisory opinion letter to Procter & Gamble in most respects, there is one point of departure on which I believe that the majority s opinion should give additional gnidance. The majority s letter defines "similarly situated customers" to include only those customers who are located equal geographical distances from the shipper s dock. While it is correct under a single-mode, mileage-based backhaul allowance formula that in order to meet the non-discrimination criterion of Section 8, the amount of compensation for identical purchases by similarly sitnated customers should vary only by the distance from the seller s dock, I believe that our advice should go a step beyond this. I would take this opportunity to acknowledge the possibilty, without attempting to define the circumstances, that customers might be "similarly situated" in cost-related ways other than mere geographical distance and, conversely, that between equidistant customers clear cost differences based on actual experience may be established. Such cost-related circumstances might involve the historic use of different or multiple modes of transportation to different customers, so that a formnla measuring only mileage from a seller s dock using single-mode rates may not truly reflect all the circumstances under which customer comparabilty conld be achieved. In short, I believe the majority s letter can be read as saying that a single-mode, mileage-based backhaul allowance formula is the only system tlrt a seller can use which wil comply with the terms of Section 8, and I would disagree with snch a narrow interpretation. Letter of Request

September 2, 1980

Dear Sir:

This is a request for an Advisory Opinion pursuant to Sections 1.1-1.4 of the Commission s Rules on behalf of The Procter & Gamble Distributing Company, Cincinnati, Ohio (hereinafter referred to as Company Set forth in detail in this letter and its attachments' is the Procter & Gamble Cnstomer Pick-up Allowance Plan (Plan) for payment of an allowance to customers choosing to pick up merchandise at plant locations rather than receiving shipment under the Company uniform delivered prices at the customer s warehouse location.

. Not reproduced hni!in. Copies of all Attachments and Exhibits !.re available for inspection in Room 130, Public Reference Branch, :Federal Trade Commission, 6th St. and Pa. Ave. , N. , Washington, D.C. 20580. 914 EDERAL TRADE COMMISSION DECISIONS

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Careful consideration has been given to designing the Plan in accordance with the Company s understanding of its obligations under the Robinson-Patman Act and Section 8 of the Motor Carrier Act of 1980. The Company does not presently permit customers to pick up orders at point of shipment.

Review of this Plan by the Federal Trade Commission and an opinion regarding its lawfulness is requested in connection with any issues it may present regarding the applicabilty of the RobinsonPatman Act, Section 8 of the Motor Carrier Act of 1980, and any other statute enforced by the Commission.

1. General Description of the Procter Gamble Customer PickUp Allowance Plan.

The Plan presented for consideration by the Commission is limited to certain selected bra1)ds in the Bar Soap & Household Cleaning Prodncts Division (BS&HCP). If the test of this Plan is sucessful consideration would be given to expansion of the Plan to other brands and shipping locations.

The test Plan would apply to 17 separate sizes of four brands: Downy, Biz, Comet, and Bounce. These items represent abont 68% of total case volume in the BS&HCP Division which markets nationally 45 separately priced items. Only the designated brand(s) would be available for pick-up at six producing plant locations for these brands around the country. For example, only Downy and Biz would be available at Lima.

The Plan reqnires customer pick-up of orders in unit-load, full truckload quantities of the brand(s) produced at designated locations. The customer pick-up allowance wil be reflected in the customer s invoice as a deduction from the uniform delivered carload price. The formula for calculating the amount of the transportation allowance is developed from two basic cost elements of motor carrier operation: (1) driver labor for loading and unloading at $16.25 per hour (current national Teamsters' wages and fringes); and (2) operating cost of $1.00 per mile (current national average to run a tractor and trailer 100,000 miles per year). These two factors are computed over a distance between the Company s designated shipping point for the customer and the customer s designated destination, converted to a rate per hundred pounds, and paid to the customer based on the total weight purchased. Exhibit A * to this letter is a copy of the contract that wil be nsed

"'Not reproduced herein. Copies of all Altachments and Exhibits IIfcavailllble for inspection in Room 130 , Public Reference Branch, Federal Trade Commission, 6th SL and POI. Ave. , N. , WashingLon, D.C. 20580. ..

ADVISORY OPINIONS

with each customer desiring to participate in the Plan. This contract incorporates the Operating Guidelines which a customer must observe in the areas of order placement, appointment scheduling, and dock disciplines. These Operating Guidelines are included as Attachment A. to Exhibit A.

2. Pick-Up Allowance Calculation Formula.

The formula for calculating how much each customer wil be paid for picking up its order wil have uniform application regardless of the brand involved or the shipping location. The amount of the allowance wil vary depending on the distance between the Company s shipping point and the cnstomer s designated destination. In congested markets where plant shipping areas converge for the same brand, the customer can elect either shipping point to make a pick-np. In other markets, the allowance wil be calculated solely on the basis of the Company s designated shipping point for the customer even though the customer may elect to pick-up at a more distant location.

The driver labor and operating expense factors in the formula are two elements of cost making up a common carrier or contract freight rate and current comparisons show that these factors represent about two-thids of snch rates as would be paid by the Company if the order were delivered to the customer. These two basic cost elements of motor carrier operation can be more fully described as follows:

a) Driver labor for loading and unloading: Fonr hours are allowed at the current national Teamsters' wages and fringes rate of $16. 25 per honr ($65.00). This reflects the most prevalent standard in the food and grocery industry. The four hours allowed for loading and unloading parallel the hours allowed under MC-88, the national uniform detention rule.

b) Operating expenses of $1.00 per mile: This rate per mile is designed to cover motor carrier operating costs. It is based on the national average cost to run a tractor and trailer 100,000 miles per year, and covers the following factors: driver, cost of equipment, fuel, tires, repair and maintenance, licensing, insurance, interest, and road use taxes. Support for determining this figure comes from a variety of sources including trucking industry cost surveys. We have included a recent survey by Hertz published in Traffic

+Not reproduced herein. Copies of all Attachments and Exhibits are available far inspection in Room 130. Publi Reference Branch, Federal Trade Commission, 6th St. and Pa. Ave.. N , Washington, D.C. 20580.

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World, May 19, 1980 as Exhibit B* This operating expense classification represents two-thirds of forhire carrier rates on average since it does not include amounts for profit or costs of sales and administration that would be included in a straight for-hire situation.

Pick-up loads transported less than 75 miles wil earn the minimum allowance of $140.00 regardless of load weight or distance. This minimum allowance level recognizes the higher fixed cost involved in driver time for metropolitan traffc and tends to parallel the increase in local freight rates by for-hire carriers. This minimum for local pickup is stil within the range of two-thirds of tile Company s average cost of local delivery.

The two factors in our allowance calculation formula wil escalate over time and the Company would plan to review these factors periodically and make changes as needed.

3. The Plan is designed to maintain Procter Gamble s efficient distribution system while meeting the intent of Congress to create better efficiency in transportation.

Procter & Gamble has developed a delivery system in the BS&HCP Division which is tailored to volume, plant number and locations, and the product replenishment requirements of our customers. The resulting distribution pattern concentrates shipment of over 95% of this Division s volnme from strategically located prodnction points directly to customers. In addition, almost 90% of our customer shipment volume is in truckload or carload quantities. Therefore, our plants handle huge volumes with what we consider to be unusually high shipping efficiencies. We need to be careful not to significantly disturb these shipping efficiencies, or the result would be higher costs which in turn would tend to increase base prices and, thus, lead to higher consumer prices on our products.

The specific purpose of Section 8 of the Motor Carrier Act of 1980 is to permit and encourage increased transportation efficiencies and cost savings in the marketing and delivering of food and grocery products, with the ultimate beneficiary of such cost savings being the American consumer. True cost savings must be realized within the transportation/distribution system to generate true consumer benefits.

Support for customer pick-up focuses on a reduction of large trucks

.Not reproduced herem. Copies of all Attachments and gllhihits are BvailBble for insper,tion in Room 130, Public Reference Branch, F€deraJ Trade Commission, 6th St. and Pa. Ave.. N. , Washington, D C. 20580. ADVISORY OPINIONS

running empty on return trips to home base following full load delivery of products to retail outlets. By picking up a full load of sup' plier product for the return trip, those trucks are literally replacing another truck which normally would carry that load. This full load replacement transportation maximizes fuel and cost savings within the total system.

Limiting pick-up to producing plant locations is another factor which importantly protects the efficiencies that are already in place at Procter & Gamble. Many other large food and grocery suppliers depend upon a broad network of warehouse distribution centers from which customer shipments are made. These multiple commodity distribution warehouse operations, after receiving product from several producing locations, store, handle, and assemble customer orders for shipment to final destinations. Obviously, this more complex system better suits the marketing objectives and/or requirements of many suppliers, but adds several elements of cost to total delivery expense which this Company has successfully avoided. Other BS&HCP items wil be available for delivery by the Company from a producing plant warehouse that are not designated for customer pick-up under the Plan. These are either lower volume items produced at that pick-up location or they have been shipped from other producing plants for fillng combined full carload or smaller orders when a customer s order includes those items. The lower volume items made at the pick-np location are not included becanse of the test nature of the Plan. On items shipped from other producing plants delivery and other costs have already been incnrred. Such items do not qualify under the Plan because they do not maximize the full economies which otherwise exists when a cnstomer picks-up a full truckload of an item that has been made at the producing plant location. 4. The Plan complies with the intent and spirit of the Motor Carrier Act of 1980.

a) Allowance payments would not "exceed seller s cost of delivery As indicated above, the pick-up allowance calculation formula would return to the customer about two-thirds of the Company s actual delivery expense on average. Section 8 of the Motor Carrier Act of 1980 permits payment of a customer pickallowance which" . . . does not exceed the actual cost to the seller of delivery to such customer. . .." The reasonable interpretation of this requirement is that the actual cost ceilng is the amount a seller would pay to a carrier as its actual shipping rate. Thus, a

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special negotiated rate would apply, if available, rather than a published or list rate.

Examination of allowances under our formula against the actual cost to the Company indicates that in every instance the Company cost of delivery would exceed the amount of the allowance. For purposes of ilustration, we have included Exhibit C,* which is a diagram and chart showing the effect of the customer pick-up plan in the Illinois market in terms of anticipated cnstomer participation and the customer pick-up allowance rates nnder the Plan versus cost of delivery by the Company.

Since the proposed Plan is based on full truckload orders the issue of incremental or marginal cost of a certain single order contributing to a combined truckload rate is not a consideration in this Plan. We hasten to point out that even though the issue is not presented here, any interpretation of the actual cost standard of Section 8 would require application of marginal or incremental costs would, in our view, be unrealistic and would result in discriminatory allowance payments among competing purchasers in cont1ct with other language in Section 8.

b) All retailers wil have an opportunity to benefit from the savings represented by the allowances paid under the Procter Gamble Customer Pick- Up Plan. The food and grocery distribntion system operates primarily on a two step movement of goods pattern: (1) Shipment of full loads of merchandise (70% by truck, 30% by rail) from individual manufacturers to customer distribution centers; and (2) Delivery of full or partial truckloads in mixed assortments from the grocery distribution centers to retail outlets. Numerically, about 000 manufacturers supply approximately 10,000 separate items to 500 food and grocery warehouse distribution centers, for combined deliveries to about 185, 000 retail outlets. The warehouse operations, whether chains, cooperative group wholesaler, voluntary group wholesaler, or unaffiliated wholesaler JUY in truckload or carload quantities from manufacturers to meet lOrmal turnover demand and/or to secnre the optimum price vailable. In the test phase of the Company s Plan it is estimated hat 127 warehouse customers wil participate out of a total of over

Not reproduced herein. Copies of all Attachments and Exhibits IIrc available for inspection in Room 130 , Public enmce Branch, Federal Trude Commission. 6th St. and Pa. Ave., N. , Washington, D.C. 20580 ADVISORY OPINIONS 919

500 who purchase BS&HCP items. These warehouse accounts in turn wil distribute brands picked-up under the Plan to thousands of individual retail stores.

A full truckload move by any of the above types of warehouse accounts provides the opportnnity for pick-up cost savings to all types and sizes of retail ontlets serviced by them. This has been confirmed by spokesmen for the largest wholesale and retail associations. Exhibit D* contains excerpts of testimony presented at hearings on various legislative proposals authorizing payment of customer pickup allowances which support and amplify this point. Exhibit E* is a diagram prepared by the National American Wholesale Grocers Association ilustrating the movement of prodncts from mannfacturer through warehouse distribution centers to retail outlets.

Finally, Section 8 expresses in Subsection (bl the . . . sense of Congress that any savings accruing to a customer by reason of compensation permitted by Subsection (al of this Section should be passed on to the ultimate consumer . Thus, Section 8 itself makes retailers who purchase from wholesalers a necessary link in the chain to pass on any savings recognized by that wholesaler through receipt of a customer pick-up allowance under the proposed Plan. The obligation to see that these benefits are in fact, passed along to the retailer and ultimate consumer has been assigned to the ICC under the Motor Carrier Act.

c) The allowance would apply to "food and grocery " products. The brands described above are two fabric softeners, a laundry presoak and a hard surface cleanser. These are generally classed as cleaning products which are normally sold in grocery stores. Webster s New Collegiate Dictionary defines "groceries" as "commodities sold by a grocer . It is our opinion that any Procter & Gamble consumer brand sold in grocery stores would be within the term "food and grocery products" as used in Section 8. We believe this shonld be the case even though some items, like Comet, may also be resold in small volume by a jobber customer for institutional use.

d) The plan would be "non-discriminatory " in application and effect. As indicated above and in Exhibit C, * the allowance formula would be applied uniformly to any customer willing to participate in the Procter & Gamble Plan. While individual customer

-Not reproduced herein. Copies of all Attachments IInd Exhibit$ are aVllilnble for inspection in Hoom 130. Public Reference Branch, Federal Trade Commission, 6th St. and Pa. Ave., N. " Washington, D.C. 20580.

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allowance amounts will vary on the basis of distance as a result of uniform application of the formula, similar differences also exist in the cost which the Company must pay to a carrier under similar circumstances- The chart in Exhibit C* wil clearly ilustrate this point.

The Procter & Gamble Customer Pick-Up Plan wil be broadly an. nounced to the trade with appropriate publicity and notices on price lists which are sent to customers.

The Plan requires a customer to declare its destination for the order it is picking up. This is the basis on which the customer s allowance will be calculated. The opportunity does exist for customers to abuse the Plan by delivering the product to stores or warehouses which are closer to the shipping point than the location designated by the customer. It is the Company s intention to protect against this possibilty by reservng the right to inspect a customer s shipment records to verify their delivery destination on orders picked up by a customer.. This would be done in cases where suspicious circumstances exist or as part of a periodic spot check procedure, Any allowance overpayment discovered by the Company would result in an immediate bil back to the customer to recover this amount. Repeated abuses of the requirements of the Plan could result in a 12 month suspension from the Plan after which the customer could be automatically reinstated subject to continued observance of the requirements of the Plan. All sanctions would be applied uniformly and objectively. It is respectfully requested that the proposed course of action as described receive the consideration of the Commission and that an

Advisory Opinion issue.
Very truly yours,
/s/ David G. Hemminger
Senior Counsel, Trade Regulation
Second Letter of Request
March 18, 1981

)ear Mr. Tasker:

The purpose of this letter is to address two specific questions that

"Not reproduced herem. Copies of all Attachments IInd Exhibits lire available for inspedioIl jn Room 130, Public ference Branch, Federo'! Trade Commission. 6th St.and Pa. Ave-. N. , Washington, D.C. 20580. ADVISORY OPINIONS

you raised regarding the Procter & Gamble Customer Pick-up Allowance Plan that was described in our Reqnest for an Advisory Opinion of September 2, 1980. Your first question related to the requirement of the Plan for a truckload order and how this requirement might affect customers purchasing in less tban truckload quantities. As indicated in onr Request, 90% of the total volume of BS&HCP products is currently shipped in truckload quantities. The 10% volume in less than truckload quantities results from a variety of reasons:

1. The Company offers the sale of BS&HCP brands for diect delivery to creditworthy customers for a minimum order size of 25 cases. There are some customers who purchase in this minimum. 2. Less than truckload orders occasionally are the result of our being unable to fulfil shipment against an original truckload order. The customer receives the truckload price under these conditions.

Small L TL order shipments are considerably more costly to the Company on a per case basis than truckload orders and much of this cost is not recovered through the higher price charges for small orders under our quantity discount structure. However, it is estimated that all such orders were shipped to only 2% of approximately 160,000 stores carrying BS&HCP brands that are not supplied by a chain warehouse. About half of the L TL shipments were to chain stores like K-Mart who had chosen to by-pass their central warehouse facilties by electing direct store delivery at a higher price under the Company s quantity discount structure. The other 98% of such stores are supplied by wholesale warehouse accounts. Some chain retailers and wholesale accounts who warehouse also order on an L TL basis to their warehouse. While this may represent their optimum inventory level, they could well have the capacity and the financial resources to purchase in truckload quantities, especially if a customer pickup allowance opportunity were available. As stated in the Request, Procter & Gamble must balance any arrangement to accomodate customer pick-up with the total effciencies inherent in the Procter & Gamble distribution system. To allow the pick-up of LTL orders would create serious disruptions in the efficient, large-scale distribution system at our prodncing plants which would inevitably result in overall higher costs. Other suppliers have announced customer pick-up allowance programs since the enactment of the Motor Carrier Act of 1980. Most of the plans which have reached our attention are in fact limited to truckload orders as well. As stated in Section 4(b) of the Procter & Gamble Request, it is an.

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ticipated that the benefits of the customer pick-np allowance plan wil accrue to small resellers through wholesalers as required by Section B(b) of the Act and as indicated by the testimony before the Select Committee on Small Businesses of the United States Senate contained in Exhibit D* of our Request. Any retailer choosing to purchase through a wholesaler to obtain the benefit of customer pick-up savings gained by the wholesaler, rather than buy direct from Procter & Gamble, may do so. There is no reqnirement that obligates a cnstomer to continue to purchase from Procter & Gamble on a direct basis. In this regard, we believe the Plan is non-discriminatory, applies uniformly and thus is fully within the requirements of Section 8 of the Motor Carrier Act of 1980.

Y onr second request was to clarify the availabilty of the Customer Pick-up Allowance Plan to all resellers of the BS&HCP brands included in the Plan. It is clearly the intent of Procter & Gamble to extend its Plan to any reseller at the wholesale or retail level regardless of trade classifcation.

I request that this letter be accorded temporary confidential status, and that it be considered exempt from disclosure under the Freedom of Information Act, unti the Commission has issued its opinion in response to Procter & Gamble s Request. This request is made for the reason described in Mr. McHenry s letter to Mr. Carol Thomas, Secretary, of September 8, 1980.

If you have any questions regarding the above, please feel free to call me at any time.

Very truly yours,

/s/ David G. Hemminger

Senior Counsel. Trade Regulation Third Letter of Request

April 16, 1981

)ear Mr. Pfunder:

This letter wil confirm our telephone conversation yesterday at 'hich time I advised you of a minor change in the Procter & Gamble equest for an Advisory Opinion. That change involves the deletion

reproduced herein. Copies of aU Attachments IInd Exhibits 8n available for inspection in Room 130, Public erence Branch, Fed"ral Trade Commission, 6th St. and Pa. Ave., N. , Washingtn, D.C. 20580. ADVISORY OPINIONS

of the Baltimore Plant as a pickup point for Downy fabric softener. This product wil be snpplied in full truckload quantities solely from the Lima, Ohio plant for destinations in the eastern United States due to cost considerations.

I have enclosed those pages which are part of the Request* that wil show a deletion of the Baltimore Plant as a picknp location. Please note that there have also been some minor wording changes in the Operating Guidelines (Exhibit A * Attachment A*) which have been made for purposes of clarification. These changes have been highlighted in the attached docnment. * It is our judgment that the deletion of the Baltimore Plant as a pickup point and the other word changes in the Operating Guidelines would not affect the substantive legal evaluation of the Company Request, nor should they contribute to any further delay in action by the Federal Trade Commission upon the Request. Should you have any questions please call me.

Very truly yours,

Isl David G. Hemminger