The Borden Company

Text (OCR of the scan at left; may contain errors)

In THE MATTER OF THE BORDEN COMPANY ORDER, OPINION, ETC., IN REGARD TO THE ALLEGED VIOLATION OF SEC. 2(a) OF THE CLAYTON ACT , Docket 7129. Complaint, Apr. 22, 1958—Decision, Jan. 30, 1963 Order requiring the producer since 1892 of Borden brand evaporated milk and which since 1938 packed the same grade and quality of evaporated milk under private labels as under its own Borden brand, to cease discriminating in price between its customers buying the milk under the Borden label and those buying the product under private label. Complaint The Federal Trade Commission, having reason to believe that the party respondent named in the caption hereof, and hereinafter more particularly designated and described, has violated the provisions of subsection (a) of Section 2 of the Clayton Act (U.S.C.A., Title 15, Sec. 18) as amended by the Robinson-Patman Act, approved June 19, 1936, hereby issues its complaint stating its charges with respect thereto as follows:

Paracrapa 1. Respondent, The Borden Company, is a corporation organized, existing and doing business under and by virtue of the laws of the State of New Jersey with its office and principal place of business located at 350 Madison Avenue, New York 17, N.Y. Par. 2. The Borden Company is primarily an operating company engaged in a variety of enterprises. These enterprises include exten- THE BORDEN CO. 131 130 Complaint sive manufacture, processing, distribution and sale of dairy products ‘throughout the United States. The Borden Company is and has been, at all times, referred to herein, one of the largest concerns in the dairy products industry.

Included among the aforesaid operations of The Borden Company is the manufacture, distribution and sale of evaporated milk. At all times referred to herein The Borden Company sold substantial quantities of evaporated milk to concerns engaged in the purchasing, dis- ‘tributing, wholesaling or retailing of food products. In 1956 its sales of evaporated milk were in excess of $30,000,000. Par. 8. In the course and conduct of its said business, The Borden ‘Company has sold and distributed its evaporated milk to purchasers thereof located in States other than the State of origin of said product, and has caused such product, when sold, to be shipped and transported from its place of business in the State of origin to purchasers located in other States. There is now, and has been, a constant current of trade in commerce, as “commerce” is defined in the Clayton Act, in ‘said product by respondent between and among the various States -of the United States and the District of Columbia. Said product is, and has been, sold and distributed for use, consumption and resale in the various States of the United States and the District of Columbia.

Par. 4. The Borden Company, in the course and conduct of its said business is now, and at all times referred to herein has been, in sub- ‘stantial competition with others engaged in the manufacture, distri- ‘bution and sale of evaporated milk in commerce between and among the various States of the United States and the District of Columbia. Each and every one of The Borden Company’s purchasers of evaporated milk are, and have been, in substantial competition with other of its purchasers of evaporated milk, Par. 5. During the period from January 1, 1956, to the present, ‘The Borden Company, in the course and conduct of its business, has discriminated in price between different purchasers of its evaporated milk of like grade and quality by selling it to some of its purchasers at substantially lower prices than to other of its purchasers. An example of such discriminations in price is set out as follows: Plants of The Borden Company engaged in the manufacture of canned evaporated milk are located at Albany, Oregon; Modesto, California; Ft. Scott, Kansas; Dixon, Illinois; New London, Wisconsin; Perrington, Michigan; Wellsboro, Pennsylvania; Lewisburg, Tennessee; and Chester, South Carolina. Each of the aforesaid plants manufactured and canned evaporated milk, some of which was offered Complaint 62 F.T.C.

and sold generally as a “Borden”-labeled product to purchasers engaged in the purchasing, distributing, wholesaling or retailing of food products, and some of which was offered and sold as a buyerlabeled product to selected purchasers engaged in the purchasing, distributing, wholesaling or retailing of food products. The Borden Company’s pricing system for evaporated milk includes two pricing methods. “Borden”-label evaporated milk is priced on a uniform, delivered, one price basis, which includes the cost of delivery from the plant of manufacture to the purchaser. Buyerlabel evaporated milk is priced on an f.o.b. plant basis. From January 1, 1956, to the present, the prices of both “Borden’-label and buyerlabel evaporated milk have varied from time to time. Throughout the aforesaid period, however, buyer-label prices have been consistently and substantially lower than “Borden’-label prices. The aforesaid price differential is illustrated by prices in effect in July 1957, which were as follows:

Borden label | Buyer label Price Plant (per case, (per case, differential tall 48’s) tall 48’s) Albany, Oreg__-------------------------- $6. 45 $5. 59 $0. 86 Modesto, Calif...-.------.--------------- 6. 45 5. 12 1. 33 Ft. Scott, Kans__------------------------ 6. 45 5. 26 1.19 Dixon, Ill._-_---------------------------- 6. 45 5. 25 1, 20 New London, Wis__---------------------- 6. 45 5. 32 1 13 Perrington, Mich.._-...------------------ 6. 45 5. 42 1. 03 Wellsboro, Pa__-------------------------- 6. 45 5. 37 1, 08 Lewisburg, Tenn___--._--.--------------- 6. 45 5. O1 1, 44 Chester, 8.C___-------------------------- 6. 45 5. 01 1. 44 Only a small portion of the price differential hereinbefore referred to was attributable to cost of delivery of “Borden”-label evaporated milk from the plant of manufacture to the purchaser. From January 1, 1956, to the present, through the use of the sales method and pricing system hereinbefore described, The Borden Company made sales of buyer-label evaporated milk to selected customers at prices substantially less than the prices to other customers of “Borden’label evaporated milk.

Par 6. The effect of respondent’s aforesaid discriminations in price between different purchasers of such products sold and purchased in the manner and method as above described may be substantially to lessen competition or tend to create a monopoly in the lines of commerce in which the respondent and the aforesaid favored purchasers are engaged, or to injure, destroy or prevent competition with said respondent, said favored purchasers, or with customers of either of them.

THE BORDEN CO. . 133 130 Initial Decision Par. 7. The foregoing alleged discriminations in price made by respondent, The Borden Company, are in violation of subsection (a) of Section 2 of the Clayton Act, as amended. Mr. Raymond L. Hays, Mr. Theodor P. von Brand, and Mr. Richard B. Smith for the Commission.

Dewey, Ballantine, Bushby, Palmer & Wood, by Mr. Kent V. Lukingbeal and Mr. John E. F. Wood, of New York, N.Y., and Mr. Cecil I. Crouse, of New York, N.Y., for respondent. Inrriat Decision py Asner E. Liescoms, Heartnc Examiner DECEMBER 15, 1961 I. The Complaint 1. The complaint herein was issued on April 22, 1958, charging the respondent with discrimination in price between different purchasers of its evaporated milk of like grade and quality during the period from January 1, 1956, to the date of the complaint, by selling such milk to some of its purchasers at substantially lower prices than to others of its purchasers, in violation of §2(a) of the Clayton Act as amended by the Robinson-Patman Act. The portions of the Clayton Act upon which the complaint is based provide as follows: Sec. 2(a) That it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality, where either or any of the purchases involved in such discrimination are in commerce, where such commodities are sold for use, consumption, or resale within the United States or any Territory thereof or the District of Columbia or any insular possession or other place under the jurisdiction of the United States, and where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them; Provided, that nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered; * * *. : (b) Upon proof being made, at any hearing on a complaint under this section, that there has been discrimination in price or services or facilities furnished, the burden of rebutting the prima facie case thus made by showing justification shall be upon the person charged with a violation of this section, * * *, 2. The complaint alleges that certain of respondent’s plants manufactured and canned evaporated milk, some of which was sold as a “Borden-labeled” product to purchasers engaged in the wholesaling or retailing of food products, and some of which was sold under the 749-557—67——10 134 FEDERAL TRADE: COMMISSION DECISIONS Initial Decision 62 F.T.C.

purchaser’s abel as a “buyer-labeled” product to certain other “selected” purchasers who were also engaged in the wholesale or retail distribution of food products. The amount of such sales in 1956 is alleged to exceed $30,000,000.

3. The complaint alleges further that two different pricing systems were employed by the respondent in the sale of such evaporated milk. On one hand, the Borden-labeled evaporated milk was sold throughout the United States at a uniform delivered price, which included the cost of the milk and the cost of transportation thereof from respondent’s plant to the purchaser. On the other hand, the buyer-labeled evaporated milk was sold on an f.o.b.-plant basis, which did not include the cost of transportation from the respondent’s plant to the purchaser. The complaint further alleges that from January 1, 1956, to April 22, 1958, the date of the complaint, the price of the buyerlabeled evaporated milk has been consistently and substantially lower than the price of the Borden-labeled evaporated milk, a difference varying, during July 1957, from 86¢ to $1.44 per case. The complaint avers further that only a small portion of such price differential was attributable to the cost of delivering the Borden-labeled evaporated milk. The complaint concludes that the effect of such discrimination in price may be substantially to lessen competition or tend to create a monopoly in the lines of commerce in which the respondent and its purchasers are engaged, or to injure, destroy or prevent competition with respondent, with respondent’s favored purchasers, or with customers of either of them.

II. The Answer 4, The respondent, although denying in its answer various particular allegations of the complaint, admits that it is one of the larger corporations in the United States engaged in the dairy industry; that it sells and distributes its products in interstate commerce; and that it maintains a different pricing system for its Borden brand milk, as distinguished from its buyer-labeled evaporated milk. - 5. Respondent particularly declares that its prices have been con- - sistently low to meet equally low prices of competitors, and that the prices of its two lines of evaporated milk did not differ more than the difference in cost thereof. In conclusion, respondent denies that its pricing practices in the sale of evaporated milk have resulted in any injury to competition, or that such practices are in violation of the provisions of § 2(a) of the Clayton Act, as amended. III. Hearings and Proposed Findings 6. Hearings for the reception of evidence in support of the case-inchief, in defense, in rebuttal, and in surrebuttal were held intermit- THE BORDEN CO. 135 130 Initial Decision tently from September 22, 1958, to and including July 11,1961. Con- ‘sideration has been given to the entire record herein, including proposed findings as to the facts, proposed conclusions, and written arguments in support thereof. Each of those proposals which has been accepted has been, in substance, incorporated into this initial decision. All proposals not so incorporated are hereby rejected. IV. The Issues 7. The controlling issues herein, arising from the pleadings, the evidence and the relevant provisions of the Clayton Act, are as follows:

a. During the period of time contemplated in the complaint, was the evaporated milk sold by respondent under its own label, and that. sold by it under the labels of purchasers, of “like grade and quality” ? b. If respondent did in fact sell evaporated milk of “like grade and quality” under both its own label and the labels of its purchasers, did respondent discriminate in price between the purchasers of Bordenlabeled milk and purchasers of private-labeled milk? c. If respondent did so discriminate in price between purchasers of its evaporated milk “of like grade and quality”, is there a reasonable probability that the result of “* * * such discrimination may be substantially to lessen competition, or tend to create a monopoly in any line of commerce” ? d. If the record shows, prima facie, that the respondent has discriminated in price in its sales of evaporated milk of like grade and quality, and by such discrimination has tended to injure competition or create a monopoly, has respondent successfully sustained its “* * * burden of rebutting the prima facie case thus made” by justifying its price discrimination by proving that such difference in price was consequent to “only due allowance for differences in the cost of manufacture, sale or delivery resulting from the differing methods or quantities in which such [evaporated milk] was to such purchasers sold or delivered’? V. Identity of the Respondent 8. The respondent, The Borden Company, is a corporation organized, existing and doing business under the laws of the State of New Jersey, with its principal office and place of business located at 350 Madison Avenue, New York 17, N.Y.

VI. Respondent’s Business in General, And Its Evaporated Milk Business in Particular 9. The respondent is engaged in the manufacture, processing, distribution and sale of an extensive variety of food, dairy and chemical Initial Decision 62 F.T.C.

products in the United States and abroad. Its total sales in 1957 amountid to $931,220,662. The only product with which we are here concerned is evaporated milk. Substantial quantities of this product have been shipped from respondent’s various plants to purchasers thereof located in States other than the States of manufacture. In 1956 respondent’s sales of evaporated milk exceeded $80,000,000. 10. Evaporated milk has been produced by the respondent by evaporating whole milk to approximately one-half its original volume; adding Vitamin D and certain minerals as a stabilizing agent to prevent curdling; putting such mixture in cans, and sterilizing it. This product has most frequently been packed by the respondent in 1414ounce cans, 48 cans to a case. These cases are called “tall 48s”. Respondent also packs evaporated milk in 6-ounce cans, 96 cans to the case, referred to as “small 96s”. When these 6-ounce cans are packed 48 to a case, it is referred to as “small 48s”. Other sizes of canned evaporated milk are also produced for the confectionery industry. VII. Respondent’s “Borden Brand” Prices and Sales 11. Respondent has been producing Borden brand evaporated milk since 1892, and selling it, in competition with Pet and Carnation, the other two large producers of evaporated milk in this country, on a delivered-price basis, with the same prices prevailing throughout the United States. The respondent, like its two chief competitors, has continued selling its Borden brand evaporated milk in the same manner, without change, throughout the period of time included in the complaint. The respondent’s carload and pool-car delivered prices for Borden brand evaporated milk during this time were as follows: Per case tall 48’s January 1, 1956, to May 14, 1956__------___---__-___--_--__----_--_--_-- $6. 05 May 15, 1956 to March 29, 1957.-_---------------_-----__---_--_--_--- 6. 30 March 380, 1957, to November 18, 1957____________--__-_-_- eee 6. 45. November 19, 1957 to March 31, 1958 ween nnn n ene 6. 60 12. The less-than-carload prices throughout this period of time were 5¢ higher per case of tall 48s. The terms of sale have included a cash discount of 2% if paid within 10 days after sale, and a swell allowance of %o of 1% to cover damaged goods sold to retail buyers. Such sales of Borden brand evaporated milk were made principally to wholesalers or jobbers, and to chain stores. VIII. Respondent’s Private-Brand Prices and Sales . In about 1938, the respondent began packing its evaporated milk under the private labels of the purchasers as well as under its own Borden brand. During the period of time with which we are con- THE BORDEN CO. 137 130 Initial Decision cerned, January 1, 1956, to March 31, 1958, the prices of such milk were determined by a pricing formula applicable to all of respondent’s private-label customers. This formula included the cost of the buyer’s label, the cost of hauling the milk from the dairy farm to respondent’s plant, the average monthly cost of the milk, and, finally, a factor referred to as “COTM”, or “Cost Other Than Milk”, which included the cost of additives such as Vitamin D, the cost of cans, the plant processing, overhead cost, anda gross margin or profit factor. The respondent’s private-label prices determined in accordance with the foregoing formula, sometimes referred to as the “Cost plus pricing formula”, were net f.o.b. plant. No cash or other discount was allowed the purchaser of private-label milk, and all purchasers buying from the sale plant at or about the same time paid the same price. These prices, however, varied from one to another of respondent’s plants, and from month to month in conformance with the changing price of milk paid to the farmers. A further factor of variation was respondent’s periodic revision of its gross margin of profit, which was reviewed approximately every 6 months, and adjusted to the changing conditions of respondent’s general operation. IX. Commodities of Like Grade and Quality 14. Counsel supporting the complaint contends that all of respondent’s evaporated milk, whether sold under private labels or under the Borden label, is of like grade and quality. The respondent insists, however, that because the uncontroverted evidence shows that Borden brand evaporated milk commanded a substantially higher market price than its private-label evaporated milk, such variously labeled . milk is not of “like grade and quality.”

15. The evidence shows that there was no difference in the physical composition or quality of the evaporated milk sold and delivered by the Borden Company under its own label, and that sold f.o.b. plant under the private labels of its customers. In both instances the milk was processed in the same manner to meet both Federal standards and Borden’s own quality standards. Milk which was qualitatively the same was placed in cans which were qualitatively the same. The method of processing the raw milk fixed both its quality and its grade, which could not thereafter be changed, either by attaching to the various cans labels bearing different brand names, or by selling the variously labeled cans at different prices.

16. Of necessity, all of respondent’s milk retained the same physical composition when it was labeled and sold, as when it was canned, and no magic of the marketplace thereafter changed that simple fact. Fidelity ty the record, in our opinion, compels the conclusion that re- Initial Decision 62 F.T.C.

spondent’s evaporated milk, regardless of how it was labeled or at what price it may have been sold, either at respondent’s plant or in the marketplace, was milk of “like grade and quality” within the meaning of § 2(a) of the Clayton Act as amended. This conclusion accords, we think, with the Commission’s past interpretation of the phrase “like grade and quality”. See: Goodyear Tire & Rubber Company, 22 F.T.C. 232 (1936), reversed on other grounds, 101 F. 2d 620 [8 S8.& D. 63] (1939).

X. Survey of Consumer Selection of Evaporated Milk Brands 17. There was received in evidence as respondent’s Exhibit 89 the results of a house-to-house survey conducted for the respondent by National Analysts, Inc., entitled “Study of Consumer Selection of Evaporated Milk Brands”. The survey was conducted in those geographical areas where the bulk of Borden brand evaporated milk had been sold during the previous years. The purpose of the survey, as stated in the report thereof, was to determine (1) the proportion of consumers using evaporated milk who would buy Borden Brand evaporated milk in preference to an unknown private-label brand, even though the private-label brand sold for from 1 cent to 5 cents per can less than the Borden brand; and (2) to ascertain each consumer’s reasons for buying the particular brand purchased. 18. Of the 3,952 housewives interviewed, 2,200 were deemed eligible for the survey in the sense of having purchased evaporated milk within the past two months. Of the 2,220 interviewed, 1,951, or 87.9 percent were represented to have purchased from the interviewer either a can of Borden brand evaporated milk, or a can of an unknown private label brand. Of the 1,951 housewives who purchased milk from the interviewer, 1,408, or 72 percent, purchased Borden brand, and 548, or 28 percent, purchased a private-label brand. Prior to the purchase, however, each housewife was presented with a set of kitchen cutlery as compensation for her cooperation in granting the interview. She was then asked to select and purchase her preference of the Borden brand milk and the unknown private-label brand milk, which latter brand was priced from 1 cent to 5 cents less per can than the Borden brand. After the purchase was completed, the interviewer returned the purchase money to the housewife, and the milk became a gift. 19. Each housewife was then asked the reason for her selection. Typical of the answers received were:

[Borden Brand] seems to be a lot creamier than other evaporated milks. [Borden Brand] doesn’t have a can taste.

I have never had any [Borden Brand] sour like I have other kinds. Well, we’ve used other brands and we like Borden’s the best. We like the flavor better.

THE BCRDEN CO. 189 130 Initial Decision [Borden Brand] is a heavier milk and you could tell in your coffee when the milk is cheaper because it’s too thin. * * * [Borden Brand] has a good thick texture.

[Borden Brand] is more flavorsome than some other brands—that have an unpleasant taste.

* * * J like Borden’s because I feel they are more sanitary in the handling and preparing of their milk.

I don’t think [Borden Brand] has that thickness that some canned milks have—that canny taste.

The cheaper ones are watery. Borden’s is the best evaporated milk to whip that I know of.

My mother used to use Borden’s and she liked it. I like Borden’s powder milk better than any kind of powdered milk so I am sure the evaporated would be good. , I’ve heard the name Borden’s a long time * * *. * * * [Borden Brand] has been on the market for forty years so it must be good.

20. To the extent that the reasons given by the housewives for their preference involve a comparison, expressed or implied, of Borden brand with an unknown brand, we regard their reasons as worthless. A valid comparison cannot, of course, be made between the known and the unknown. Furthermore, the survey does not prove, nor tend to prove, that Borden brand and Borden’s private-label brands are of a different grade or quality of evaporated milk. 21. The survey does tend to prove, however, that Borden brand evaporated milk is a well-known and widely distributed product, which is preferred to unknown brands by a substantial number of housewives, even though the Borden brand costs 1¢ to 5¢ per can more. This conclusion is supported in substance by the testimony of the retail merchants in North Carolina who testified in this proceeding. XI. Differences in Price Between Borden Brand and Private-Label Brand Evaporated Milk 29. Numerous invoices in the record show that during the period of time included in the complaint, the f.0.b, price of respondent’s privatelabel evaporated milk at its various plants was consistently and substantially lower than the delivered price of respondent’s Borden brand evaporated milk. The transactions evidenced by these invoices occurred at one or another of respondent’s nine plants, located, respectively, at Fort Scott, Kansas; Wellsboro, Pennsylvania; Modesto, California; Albany, Oregon; Dixon, Illinois; New London, Wisconsin; Perrinton, Michigan; Lewisburg, Tennessee; and Chester, South Carolina. The prices of Borden brand and private-label brand evaporated milk prevailing at three of respondent’s plants during the time involved illustrate the differences in price, as follows: Initial Decision 62 E.T.C.

CHESTER, 8.C,, PLANT {Per case] Delivered F.o.b. price price, Borden | private-label brand milk milk 1957—June____--. 2 eee $6. 45 $4. 8942 July_.. 2-2 - eee eee 6. 45 4, 9051 August___.---- 22-2 eee 6. 45 4, 9210 September__.___.---------------------------- 6. 45 4. 8660 October. .-.....--.--------------- eee 6. 45 4. 8166 November____.---------.--...-------~------- 6. 45 4, 9361 December__....-.-.---.------.----------- ee 6. 60 4, 9741 1958—January 6. 60 5. 0227 February ---------------------------- ‘pene nnee 6. 60 5. 0289 March. _._.----- eee 6. 60 4, 9436 LEWISBURG, TENN., PLANT Delivered F.o.d price price, Borben | private-label brand milk milk 1956—Auegust__..------.-- eee 6. 30 $4. 7363 September____..-. 22222 eee 6. 30 4, 81988 6. 30 4, 8321 6. 30 4.7718 6. 30 4, 8418 6. 30 4, 7411 6. 30 4, 8211 6. 30 4, 8311 6. 30 4. 9837 6. 30 5. 0737 6. 30 5. 0478 6. 30 4, 9628 6. 30 5. 0578 6. 30 4. 9766 6. 30 4. 8966 6. 30 4. 9666 6. 30 4. 9866 6. 30 5. 0566 6, 45 4, 8742 6. 45 4, 9542 6. 45 4, 8389 6. 45 4. 9189 6. 45 4, 8749 6. 45 4, 9232 6. 45 4, 8332 August__._. 222-2 eee 6. 45 4, 8327 September_____---..-------------- ae ee 6. 45 4. 8744 October_._..-------.------- eee eee 6.45 | 4. 9738 November__...----..-.----------- + --- eee 6. 45 4, 966 December___--_--_--.--__------ eee 6. 60 4. 999 1958—January -...-------.------------ eee 6. 60 5. 0278 February --_ —- Lee eee eee nee eee eee 6. 60 5. 0072 March____--___-_---------------------------- 6. 60 4, 9436 6. 4.

THE BORDEN CO. 141 130 Initial Decision FORT SCOTT, KANS., PLANT $6. 30 | $5. 0625 6. 30 5. 0606 6. 30 4, 9749 6. 30 5. 0241 6. 30 5. 05866 6. 30 5. 0037 6. 30 5. 0567 6. 30 5. 0877 6. 30 5. 1146 6. 30 5. 1716 6. 30 5. 1986 6. 3 5. 1258 6. 30 5. 1828 6. 30 5. 2098 6. 30 5, 2431 6. 30 5. 3001 6. 30 5. 2759 6. 30 5. 8271 6. 80 5. 0874 6. 30 5, 1444 6. 30 5, 2244 6. 30 5. 1714 6. 30 5, 2514 6. 45 5. 1512 6. 45 5. 2082 6. 45 5. 2352 6. 45 5. 1295 6. 45 5. 1865 6. 45 5. 2135 6. 45 5, 1256 6. 45 5. 1966 6. 45 5. 1822 6. 45 5. 1832 6. 45 5. 1122 6. 45 5. 2077 6. 45 5. 2757 6. 45 5, 2229 6. 45 5. 2959 6. 45 5, 2737 6. 45 5. 8455 6. 45 5. 2725 6. 45 5. 3245 6. 45 5. 8995 6. 45 4, 966 6. 60 5, 2509 6. 60 5. 3249 93, Respondent contends that the differences in price cited above are not comparable because they do not include such factors as the delivery cost of the Borden brand milk, as well as many other factors which they contend are included in the price of that brand, and which are not included in the price of Borden’s private-label evaporated milk. Counsel supporting the complaint contend, however, that it is not necessary to adjust the price of the private-label milk and the Bordenlabel delivered price, in order to make them comparable for the purpose of showing a price differential under the Clayton Act. Counsel Initial Decision 62 F.T.C.

quoted from the opinion of the Supreme Court in Federal Trade Commission v. Anheuser-Busch, Inc., 363 U.S. 5386 [6 S.&D. 817, 826] (1960), as follows:

* * * it is only by equating price discrimination with price differentiation that Section 2(a) can be administered as Congress intended. As we read that provision, it proscribes price differences, subject to certain defined defenses, where the effect of the differences “may be substantially to lessen competition * * *.” In other words, the statute itself spells out the conditions which make a price difference illegal or legal, and we would derange this integrated statutory scheme were we read to other conditions into the law by means of the non-directive price “discriminate in price” * * *, :

24. Although counsel admits that the Supreme Court was not therein adjudicating the same problem of determining whether prices had to be adjusted to make them comparable prior to determining price differential or discrimination within the meaning of the Clayton Act, they nevertheless contend that the above language clearly indicates that price discrimination means mathematical difference between the two prices, without considering those factors which may be offered in a cost-justification defense by respondent. We believe that counsel supporting the complaint are correct in their contention; and, accordingly, we find that the differences in price, as herein shown, are prima facie price discrimination within the intent and meaning of the Clayton Act. 25. It remains to be determined, however, whether such price differences resulted in a substantial lessening of competition, thus violating the law, or whether such differences in price between respondent’s Borden brand evaporated milk and respondent’s private-brand evaporated milk have been justified by respondent, as due allowances for differences in the cost of manufacture, sale or delivery of such milk. XII. Business Lost and Gained by Respondent 26, As previously stated, respondent has been selling private-labeled evaporated milk since about 1938, using its f.o.b.-plant pricing formula. In the 18 months preceding the period of time covered by the complaint, respondent lost the business of Safeway in the Northwestern and Rocky Mountain States, in the amount of approximately 200,000 cases a year. According to respondent’s representative, this business was acquired by Pet and Carnation, who, because they had plants in that area while respondent did not, were able to offer Safeway a better price. — 27. In the first few months of 1956, the respondent also lost additional business, amounting to 33,000 to 35,000 cases of evaporated milk, to Pet in the El] Paso, Texas, area, which that representative of respondent again attributed to a lower price resulting from the more THE BORDEN CO. ~ 1438 130 Initial Decision convenient location of Pet’s plants in that area. During the remainder of the period covered by the complaint, respondent lost additional private-label business in the amount of about 20,000 cases, based upon its sales for the preceding 12 months, to unknown competitors in the Midwest area.

28. About July of 1955, Producers Creamery of Springfield, Missouri, discontinued the sale of private-label evaporated milk. Three of its customers, namely, Topco Associates, Central Retailer-Owned Grocers, and Hill Stores Company (hereinafter referred to as Topco, CROG and Hillco) asked the respondent to supply them with privatelabel milk. In the negotiations which followed, respondent agreed not only to supply these “orphaned” customers of Producers Creamery with evaporated milk for their Southwest area, but to supply CROG and Topco in a number of other areas. Respondent also agreed to supply Hillco from respondent’s plant in Birmingham, Alabama. 29. Thereafter, respondent commenced the packing of evaporated milk at four additional plants, at which it had formerly packed only Borden brand milk: Dixon, Illinois; New London, Wisconsin; Perrinton, Michigan; and Lewisburg, Tennessee. In 1957, respondent received additional requests from other new customers to pack milk under their private labels, and as a result, in May 1957, it began canning private-label evaporated milk at its Chester, South Carolina, plant.

30. The evidence shows that all of these new private-label purchasers came to the respondent of their own accord, and were not solicited by the respondent; that respondent dealt with them in the same manner in which it had dealt with its previous private-label customers; and that respondent made no distinction between large and small accounts. Respondent’s private-label prices were in each instance determined by the use of its cost-plus pricing formula.

31. In determining the amount of the gross margin to be included in the price of private-label evaporated milk, Witness Barry, production merchandising manager for the Borden Company, testified that the respondent followed the same practice which it had followed in the past, of selling at the highest possible price, so as to obtain the maximum amount of profit, and yet not at a price so high as to create an undue risk of losing the business to other private-label canners. XIII. Midwest Competitors of The Borden Company 32. Representatives of seven relatively small canners of evaporated milk located in the Midwest, including Ohio, Indiana, Illinois, Michigan, Iowa, Missouri and Kansas, testified in support of the com- Initial Decision 62 F.T.C.

plaint. Although each of these seven milk canners sold evaporated milk both under their own labels and under private labels, by far the larger percentage of their evaporated-milk business consisted of the sale of private-label milk. None of them advertised or sold their product on a national level, and all of them sold their private-label evaporated milk, with minor exceptions, on a delivered-price basis. None of these canners had plants east or south of the Ohio River or south of the Missouri-Arkansas state line. In fact, no evaporatedmilk producers at all had plants in the Eastern or Southern areas, other than the respondent and its two largest competitors, Pet and Carnation.

a. Page Milk Company 33. The testimony of Mr. George B. Page, president of the Page Milk Company, shows that his company canned evaporated milk at plants located in Merrill, Wisconsin, and Coffeyville, Kansas. The milk produced at the Wisconsin plant was shipped principally to customers in the metropolitan east, whereas the Kansas plant served the area west of the Mississippi River. The annual sales volume of the Page Milk Company from 1950 through 1957 was: Cases 1950_-__-----------_-----------+------------------------------------ 701, 100 1951__--------------------------+-- ++ ee -eeee ee 647, 705 1952___--.------------- +--+ eee eee 687, 858 1953___--------------------------------------------+---------------- 761, 168 1954___------_-__--_--------------+- +--+ +--+ +--+ 714, 318 1955_------------------- ++ ---+ - ---------- 720, S84 1956__-----_---------------------+----------------------+-+----++---- 726, 443 1957__.---------------~-----------------------a------+---------- +--+ 735, 803 34. During the period covered by the complaint, the Page Milk Company lost to the respondent sales of about 3,650 cases of evaporated milk, based upon the volume of sales for the previous 12 months. The purchaser was the Kimbell Grocery Company, Fort Worth, Texas, with six locations in Texas and New Mexico. The date of Kimbell’s last order to Page was February 8, 1958, and the purchase price on that order was $6.03 per case of tall 48s, including delivery, with a 2% cash discount. Kimbell’s first order from respondent was dated March 14, 1958, and shows a price of $5.44 per case of tall 48s, f.0.b. respondent’s plant, with a label charge of 9¢ per case, and a swell allowance of 1%.

35. The record does not show specifically what private-label business was gained by Page during the period covered by the complaint, but it does show a gain of 9,360 cases of tall 48s evaporated milk in 1957 over 1956. This gain more than balances the loss to Borden THE BORDEN CO. 145 130 Initial Decision that the Page Milk Company sustained during that same period. Mr. Page testified, however, as follows:

* ® * The entry of the Borden Company into the private-label business and the manner in which they have been operating has placed a severe competitive pressure on the entire unadvertised brand of private-label milk structure and that has, in my opinion, largely been felt in the way of a lowered market price with which we must contend.

b. United Dairy Company 36. Mr. Jack D. Anderson, vice president and general manager of the United Dairy Company (hereinafter referred to as United Dairy), testified that his company had evaporated-milk plants located at Barnesville, Lodi and Waterford, Ohio, and that its principal sales territory consisted of the Northeastern States east of Ohio, and extending as far south as Virginia and West Virginia. United Dairy’s annual domestic sales volume of evaporated milk during the years 1950 to 1957, inclusive, was:

Cases 1950 - pee eee enn en ee ee ee en en ee eee eee 754, 666 1951 -. 610,171 . 1952 --- pe eee en en 641, 862 1953. ~ - 636, 945 1954 - wenn eee eee eee 738, 315 1955_---- - 887, 651 1956___-.------------------- - ~ 1, 041, 041 1957___ -- -- 958, 373 37. During 1956 United Dairy lost two accounts, Penn Fruit Company, Philadelphia, Pennsylvania, and Brockton Public Markets, Brockton, Massachusetts, which had totaled 8,990 cases of evaporated milk over the previous 12 months, to Topco, which was purchasing from the respondent. During 1957 United Dairy lost the Central Retailer-Owned Grocers account, with an annual volume of 3,425 cases, to the respondent. United Dairy’s total 1957 sales of 958,373 cases, although less than its 1956 sales of 1,041,041 cases still constituted its ‘second-highest annual volume for the 8-year period from 1950 through 1957; and the 3,425 cases lost to the respondent were only a small portion of its total drop of 82,668 cases in sales during 1957. The record does not disclose the reason for all of this decrease in sales. Three of the four accounts lost by United Dairy to the respondent or customers of the respondent were, however, located considerably closer to the respondent’s plants than to United Dairy’s plants. 38. Witness Anderson complains particularly of the competition of respondent since 1956, as follows:

The competition has forced our prices down from the level we had previous to that and some of the competition has been selling on a different basis. On an f.0.b. basis and it is made highly competitive because of those factors. Initial Decision 62 E.T.C.

c. Westerville Creamery Company 39. Mr. William L. Johnson, president and general manager of Westerville Creamery Company (hereinafter referred to as Westerville), testified that his company produced evaporated milk, fluid milk, powdered milk, cottage cheese and ice cream, and that it had an evaporated-milk plant located in Covington, Ohio, from which it sold products in the Eastern section of the United States, from Maine to Florida. The company’s annual sales of evaporated milk for the years 1950 +through 1957 were:

1950----------------------- - ---. 641, 981 1951 --- 597,171 1952__------------------ - - - -- 455, 127 1958__--- ween nanan anne a= eee 571, 574 1954 ---- 656, 745 1955 -- ---- 701, 847 1956_.----------------------------- -- -- 598, 739 1957 — --- 589, 242 40. The record shows that Westerville lost five accounts in 1956, with an annual volume aggregating 102,931 cases, approximately the amount by which that company’s 1956 sales volume declined as compared with its 1955 volume, as shown by the table above. None of those accounts were lost to the respondent. In fact, Mr. Johnson testified that Westerville was not in competition with the respondent until the following year, 1957. In that year, however, Westerville lost six accounts, which subsequently began purchasing from respondent’s customer Biddle. This loss involved a volume of approximately 38,462 cases per year. Mr. Johnson blamed this downward trend in his company’s sales of evaporated milk upon the respondent’s competition.

41. In fairness, however, it must be observed that such a trend started before the respondent gained any of Westerville’s customers, and that Westerville’s loss of business in 1956, which was not attributable to respondent or its customers, was nearly three times as much as the volume of the business lost to respondent’s customer in 1957. Examination of the above table shows that Westerville’s annual volume of sales has fluctuated considerably from year to year since 1950. d. Gehl’s Guernsey Farms 42. Mr. Paul Gehl, vice president of Gehl’s Guernsey Farms (hereinafter referred to as Gehl’s), testified that his company produced fluid milk, ice cream, condensed milk of various kinds, and powdered milk, as well as evaporated milk, at its plant located at Germantown, Wisconsin, with a sales territory principally in the Eastern United States, consisting of an area east. of the Mississippi and north of the THE BORDEN CO. 147 130 Initial Decision Ohio River. Gehl’s annual sales volume of evaporated milk for the years 1950 through 1957 was:

Cases 1950_____ - a------ eee --ee - --- 155, 417 1951__-_-- eee 154, 293 1952___ - ~o-------- eee 138, 124 1953__--..-.-----------__-------- +--+ + 84, 735 1954.____ pone ees 119, 395 1955__..---.-- -- +--+ 108, 924 1956__-__..----- -- ----------- ++ - woe-e e+ eee 168, 479 1957__-----__------- +--+ eee ee eee 285, 544 43. In 1956, Gehl’s lost to the respondent business amounting to 4,077 cases of evaporated milk. During the same year, however, Gehl’s had a 55% increase in its sales volume, from 108,924 cases in 1955 to 168,479 cases in 1956. During 1957 Gehl lost to the respondent an account amounting to 21,357 cases a year. Despite that loss, Gehl had gained in volume of sales from 168,479 cases in 1956 to 285,544 cases in 1957.

44, With respect to all the business lost by Gehl to the respondent, it should be observed that the respondent’s plants were substantially closer to the location of the accounts lost by Gehl than was Gehl’s plant at Germantown, Wisconsin. Dixie Home Stores in Greenville, South Carolina, which accounted for 80% of the volume involved in this loss by Gehl to the respondent’s customer, was at least 600 miles from Gehl’s plant in Wisconsin, but only 70 miles from respondent’s plant at Chester, South Carolina.

e. Dairyland Cooperative Association 45. Mr. John E. DeMaster, a sales official of Dairyland Cooperative Association (hereinafter referred to as Dairyland), testified that his organization had one evaporated-milk plant located at Juneau, Wisconsin. Dairyland was described as a cooperative engaged in the processing of raw milk into butter, powdered milk, and cheese, as well as evaporated milk. He defined its sales area rather vaguely as “the central states east of the Mississippi”. Dairyland’s sales of evaporated milk from 1950 through 1956 were:

‘Cases 1950___..-----_------------------------------------+------+---------- 88, TH+ 1951_-_---..-__-- +--+ ee +--+ 334, 131 1952__.--_-__---_--------------------------------------------------- 173, 346 19538__-_---.----------_---------------~----------~-~-----------+------- 17, 423 1954_.----..--------_----- +--+ +--+ -- +--+ +--+ 28. 799 1955_-.-__-_--------- +--+ ee - 5 == + -- 25. 766 1956_-._..----_------_---------------------------+----------------+-- 49, 404 46. In 1956, Dairyland lost to the respondent eight accounts amounting to approximately 22,320 cases of evaporated milk. As to seven Initial Decision 62 F.T.C.

of these accounts, the respondent’s plant was substantially closer to the customer’s location than was Dairyland’s plant in Wisconsin. There was one exception, Kline’s Supply Markets, St. Paul, Minnesota, which was approximately the same distance from both suppliers’ plants. Mr. DeMaster stated, with deference to the lost business of Dairyland, that “* * * we paid practically the same price for milk that they did, and naturally it is Pittsburgh and to the east where they would have a freight advantage, which was okay. It was one of those things; that is the way it was; it could not be helped.” 47, When asked specifically how he accounted for the loss to his company of sales of evaporated milk from 1950 through 1957, Witness DeMaster again placed primary responsibility for the decrease upon his geographical location relative to the competitors and buyers located in the East. He specifically named the Westerville and Defiance milk-producing organizations as competitors in the Ohio area; and he did not blame the respondent for the loss to his own company of this evaporated milk business, or for its going out of business in 1957. f. Defiance Milk Products Company 48. Mr. William A. Diehl, president. of Defiance Milk Products Company (hereinafter referred to as Defiance), testified that his company produced evaporated milk at its plant at Defiance, Ohio, and sold it principally in the Eastern part of the United States north of Norfolk, Virginia. His company’s annual sales of evaporated milk for the years 1951 through 1957 were:

Cases 1951__--___-_-_- eee 628, 248 1952_-__-__------ 646, 869 1953_.__ ween eee eee 692, 978 1954___ - ween een eee eee eee 738, SSO 1955__.. - penne eee eee 739, 886 1956_.___---.-.----- -- - 699, 953 1957 paneen------ +--+ +--+ ween eee eee 694, 166 49. The record shows that Defiance lost the sale of 2,400 cases of evaporated milk to the respondent in 1956. That loss was, however, only a small percentage of Defiance’s total loss of such sales during 1956, at which time, Mr. Diehl stated, respondent had not yet become a factor in the private-label evaporated milk field. 50. In 1957 Defiance lost the sale of 70,406 cases of evaporatd milk to customers of the respondent, including two Colonial Stores located, respectively, at. Norfolk, Virginia, and Raleigh, North Carolina; but in the same year Defiance gained from some unknown source or sources a larger volume of sales than it lost to these customers. The two Colonial Store accounts, which represented approximately two-thirds of that loss of business, were Iccuied hundreds of miles closer to the “THE: BORDEN CO. ~ 149:

1BO 88S: Initial Decision respondent’s supplying plant at Chester, South Carolina, than to Defiance’s plant at Defiance, Ohio. Mr. Diehl’s testimony reveals that he was thoroughly aware of the importance of plant location in relation to the plant’s market, and that he was considering acquiring equipment for packing evaporated milk at a newly acquired plant at Jonesboro, Tennesse.

g. Nashville Milk Company 51. Mr. Diehl further testified that he was alse president of the Nashville Milk Company (hereinafter referred to as Nashville), a wholly owned subsidiary of Defiance. He explained that Nashville’s plant which produced evaporated milk was at Nashville, Hlinois, and that it sold that product in the Southeastern part of the United States, in the area south of Norfolk, Virginia, and east of Knoxville, Tennessee. Nashville’s annual sales volume for the years 1951 through 1957 was:

Cases 1951_---- eee e+e -- --. 56,070 1952-00 eee eee eee ee 87, 283 1958_.---_.-_- eee +--+ = --- 99, 204 1954_ woe eee en - ~-. 125, 489 1955-0 +--+ - 1382, 863 1956_------- e+ +--+ 150, 645 1957. eee eee nnn nee a 158, 811 52. During 1956 Nashville lost the sale of 2,100 cases of evaporated milk to the respondent, and during 1957 that loss was increased by 62,940 cases. From the fact, however, that Nashville’s sales volume increased by 18% in 1956 over 1955, and by another 514% in 1957 over 1956 despite its losses of sales to the respondent, it is apparent that Nashville gained from some source a volume of sales more than equal to that lost to customers of the respondent. Its sales volume in 1957 was the highest in its entire history. XIV. Relationship Between Respondent’s Prices of Evaporated Milk and Competitors’ Loss of Business 53. Counsel supporting the complaint has requested a finding which emphasizes the respondent’s size and the favorable geographical locations of its plants as compared to its Midwest competitors, as follows: An important factor leading to the competitive disparity between Borden and the smaller independent evaporated milk packer was that in the period January 1956 through March 1958, Borden had nine evaporated milk plants in contrast to its smaller competitors with one, two or three plants. This gave Borden greater flexibility to take advantage of favorable freight rates and thus to compete on more favorable terms than its smaller competitors in a wider area. 749-5387—67——-11 Initial Decision 62 E.T.C.

54. The record warrants the requested finding of fact, which we here adopt. In fact, the record shows that of the 241,815 cases of evaporated milk, the sale of which was gained by the respondent from its Midwest competitors during the period covered by the complaint, as to at least 208,170 cases, or approximately 86%, the respondent had a clear freight advantage over its Midwest competitors. This advantage was, of course, due to respondent’s more convenient locations. In considering this factor, it should be remembered that a similar geographical advantage on the part of other competitors caused the respondent to lose sales of evaporated milk in the Northwest area of the United States during the 18 months’ period preceding the period covered by the complaint.

55. Four of respondent’s Midwest competitors, namely, Page, United, Gehl’s and Nashville, had increased volumes of sales both in 1956 and in 1957, as compared with their sales in 1955. The only two of the seven competitors who, in 1957, had a smaller volume of sales than in 1955 had, in fact, suffered their major decline in sales in 1956, at a time when the respondent was not regarded by them as a competitor.

56. The market share data of evaporated milk for the entire United States, as compiled by the Department of Agriculture in pounds and converted by the Department’s recommended formula into cases of “talls”, shows the individual sales of evaporated milk by respondent and its Midwest competitors, for the years 1955 through 1957, as follows:

MARKET SHARE DATA (TALL CASE BASIS) 1955 1956 1957 Sales Market Sales Market Sales Market volume share volume share volume share . Percent Percent Percent . Total industry_....----.--.--------------- 52, 804, 598 100 | 51, 862, 069 100 | 50, 566, 667 100 Packers on whom evidence was introduced:

Page Milk Co___..-.----------------- 720, 884 1.4 726, 443 14 735, 803 1.5 United Dairy Co_-_--.---- wtee 887, 651 1.7 1, 041, 041 2.0 98, 373 1.9 Westerville Creamery Co.. ---- 701, 847 1.3 593, 739 11 589, 242 1.2 Gehl Guernsey Farms. --.- a 108, 924 2 168, 479 13 285, 544 6 Dairyland Cooperative. --- anne 25, 766 05 49, 404 al () (1) Defiance Milk Co....---- oe 739, 886 1.4 699, 593 14 694, 166 1.4 Nashville Milk Co-- — 182. 863 3 150, 645 3 158, 811 3 Total. ----..-..- ----| 3,317,821 6.3 8, 429, 704 6.6 | 3,421,939 6.8 The Borden Company..- 5, 235, 852 9.9 5,010, 205 9.7 | 5,419, 108 10.7 1 None—Discontinued evaporated-milk production in April 1957. 57. The above chart shows that respondent’s market-share increase during the years in question was less than 1%, and that the marketshare changes of its Midwest competitors were also slight. THE BORDEN CO. 151 130 Initial Decision 58. The evidence shows that respondent’s private-label prices during the period in question were computed in accordance with its former practice, including a gross-margin-of-profit factor which was never less than 15¢ per case, and ranged as high as 35¢ per case. The lowest profit markin, 15¢ per case, was at its Modesto plant, and there is no evidence that respondent obtained any private-label business from other packers at that plant. The respondent’s plants to which most of such business came were located at Lewisburg, Tennessee; Chester, South Carolina; and Wellsboro, Pennsylvania. It was at those plants that the respondent set the highest gross margin during the complaint period. Moreover, there is no evidence, and no basis for any inference, that the respondent acted, at any time during the period covered by the complaint, with any purpose of harming or eliminating any competitor, or with any vindictive or predatory motive.

59. It appears to us that the present controversy, as interpreted by counsel supporting the complaint, has arisen because of three competitive advantages which have been acquired by the respondent during its many years in business, namely: its size, the location of its plants, and its consequent ability to sell private-label evaporated milk profitably on an f.o.b. basis. Counsel supporting the complaint contends: Even if the testifying competitors had not lost any business to the Respondent, actual substantial injury to competition would have to be inferred from the fact that Respondent’s discriminatory pricing, coupled with the competitive advantages stemming from its size* and advantageously located evaporated milk plants, has effectively foreclosed the independent packer group from selling to certain of the most desirable private label accounts with great potential volume; for Respondent has been able to negotiate agreements covering the sale of private label milk to certain large buying organizations on a permanent basis for periods of indefinite duration covering all or most of the private label requirements of such customers.

60. From the above statement, it appears that counsel supporting the complaint would have us find injury to competition because of three factors, namely: ;

a. The “competitive advantage [of the respondent] from its size”, resulting in respondent’s ability to supply a larger demand for evaporated milk from a single customer than could its competitors ; __b. The advantage of lower transportation cost inherent in the geographical location of respondent’s plants nearer to the Eastern markets than those of its Midwestern competitors; and *The testimony of Mr. Page at R. 264-5 documents the difficulty with which the small packer is faced in selling to large scale accounts, for this testimony indicates that Page in early 1956 could supply only a portion of the Winn-Dixie business when this account expressed its interest in purchasing private label from Page for its entire operation. Initial Decision 62 F.T.C.

c. Respondent’s use of a pricing formula in selling private-label évaporated milk f.0.b. plant instead of at a delivered price, which was advantageous to respondent’s customers as well as to respondent because of the location of its plants.

61. These competitive advantages which counsel supporting the complaint would have us condemn as unlawful are the accumulated. benefits of that private initiative, industry and business acumen which our system of free enterprise is designed to foster and reward. 62. If a supplier is to be penalized because its size enables it to negotiate and fulfill contracts for a product in larger amounts than its competitors can produce, then the efficient conduct of a business, and its resultant growth, have become legal detriments. 63. If a supplier be forbidden to pass on to its customers a saving in transportation costs, made possible by the fact that its plant is more advantageously located than those of its competitors, then the supplier is, in effect, required to add to its selling price a “phantom freight”— a charge equal to the difference between its cost of transportation and that of its less conveniently located competitor. 64. Furthermore, if a supplier is to be penalized for selling its product at a lower price f.o.b. its plant, instead of adding thereto the cost of transportation to the customer’s plant and selling at a higher delivered price, the supplier’s right to conduct its business in the manner it deems most practical is abrogated, and its customers are thereby deprived of the legitimate saving in cost which they might otherwise obtain by electing to take delivery at the supplier’s plant. Such an edict would injure both the respondent and its customers, by depriving them of what would appear to be a basic right of free business enterprise.

65. We conclude that the above-described contentions are beyond both the allegations of the complaint and the theory upon which it is predicated. We conclude further that all the above factors, whether considered separately or collectively, constitute lawful commercial advantages of the corporate respondent. Furthermore, we conclude that. respondent has made only lawful use of such lawful advantages, and that the resulting effect upon the sales of its Midwest competitors has been only that of the normal give-and-take of healthy competition inherent in the free-enterprise system. Such competition is not unlawful.

XV. Possible Injury to Competition Between Wholesaler Customers : of the Respondent 66. The record contains evidence of only ten transactions wherein a purchaser of respondent’s private-label evaporated milk was THE BORDEN CO. 153 130 Initial Decision shown to have paid a lower price than that paid by a competing customer purchasing respondent’s Borden brand evaporated milk. 67. Counsel supporting the complaint questioned a small group of wholesaler purchasers, who were all from North or South Carolina, relative to their interest in buying private-label evaporated milk in addition to their purchases of Borden brand evaporated milk. In his interrogation of these witnesses, he did not ascertain whether they knew of the business requirements involved in the purchase of respondent’s private-label milk, which were rather complicated, as distinguished from the simple purchase of Borden brand evaporated milk. These witnesses were asked hypothetical questions, of which the following is typical:

Q. Well, Mr. Mc¥Feely, in February as in March you were paying $6.60 a case for Borden brand evaporated milk. Using the month of March 1958, as a basis, would you have been interested in buying out of Spartanburg, with a shipment from Chester, South Carolina, private-label evaporated milk packed by the Borden Company at a price of $5 to $5.25 per case for talls? 68. We believe that the phrasing of this question implied to the witness that the conditions of the purchase of Borden brand evaporated milk at $6.60 per case, or of private-label evaporated milk packed by the same company at $5 or $5.25 per case, were otherwise substantially the same. In each case, the witness gave an affirmative response. The record shows that the terms and conditions upon which respondent sold its private-label evaported milk differed materially from the simpler purchase of Borden brand milk. Those differing terms and conditions may be summarized as follows: Private-label evaporated mitik No cash discount.

All orders sent to Respondent’s headquarters in New York and filled through Respondent’s plant nearest the purchaser.

Price f.o.b. Respondent’s plant.

Variable increase in cost of transportation on less-than-carload shipments.

Varying cost of designing and printing private labels.

Must be arranged for well in advance;

purchaser obligated to pay for all milk packed under his private label.

No advertising or services furnished by Borden on private-label milk.

Broden brand evaporated milk 2 percent cash discount.

Orders handled locally and filled from nearest plant or from Respondent's warehouse, Price delivered to customer.

5 cents per case additional on ‘lessthan-carload shipments, No charge for labels, Can be bought in any quantity at any time without prearrangement.

Purchaser benefited by Respondent’s advertising and services.

69. Since the record does not show that the witnesses who answered the hypothetical question in the affirmative were aware of all of the Initial Decision 62 F.T.C.

above conditions, we cannot assume, without further evidence, that they understood all the considerations involved in contracting for respondent’s private-label evaporated milk. Accordingly, their response to the hypothetical question proves no more than that each of the witnesses was interested in paying less for evaporated milk. 70. Wholesaler McFeely, under cross-examination, admitted that in order for him to be interested in the purchase of private-label evaporated milk, he would have to be able to buy it for $1.50 to $2 per case less than he was paying for Borden brand. It should he observed in this connection that respondent was not offering its private-label milk for that much less than its Borden brand milk. 71. One purchaser talked with a broker concerning the possible purchase of a private-label brand from the respondent, and was told by the broker that he did not know the requirements for such ‘a purchase. There is, however, no evidence that any purchaser was, for any reason, denied the right to buy private-label evaporated milk from the respondent.

72. We must conclude that there has been no substantial injury to competition affecting respondent’s wholesaler customers purchasing Borden brand evaporated milk, in their competition with respondent’s wholesaler customers who also purchased respondent’s private-label evaporated milk.

XVI. Possible Injury to Competition Between Retailer Customers of the Respondent 73. Seven retailers in South Carolina were called as witnesses by counsel supporting the complaint. Each testified that he carried Borden brand evaporated milk in his usual course of business, as well as Pet and Carnation. Each recognized that there existed a strong consumer demand for Borden brand evaporated milk, and that it commanded a higher price than unadvertised brands. All regarded the handling of evaporated milk as an unprofitable part of their retail grocery business, but necessary because of the continuing consumer demand therefor. One witness stated :

Well, [Borden brand evaporated milk] is a must item * * * Well, you have got to handle [Borden brand] to satisfy the customers. Another witness testified, similarly:

Well, [Borden brand evaporated milk] is essential in the grocery business and it’s one of the items that we feel like we handle more or less just to have something the housewife needs. Several other items in that same category, you know. 74, They described their mark-up on Borden brand evaporated milk as ranging from 28 to 84¢ per case. They did not, in general, regard THE BORDEN CO. 155 130 Initial Decision this as sufficient to cover overhead expenses. The testifying retailers purchased Borden brand evaporated milk from a wholesaler who had, in 1957, offered them the Miss Virginia brand, a private-label evaporated milk produced by the respondent. Witness Shumpert testified that he commenced purchasing Miss Virginia evaporated milk about a month after it had been offered him. Witness Power’s testimony shows that he waited approximately 18 months after such offer, or until about 2 weeks prior to the time of his testimony, before commencing to purchase the Miss Virginia brand evaporated milk. Retailer witness Caughman testified that he waited until about a year after the first offer before commencing to purchase. Witness Cromer testified that he waited almost a year before buying Miss Virginia milk. Witnesses Charles and Coleman, at the time of their testimony, had not purchased Miss Virginia evaporated milk. Witness Wrenn, who operated both as a wholesaler and as a retailer, at various times carried evaporated milk packed under various private labels, which he purchased from railroad salvage. He never requested the respondent or any other packer to produce a private label for him. 75. On one hand, the retailers described some customers as “price conscious,” who were “shopping around for cheap milk.” On the other hand, they described other customers as being “name-conscious” and demanding the advertised brands, without particular regard for the differences in price. A typical example of such testimony is: A. Some people say they want [Borden’s] Silver Cow milk. In other words, for maybe a coupon on the side of the can or because they have been educated to want that brand. Some of them won’t have anything but that. Some of them won’t have anything except Carnation, and some of them don’t want anything except Pet.

Q. They don’t care what price—— A. If the doctor tells the woman to put the baby on Pet milk, that is all she wants, you couldn’t interest her in something else. From such testimony we must conclude that there was in the South Carolina area a persistent demand among a substantial number of purchasers for Borden brand evaporated milk, without particular regard to price.

XVII. Conclusion as to Effect of Price Differences Upon Competition 76. We must conclude that the differences in price between respondent’s Borden brand evaporated milk and its private-label evaporated milk have not substantially lessened competition, nor is there any reasonable probability of such danger to competition in the future. The complaint herein should, therefore, be dismissed. Initial Decision 62 FI.T.C.

XVIII. Cost Justification a. Purpose and Preparation 77. After counsel supporting the complaint had rested his case-inchief, counsel for the respondent offered in evidence an analysis based upon the records of the Borden Company for the calendar year 1957, pertaining to the production, distribution and sale of Borden brand evaporated milk and Borden’s private-label evaporated milk. The purpose of that analysis was to determine the difference between the price received by the respondent for its product under each type of label, and the relative difference in cost of manufacture, sale and delivery thereof resulting from the different methods or quantities involved in the sale or delivery of the product under the different labels. 78. The analysis was prepared in 1959 by Edward M. Darcey of the accounting firm of Haskins & Sells of New York City. Mr. Darcey, who had supervised the regular audits of the respondent’s accounts since 1953, was shown to have a detailed familiarity with respondent’s accounting system. Mr. Darcey was advised both in the preparation of his analysis and in its execution by Dr. Herbert F. Taggart, professor of accounting of the University of Michigan, and Chairman of the Advisory Committee on Cost Justification which was appointed by the Federal Trade Commission in 1953 to review and analyze all aspects of the cost proviso of the Clayton Act. 79. All the documentary materials underlying the analysis were made available to the Commission’s staff, and Mr. Melvin Steele, Assistant Chief Accountant of the Accounting Division, Bureau of Investigation, of the Federal Trade Commission, and another of the Commission’s accountants examined them in New York during 5 weeks in February and March 1960. At the end of their study, and as a result of conferences between Mr. Steele and Mr. Darcey, three minor changes were made in the report, the effect of which was to reduce the difference in cost between Borden brand and Borden’s private-label brands by about 1¢ per case. As so modified, the cost analysis was received in evidence as respondent’s Exhibit 76. b. Production Methods 80. Before examining a summary of that exhibit and the cost analysis which it contains, we should review certain important factors. In 1957 respondent produced evaporated milk at nine plants variously located in California, Oregon, Wisconsin, Michigan, Illinois, Kansas, Tennessee, South Carolina and Pennsylvania. Each of those plants packed private-label as well as Borden brand evaporated milk, with no difference in the manufacturing process up to the point of affixing labels. Thereafter, Borden brand and the private-label brands were THE BORDEN CO. 157 130°. Initial Decision handled differently. Borden brand evaporated milk was packed in printed cartons bearing the Borden name, whereas private-label milk was packed either in printed cartons bearing a private label, or in plain cartons on which a private-label identification was stenciled. ce. Marketing Methods—Borden Brand 81. In 1957 Borden brand evaporated milk was sold in various States across the country at a uniform delivered price. Substantial inventories of Borden brand evaporated milk were carried in three types of storage facilities: (1) at the plants which produced the milk; (2) at about 15 reserve warehouses located between the plants-and the places where it was expected that the evaporated milk would be sold; and (3) at about 100 local consignment warehouses. Carload shipments were made from the plants and reserve warehouses direct to customers, and also to consignment warehouses. Orders for less-thancarload quantities were generally filled from the consignment warehouses. All customers were offered a 2% cash discount for payment within 10 days, and retail customers were offered a 1/10 of 1% “swell allowance” in lieu of credit for or replacement of goods found to be in unsalable condition. Orders for Borden brand evaporated milk were solicited by brokers, and, in some of the larger cities, by respondent’s jobbing salesmen. Both brokers and jobbing salesmen handled, in addition to Borden brand evaporated milk, all of the other Borden brand food products manufactured and sold through respondent’s Food Products Division, including Starlac, Eagle brand condensed milk and instant coffee. Orders for the delivery of Borden brand evaporated milk direct from a producing plant or reserve warehouse were generally forwarded to the respondent’s New York office of its Food Products Division, which in turn forwarded them to the appropriate shipping point; while orders for delivery from a consignment warehouse were processed in the field.

82. Respondent’s Food Products Division maintained a staff of field representatives, whose primary duty was to call upon retailers to assist them in promoting sales of Borden products to consumers. These field representatives operated in all areas, regardless of whether orders were solicited by brokers or by respondent’s jobber salesmen. The work of the field representatives included such activities as arranging displays and display space, and inspecting code datings on Borden brand evaporated milk to insure that the older milk was sold first in order to prevent its remaining too long on the retailer’s shelves. This service was not performed in every store carrying Borden brand evaporated milk. The field representatives were furnished sales promotion material designed to direct consumers’ attention to Borden brand products, and to encourage the retailer to devote additional or Initial Decision 62 F.T.C.

special effort to the promotion of those products. While the sales representatives were responsible for the promotion of all Borden brand food products, they devoted special attention to Borden brand evaporated milk, which was the leading product of the Food Products Division.

83. Advertising of the Borden name and of the Borden brand products was financed through a budget administered at the Borden Company level, and, as to particular food products, at the level of the Food Products Division, which maintained a separate budget account for each individual product. The Borden brand evaporated milk also carried on the label coupons which were redeemable by consumers for merchandise, in the manner of trade stamps. d. Marketing Methods—Private-Label Brands 84. In 1957, private-label evaporated milk was sold from the Borden Company’s plants, and inventories of such milk were maintained only at those plants. Orders for private-label milk were sent direct to the New York office of respondent’s Food Products Division, which thereafter forwarded them to the plant nearest the customer. Prices were f.0.b. plant, and were determined each month for each plant. Respondent did not advertise its private-label milk, and such milk carried no reference to the Borden name. Furthermore, the purchasers of such private-label milk were forbidden by respondent to use the Borden name, in any way, in the distribution and sale of the product. No field services were performed by respondent in connection with private-label evaporated milk.

e. Cost Analysis Prepared on a Nationwide Basis 85. In the opinion of Mr. Darcey and Dr. Taggart, the cost analysis which they prepared was necessarily predicated upon respondent’s production and sales of evaporated milk throughout the United States. In their opinion, the relative costs of Borden brand evaporated milk, and of private-label evaporated milk, could be correctly determined only by considering the overall expenses incurred by respondent in producing and selling such milk at all the various locations in which respondent sold its milk. As previously stated, respondent’s cost of producing its Borden brand and private-label brand evaporated milk was the same until the labels were applied. Each item of expense thereafter, such as labels and cartons, freight, storage, advertising, and so on, for all respondent’s plants was averaged, both for Borden brand milk and for private-label milk, on a nationwide basis, and that average compared with the average selling price of the respective products.

THE BORDEN CO. 159, 130 Initial Decision 86. On that basis, respondent determined that the difference between its selling price per case of Borden brand evaporated milk and its average selling price per case of private-label evaporated milk had been more than justified by an excess of $0.1780 per case in the average cost thereof.

f. Summary of Cost Analysis 87. Respondent’s summary of the cost analysis contained in respondent’s Exhibit 76 varies from that exhibit in several respects so infinitesimal that they have been disregarded. That summary is as follows:

RESPONDENT'S COST ANALYSIS, 1957 Average per case Borden Private Differbrand label ence Gross sales___.__--.-.-.--------------e ee $6. 4046 | $5. 1743 $1. 2303 Less sales deductions:

Damaged goods_..._.-.--..--.------- . 0112 . 0027 . 0085 Cash discount offered........-..----- ~ 1279 |_---__ ee. . 1279 Net sales_._-...-.-----2- 22 - ue 6. 2655 5. 1716 1. 0939 Costs:

Labels and cartons....--_..-.-._------- . 1789 . 1376 . 0413 Primary freight......-..-----.--.-_-- - 8684 . 0188 . 8496 Secondary freight._...._-_..-.---.-.- 0112 Joe . 0112 Reserve storage_.-.---.-------------- . 0690 j-------- . 0690 Consignment storage._..__-.--.------ . 0305 |_------_- . 0305 Investment cost_.-.-_.._---.--------- . 0972 . 0568 . 0404 Premium label redemption.._..-..-.-- . 2316 |---------- . 2316 Advertising....._..-..-.2--2-----L-- . 1247 |_----__--- . 1247 Sales department___......-..-.----.-- . 3163 . 0009 . 3154 Brokers’ commissions__._..-....----_- . 0427 |.--_--___-- . 0427 Promotion department...._....--.-.-- . 0189 . 0123 . 0066 Clerical.__.---.------------------2-- . 0151 . 0062 . 0089 Total__---_.---------------eee 1, 5045 . 23826 1. 2719 Difference in cost..._.-.-.-.------~------------ See eee ene e eee $1, 2719 Difference in price._.--_---.---------.- 2-2-2 ee eee 1, 0939 Excess of cost difference over price difference..._.-.-.--------- 0. 1780 XIX. Cost Study Prepared, and Presented in Rebuttal, by Mr. Melvin C. Steele a. Cost Failure of $0.4025 Per Case 88. Counsel supporting the complaint recalled Mr. Melvin C. Steele, who testified that he had prepared a memorandum reviewing respond- Initial Decision 62 F.T.C.

ent’s cost analysis as presented in respondent’s Exhibit 76, and a cost study of his own, which he described as follows: * * * A summary has been prepared of the price differences and the cost ‘differences between the sale and distribution of Borden brand and private-label evaporated milk by the respondent during the year 1957. The sales were limited to shipments from the respondent’s Chester, S.C., and Lewisburg, Tenn., processing plants. The summary shows a net price difference, after deducting damaged goods and cash discount, of $1.4181 per case while the total cost difference was $1.0156 which indicated a cost failure of $0.4025 per case. ‘The respondent’s cost study showed a cost difference over price difference of $0.1891 per case.

Mr. Steele’s memorandum containing the above summarization was received in evidence as Commission’s Exhibit 5479. b. Choice of Two Plants as Basis for Cost Study 89. Mr. Steele’s testimony revealed that he was directed by counsel supporting the complaint to make this cost study, and to limit it to the cost data pertaining to respondent’s Chester, South Carolina, and Lewisburg, Tennessee, plants only, the two plants at which respondent’s private-label evaporated milk had been sold in 1957 at the lowest prices. Although Mr. Steele testified that the basing of his study upon two plants only was a proper method under “the circumstances”, the exact nature of “the circumstances” was never satisfactorily explained. He also testified that the respondent’s nationwide cost analysis was not proper cost accounting, but the reason for that conclusion was likewise never made clear.

90. We must observe that during the precomplaint investigation of respondent’s price structure, prior to this proceeding, Mr. Steele, in a memorandum based upon data furnished him by the respondent on a national basis, expressed the opinion that respondent’s price difference was justified by its costs. At that time he made no suggestion that a study should have been made on the basis of only two of respondent’s plants, rather than upon a national basis including all of respondent’s nine plants.

91. Mr. Steele, in his computation of the 2-plant analysis, took into account a particular amount of freight cost incurred by the respondent in shipping 1,200 cases of Borden brand milk from Chester, South Carolina, to Colonial Stores in Norfolk, Virginia, on November 18, 1957. The amount of that freight cost was 21¢ per case. None of the accountants questioned these facts. On the same day, however, the respondent also shipped to the same customer in the same city, from the respondent’s plant in Dixon, Illinois, 800 cases of Borden brand milk, on which the freight cost, also readily ascertainable from the respondent’s records, was 47¢ per case, or 26¢ per case greater than, and more than twice as much as, the freight on the above-mentioned THE BORDEN CO. 161 130- Initial Decision shipment from the respondent’s plant in Chester, South Carolina. Mr. Steele did not take the latter freight cost into account in his analysis. While the figure which Mr. Steele did use, the 21¢ per case on the shipment from the Chester plant, was mathematically accurate, his exclusion of the other, and much higher, figure of freight cost on the shipment from the Dixon plant necessarily means that, as to business done by the respondent with that customer in Norfolk, Virginia, Mr. Steele’s analysis does not reflect the respondent’s full cost. 92. Counsel supporting the complaint contend that they did not offer Mr. Steele’s cost study in evidence “to show a correct: cost-justification defense, but merely to show the distortion resulting from the respondent’s broad overall averaging in respondent’s Exhibit 76 by the contrast with a two-plant average.” The two-plant study presented by counsel supporting the complaint does, as they suggest, show a distortion, but we believe that the distortion is in the two-plant study itself.

ce. Corrected Cost Failure Reduced to $0.2678 93. During cross-examination Mr. Steele discovered several errors in his cost study, all of which were adverse to the respondent, and, when corrected by Mr. Steele, showed the cost failure indicated by his two-plant study to be only $0.2673 per case, instead of $0.4025 as originally stated. This correction reduced the unjustified remainder of the difference in price by $0.1352 per case. Mr. Steele’s corrected summarization was received in evidence as respondent’s Exhibit 114. d. Conclusion as to Two-Plant Cost Study 94. We believe that, in a greater or lesser degree, every accounting datum, no matter how precisely determinable in isolation, is meaningful in this proceeding only if considered in relation to all of the other cost and price data. So believing, we conclude that the two-plant cost study in question does not constitute an adequate basis for a costjustification study, nor an effective rebuttal of respondent’s costjustification defense.

XX. Items of Cost in Respondent’s Analysis in Dispute Between ‘Accountants a. Investment Cost of $0.0404 per case 95. As we have previously observed, respondent, in order to have its Borden brand evaporated milk available for immediate delivery throughout the country, maintained a substantial inventory thereof in all its plants, reserve warehouses and consignment warehouses. As to private-label evaporated milk, however, respondent maintained in storage at the plant of its production only a supply sufficient to fill the Initial Decision 62 F.T.C.

orders of its private-label customers which it had already received. This difference in the method of storage in the process of sale and delivery of the Borden brand and private-label milk resulted in a substantially higher investment by the respondent in its Borden brand milk than in its private-label milk.

96. Respondent, in its cost-justification analysis, concludes that the money invested in both Borden brand and private-label evaporated milk during the time it was held in storage, valued at the rate of 8%, resulted in an average cost of $0.0835 per case for the storage of Borden brand milk, and an average cost of $0.0257 per case for private-label milk.

97. Mr. Steele did not question the respondent’s figures as to the money invested, nor that this constituted a real cost to the respondent; nor did he question the soundness of the aforesaid 8% rate of interest adopted for purposes of the calculation. He did state, however, that it was not “acceptable as an element of cost for the reason that it is considered to be a payment for the use of capital and not a cost of production and distribution.” In his oral testimony, Mr. Steele cited the Thompson’s Products case, 55 F.T.C, 1252 (1959), in support of his position. In that case, the issue in question involved a claim of a “cost item” computed on the basis of profit, which is an issue quite different from that herein raised. The Commission, in its opinion in the Thompson’s Products case, stated that “the return rate factor or element here claimed is thus entirely outside the sphere of actual cost differences.” In our present case, however, the cost factor is not based upon profit, but is a legitimate element of actual expense which must be borne by the respondent in distributing and selling its product. The respondent, in the regular course of its business, continually incurs this real cost, which must be taken into account if its cost figures are to reflect its actual expenses. 98. Accordingly, we conclude that the difference of $0.0404 per case in investment cost between respondent’s Borden brand milk and its private-label milk was properly included by respondent in its cost analysis as one element of the difference in price between Borden brand and private-label milk.

b. Premium Label Redemption Cost of $0.0069 Per Case 99. Contained in the label of Borden brand evaporated milk was a premium coupon which was redeemable for merchandise. The premiums were redeemable by Premium Associates, Inc., a corporation in which respondent held 25% of the stock. This corporation served not only the respondent, but other corporate stockholders, and also nonstockholders, who wished to avail themselves of such premiumredemption coupons and service. The redemption cost of the respond- THE BORDEN CO. 163 130 Initial Decision ent’s Borden brand coupons consisted of regular monthly payments by respondent to Premium Associates, Inc., based upon the number of coupons redeemed during the preceding month, and a payment for special offers. In addition, the respondent also allocated to its coupon redemption account the amount of an adjustment which was made at the end of the year to the reserve fund maintained to provide for redemption in future years of premium coupons issued in 1957. 100. The facts show that Premium Associates, Inc., has never paid any dividends to its stockholders; that it endeavors to operate on a break-even policy; and that its net income of $71,757 earned in 1957 was not distributed to its stockholders, but retained by the corporation as a reserve fund. Respondent had nothing to credit to its couponredemption account from the earnings of Premium Associates, Inc., in 1957. Mr. Steele contends, however, that the total amount of the premium cost, as shown in respondent’s cost analysis, should be reduced by respondent’s 25% share of the net income of Premium Associates, Inc., for 1957.

101. We believe that because the respondent did not technically, legally, or actually receive any income from its investment in Premium Associates, Inc., in 1957, it would be improper to reduce the cost of the premium-label redemption, as shown in respondent’s cost analysis, by any such amount as suggested by Mr. Steele. c. Advertising Cost of $0.0059 Per Case 102. The respondent’s costs in respect to Borden brand advertising, as determined by its accountants, were $0.1247 per case. This amount was determined on the basis of an estimate made administratively at respondent’s top-management level. Mr. Steele challenged the soundness of that determination as arbitrary. In lieu thereof, he would make the determination by computing a percentage of respondent’s total sales dollars chargeable to Borden brand milk for the year 1957. In our opinion, Mr. Steele’s method of calculating, the advertising cost of Borden brand milk is sounder than respondent’s method. Accordingly, the amount of respondent’s advertising cost charged to Borden brand evaporated milk will be reduced by $0.0059 per case, resulting in an advertising cost for Borden brand milk of $0.1188 per case instead of $0.1250, as shown in respondents cost analysis. d. Brokers’ Commission Cost of $0.0159 Per Case 103. As stated in respondent’s cost analysis, “* * * Brokers performed the function of selling the Division’s [Borden’s Food Products Division] advertised products to wholesalers and chains in those areas where the Division did not have its own jobbing salesmen.” The brokers were paid a commission of 5¢ per case on the sale by them of 164 FEDERAL TRADE. COMMISSION DECISIONS Initial Decision 62 F.T.C.

Borden brand evaporated milk. The total brokerage paid in 1957 for the sale of Borden brand evaporated milk was $170,151.48. This amount represents an average of $0.0394 per case of Borden brand evaporated milk sold in that year. In addition the respondent paid brokers at the rate of 214¢ per case on some sales of private-label evaporated milk, although the facts show that no substantial service was rendered by them to respondent in promoting such sales. Respondent contends that this brokerage payment constituted, in effect, an additional brokerage cost chargeable to Borden brand evaporated milk. Mr. Steele contends, however, that because the brokerage was not paid on all private-label milk sales, and because the amount of the brokerage varied directly with the sale of private-label evaporated milk, the brokerage so paid should be considered as an additional cost applicable to private-label evaporated milk. 104. We believe that Mr. Steele’s analysis of this problem is correct, and, accordingly, we conclude that the brokerage cost charged by the respondent entirely to Borden brand milk should be charged in part to private-label milk, and that the broker’s commission cost of Borden brand milk in respondent’s cost analysis should therefore be reduced by $0.0159 per case, the cost of brokerage paid on privatelabel milk, changing the Borden brand brokerage cost from $0.0427 per case to $0.0189 per case.

e. Sales Department Cost of $0.0247 Per Case 105. Mr. Steele did not question the accuracy of the respondent’s determination of the amount spent by it to maintain its sales department. He did not question the necessity or soundness of making an allocation thereof between Borden brand evaporated milk on the one hand, and the other Borden food products on the other hand. The dispute between the accountants relates solely to the formula which should be used in determining that allocation. The respondent’s accountants used as a basis for their calculation all dollar sales, allocating to Borden brand evaporated milk that proportion of the total unallocated Sales Department expense which the dollar sales of Borden brand evaporated milk bore to the total sales of all Borden’s food products. That proportion was 44.0206%. Mr. Steele contends, however, that this calculation should be based upon the gross profits on Borden brand evaporated-milk sales compared with the sales of other Borden brand food products, with the result that he claims the percentage of sales expense to be charged to Borden brand evaporated niulk should be 40.10%.

106. The managing officials showed by their testimony that the touchstone by which they were guided in allocating their sales-department expense consisted of cases sold and sales dollars received. In our THE BORDEN CO. 165 130 Opinion opinion, this method of calculation is correct, because cost is properly an element in the calculation of profit, not profit in the calculation of cost. Accordingly, we conclude that the correct amount of sales-department cost to be properly charged to Borden brand evaporated milk is $0.3163 per case.

XXI. Conclusion as to Cost Justification 107. In our opinion, the respondent’s cost analysis, as hereinabove modified, constitutes full justification for the differences in price between Borden brand evaporated milk and respondent’s private-label evaporated milk, within the intent and meaning of §2(a) of the Clayton Act. It is therefore accepted as an adequate cost-justification defense against the allegations of the complaint herein. XXII. Summary Conclusion 108. The acts and practices of the respondent, as herein found, are not in violation of § 2(a) of the Clayton Act as amended. Accordingly, It is ordered, That the complaint herein be, and the same hereby is, dismissed.

OPINION oF THE Commission NOVEMBER 28, 1962 By Dixon, Commissioner:

Respondent has been charged with violating Section 2(a) of the Clayton Act, as amended, by discriminating in price between its customers buying evaporated milk under the Borden label and those buying such product under private label. The hearing examiner, in his initial decision filed December 15, 1961, held that no price discrimination in violation of the Act was established because there was no showing of substantially lessened competition or a reasonable probability of such danger to competition in the future. He further held that respondent had fully cost justified the price differences shown. The examiner dismissed the complaint. Both parties have appealed. Counsel supporting the complaint challenges the holding that there was a failure to prove competitive injury as prescribed in the Act and from the holding that respondent had successfully cost justified the price differences. They request that respondent be found to be in violation of Section 2(a) and that an appropriate order to cease and desist be issued. Respondent, in its appeal, mainly contests the examiner’s finding and conclusion 749-537—67——12 Opinion 62 F.T.C.

that evaporated milk under its Borden’s brand and private label are commodities “of like grade and quality”.

The Borden Company is engaged in the manufacture and sale of a ‘wide variety of food, dairy, and chemical products in the United States and abroad. Its total sales in 1957 were $931,220,662. The commodity involved in this proceeding is evaporated milk, a product made from whole fresh milk by processing, which includes evaporation, homogenization, and the addition of vitamins and certain minerals. Respondent manufactures and sells evaporated milk in commerce in substantial quantities. In 1954, its sales of the product exceeded $30,000,000. Respondent’s plants for producing evaporated milk during the period covered by the complaint were located at Fort Scott, Kansas; Wellsboro, Pennsylvania; Modesto, California; Albany, Oregon; Dixon, Illinois; New London, Wisconsin; Perrinton, Michigan; Lewisbury, Tennessee; and Chester, South Carolina. Packers of evaporated milk consist of those who sell under nationally advertised brands, z.e., respondent, Pet Milk Company, and the Carnation Company; chain stores and their subsidiaries which pack only for their respective organizations under their own brands, e.g., The Kroger Company; and the smaller packers who produce mainly under labels owned and controlled by their customers. Packers in this latter category in the Midwest, some of whom testified in the proceeding, include:

Page Milk Company, Merrill, Wisconsin ;

United Dairy Company, Barnesville, Ohio;

United Milk Company, Cleveland, Ohio;

Defiance Milk Products Company, Defiance, Ohio; Westerville Creamery Company; Westerville, Ohio; Gehl Guernsey Farms, Milwaukee, Wisconsin ; Edwardsville Milk Company, Edwardsville, Illinois; Consolidated Badger Cooperative, Shawano, Wisconsin. These concerns were all in competition with Borden in the sale of evaporated milk in the period covered by the complaint. These and other packers in the Midwest will hereinafter sometimes be referred to asthe Midwest competitors.

I. “Like Grade and Quality”

As an essential element in a Section 2(a) matter, there must be a showing that the commodities involved in the price discrimination are “of like grade and quality.”? Respondent concedes in its brief that 1 Section 2(a) reads in pertinent part:

“That it shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality * * *.” ‘THE BORDEN CO. 167 130 Opinion physically, at the point of manufacture, the two products (the Borden brand and the private label) were alike. It argues, however, that in the market place they were unlike, z.¢., the one (Borden brand) could command a higher price than the other (private label), and, therefore, they were not of like grade and quality within the meaning of the statute.

The Commission in a number of prior proceedings has held that goods which are the same in all respects except labels are comparable goods for the purpose of Section 2, or goods of like grade and quality. In The Goodyear Tire & Rubber Company, 22 F.T.C, 282 (1936), reversed on other grounds 101 F. 2d 620 [3 S. & D. 63] (6th Cir. 1939), a pre-Robinson-Patman Act proceeding, the Commission held, in effect, that corresponding grades of Sears, Roebuck & Co. private label tires and Goodyear’s own brands of tires were comparable in grade and quality.2. Under the Clayton Act, as amended by the Robinson-Patman Act, the Commission in United States Rubber Co., et al., 98 F.T.C. 1489 (1939), a matter involving tires, and United States Rubber Co., 46 F.T.C. 998 (1950), a matter involving canvas shoes, prohibited discriminatory price differentials between sellers’ brands and customers’ private labels. In these cases the Commission disregarded brand differences and found the products to be of like grade and quality. Similarly, in Page Dairy Co., 50 F.T.C. 395 (1953), different label markings were held to be without significance. See also, the Trade Practice Rules for the Steel Bobby Pin and Steel Hair Pin Manufacturing Industry (1957) (Rule 11, Section II, Example No. 4) in which, under the example, brand differences are disregarded. There have been some court decisions as to the meaning of the phrase “like grade and quality”, but these do not deal with the precise issue now before us, i.¢., whether the label difference alone renders the goods unlike and outside the scope of the Act. The court cases include Bruce’s Juices, Inc. v. American Can Co., 87 F. Supp. 985, 987 (S.D. Fla. 1949), aff’d 187 F. 2d 919, 924 (5th Cir. 1951), modified 190 F, 2d 73 (5th Cir. 1951) (District Court upheld on holding the different sized cans were of like grade and quality) ; Atalanta Trading Corp. v. Federal Trade Commission, 258 F. 2d 865 [6 S. & D. 489] (2d Cir. 1958) (rejection of a broad “relevant market” test for determining “like grade and quality”); Moog Industries, Inc. v. Federal Trade Commission, 238 F. 2d 43 [6 S. & D. 91] (8th Cir. 1956), reviewed on other grounds 855 U.S. 411 [6 S. & D. 382] (1958) (noninterchange- 2Under old Clayton Act Section 2, the provision for price differentials reflecting differences in “grade” or “quality” was a defensive proviso. In the Act as amended, the provision “like grade and quality” was placed in the definitional text of the statute. Opinion 62 F.T.C.

able items in a line of automotive parts sufficiently comparable for price regulation).

The legislative history leaves little doubt that Congress intended that brand distinctions be disregarded under the “like grade and quality” requirement. The Commission’s The Goodyear Tire & Rubber Company case, supra, was noted in a Committee report.* At one point in the consideration of the legislation, there was a move to amend the bill by inserting “and brands” after the words “commodities of like grade and quality.” This proposal was branded by the draftsman of the Patman bill, as “ a specious suggestion that would destroy entirely the efficacy of the bill against large buyers.” * Congress could have required a distinction for brands. It did not. Respondent, interestingly, does not contend in its argument, that all brand differences result in goods of unlike or different grade and quality. Clearly, the basic aims of the Act could be too easily thwarted if merely changing a label would nullify the application of the statute. Respondent argues, instead, that a distinction should be made between differing situations, as follows: (a) the situation where the brand name is not shown to represent any significant added value being sold by the manufacturer, and (b) the situation where, as is asserted in the present case, the manufacturer’s well-known brand name has a very substantial and thoroughly demonstrated commercial significance. Respondent has cited no controlling authority or persuasive support of any nature for such interpretation. We believe it to be more reasonable, considering the objectives of the legislation, to interpret the phrase so as not to exclude the application of the Act in cases where the only distinction is in the label. In this connection, the Attorney General’s Report has this to say in part: The majority of this Committee, however. recommends that the economic factors inherent in brand names and national advertising should not be considered in the jurisdictional inquiry under the statutory “like grade and quality” test * * *, [T]he Committee majority believes that abandonment of a physical test of grade and quality in favor of a marketing comparison of intrinsically identical goods might not only enmesh the administrators of the statute in complex economic investigations for every price discrimination charge, but also could encourage easy evasion of the statute through artificial variations in the packaging, advertising or design of goods which the seller wishes to distribute 3H, Rept. No. 2287, 74th Cong., 2d sess., 4. The report refers to the case as support for the view that the granting of preferences was not confined to any one line of industry or distribution. The report states that the Commission found in the Goodyear case that “* * * at no time did it [Goodyear Tire & Rubber Co.] offer its own dealers prices on Goodyear brands of tires which were comparable to prices at which respondent was selling tires of equal and comparable quality to Sears, Roebuck & Co.” : . ‘Hearings Before a Subcommittee of the House Committee on the Judiciary, on Bills to Amend the Clayton Act, 74th Cong., 2d sess., 421, 469 (1936). THE BORDEN CO. 169 1380 Opinion at differential prices * * *. (Report of the Attorney General’s National Committee to Study the Antitrust Laws, 158 (1955).° This we believe is a sound analysis. In our view, the discriminatory price transactions should first be subject to scrutiny under the statute; the market factors which may dictate that there will be different prices between the seller’s brand and private label can then be considered in connection with the provisions of Section 2. For example, if cost savings are involved, these can be raised in connection with a cost defense. Thus, economic factors may be considered, but the price relationship between different brands of intrinsically like goods remains subject to the terms of the statute. We believe the examiner correctly decided this issue. The Borden brand and the private label evaporated milk are commodities of like grade and quality. Respondent’s contention that the examiner erred in his holding on the question is rejected. II. Price Discrimination - A price discrimination under Section 2 is merely a price difference. Federal Trade Commission v. Anheuser-Busch, Inc., 363 U.S. 536, 549 [6 S. & D. 817] (1960). The examiner found a price discrimination within the meaning of the statute. Respondent appears to challenge this finding in its contention that no difference in comparable prices has been shown. Respondent claims that to make the prices comparable it is necessary to deduct from the Borden brand price, net of the delivery factor, the value of the Borden brand name, and that when this is done the Borden brand price is less than the private label price.

We have held that the products are of like grade and quality and, thus, the initial determination as to whether a mere difference in price exists is concerned only with whether respondent has charged a higher net price to one customer than it has charged another. The net price is the price after deducting discounts, rebates and allowances. In this case, it is clear that there is such a price difference. The examiner was correct in his holding on the question.

III. Competitive Effects The complaint charges that respondent’s price discrimination resulted in prescribed adverse effects upon competition in several lines 5In Moog Industries, Inc, v. Federal Trade Commission, 238 F. 2d 48, 49 [6 8S. & D. 100] (8th Cir. 1956), the court adopted the statement in the Attorney General’s Report at page 157 that “The like grade and quality concept * * * Was designed to serve as one of the necessary rough guides for separating out those commercial transactions insufficiently comparable for price regulation by the statute.” Opinion 62 E.T.C.

of commerce, including the line in which respondent is engaged (the primary line). We will first analyze the proof herein on the alleged competitive injury at the primary level.

It must be emphasized that Section 2(a) of the Clayton Act, as amended, which prohibits price discriminations whose “effect * * *— may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy, or prevent competition with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them * * *” does not require a finding that the discriminations in price in fact have had an adverse effect on competition. Corn Products Refining Co., et al. v. Federal Trade Commission, 324 U.S. 726 [4S. & D. 331] (1945) ; Federal Trade Commission v. Morton Salt Co., 384 U.S. 87,46 [4 S. & D. 716] (1948). “The statute is designed to reach such discriminations ‘in their incipiency’ before the harm to competition is effected. It is enough that they ‘may’ have the prescribed effect.” Corn Products Refining Co., supra, at 738 [4 8. & D. 340]. Accordingly, it is not essential that the record show actual injury. We will consider this matter on the basis of whether there has been a showing that respondent’s price discrimination may have, or will likely have, any adverse competitive effects.

The record reveals that the evaporated milk industry has suffered a decline in sales and that a large number of companies have in recent years gone out of this business. Market share data, as found by the examiner, shows the total industry sales volume (on tall case basis) as follows:

Year: Cases sold 1955_-_-~ 52, 804. 598 1956. 51, 862, 069 1957. 50, 666, 667 The concerns which have discontinued the production of evaporated milk since 1950 include the following:

Dairyland Cooperative Association (Dairyland Cooperative), Juneau, Wisconsin (discontinued April 1957) ;

Amboy Milk Company, Amboy, Illinois (discontinued early in 1958) ; Dean Milk Company (discontinued 1955 or 1956) ; Fort Dodge Creamery Company;

Rochester Dairy Company, Rochester, Minnesota (discontinued 1954 or 1955) ; Hillpoint Creamery Company, Reedsburg, Wisconsin ; Dairyland Distributors Cooperative, Watertown, Wisconsin ; Producers Creamery, Springfield, Missouri (discontinued in 1956) ; Reich McJunkin, Meadville, Pennsylvania ;

Wilson Milk Company, Indianapolis, Indiana. THE BORDEN CO. 171 130 Opinion Also, between 1956 and 1958, Consolidated Badger Cooperative restricted its evaported milk operation to Wisconsin and the upper part of Michigan. The record shows that there have been no new concerns going into the evaporated milk business.

The 1957 sales volumes of the Midwest competitors who testified in this proceeding were as follows:

1957 sales volume Company (tall case basis) Page Milk Company. 735, 803 United Dairy Company. - - 958, 373 Westerville Creamery Company_ -~ 589, 242 Gehl Guernsey Farms. 285, 544 Defiance Milk Products Company. - --. 694, 166 Nashville Milk Company: 158, 811 Dairyland Cooperative (discontinued in 1956) By way of comparison, the sales volume of respondent (tall case basis) for 1957 was 5,419,108.

The facts concerning respondent’s expansion into the private label evaporated milk field and the impact upon the Midwest competitors (as reflected by specific losses of accounts to respondent) is not in any substantial dispute. About July 1955, Producers Creamery of Springfield, Missouri, discontinued the sale of private label evaporated milk and three of its customers, Topco Associates, Central Retailer-Owned Grocers, and Hills Stores Company, thereafter arranged with respondent to supply them with such milk. Respondent subsequently expanded its private label operations to plants previously producing only Borden label and also began serving other additional accounts. As a direct consequence, Midwest competitors lost accounts and sales to respondent.© The number of cases lost cannot be figured exactly because it is impossible to know with certainty how much a given account would have purchased. However, based on purchases for the prior twelve months when such accounts were customers, some estimate of the lost sales can be made. Respondent has figured the total loss to be 241,815 cases, a figure which the examiner accepted. Counsel supporting the complaint claims a higher loss figure of about 287,000 cases. The figures in either case do not show the full impact of respondent’s pricing practices on competition because they reflect only the initial losses. The fact is that these were not just temporary losses. Arrangements with buying organizations, such as Topco Associates, were of a long-term nature to supply all or a large part of 6In certain instances sales were lost to respondent indirectly. Some of the lost customers switching to respondent's private label evaporated milk made their purchases of this product through Biddle Purchasing Company, of New York City, an organization which performs a buying service for wholesale grocers. Opinion 62 F.T.C, the purchaser’s needs. For all practical purposes, the accounts were lost permanently.

Using data which respondent apparently does not dispute, the sales losses for individual Midwest competitors were as follows for the period covered by the complaint:

: Cases lost Competitors: to respondent Page___-------- ++ - 3. 650 United --ee 14, 168 Westerville.-..---._.--_-----_- ---- 38, 397 Gehl__ --- ~a-- --- ~--- 25,484 Dairyland_-__._-__-_--_---- eee ee 22, 320 Defiance _ __ --e 72, 806 Nashville. a 65, 040 Total__-__-_-_-~--_-- ee 241, 815 Examples of specific accounts lost are as follows : Competitors Accounts lost Page-..------__ Kimbell Grocery Co., Fort Worth, Texas; United___.-___-. The Penn Fruit Co., Philadelphia, Pennsylvania ; Brockton Public Markets, Brockton, Massachusetts ; Westerville_____ Colonial Stores, Thomasville, Georgia; : Thomas & Howard Co., Columbia, South Carolina ; Gehl__.-_-__- Central Retailer Owned Grocers, Chicago, Illinois; Dixie Home Stores, Greenville, South Carolina; Dairyland______ The Penn Fruit Co., Philadelphia, Pennsylvania ; Wein's Supermarket, St. Paul, Minnesota ;

Defiance_______- Central Retailer Owned Grocers, Chicago, Illinois ; Colonial Stores, Raleigh, North Carolina;

Nashville.______ Central Retailer Owned Grocers, Chicago, Illinois; Colonial Stores, Thomasville, Georgia ;

Winn Dixie, Tampa, Florida.

Thus, the immediate effect of respondent’s expansion into the private label evaporated milk area was to attract accounts away from competitors. Such lost accounts were large and important purchasers. The loss of business was substantial, particularly for certain of the competitors. For instance, Dairyland Cooperative, which subsequently discontinued evaporated milk production, lost the Topco Associates’ account in 1956 to respondent. The total purchases by this account in 1956 were $22,320, while Dairyland Cooperative’s total evaporated milk sales in 1956 were only 49,404 cases. The loss was about onehalf its sales for the period.

Witness DeMaster testified that the reason for Dairyland Cooperative’s decline in sales and eventual discontinuance of business was the freight rate advantage of plants to the East. However, it was not until the time that respondent expanded in the private label field, applied its discriminatory prices and took a substantial share of the THE BORDEN CO. 173 130 Opinion firm’s business that it finally discontinued production of the product. Although other factors apparently were involved, we believe that the record supports a finding that respondent’s price structure to an important extent led to Dairyland Cooperative’s discontinuance. The entry and expansion of respondent in the private label field and its pricing methods has put severe pressure on its Midwest competitors. Mr. Page, of Page Dairy Company, testified : * * * The entry of the Borden Company into the private label business and the manner in which they have been operating has placed a severe competitive pressure on the entire unadvertised brand of private label milk structure and that has, in my opinion, largely been felt in the way, as far as we are concerned, has largely been felt in the way of a lowered market price with which we must contend.

Mr. Anderson, of United Dairy Company, referred to the same situation in his testimony as follows:

The competition has forced our prices down from the level we had previous to that and some of the competition has been selling on a different basis, on an f.0.b. basis and it is made highly competitive because of those factors. Respondent in denying that its pricing practices have injured competition, points especially to the fact that certain of the testifying competitors gained in sales volume in the period covered by the complaint. At least part of these increases was obtained from other Midwest companies which had ceased operations. Witness Page, of Page Milk Company, testified that he attributed the increase of his company principally to trade that had previously been handled by Producers Creamery of Cabool, Missouri, which company went out of business. Witness Anderson, of United Dairy Company, testified that the increase of that company was accounted for by additional business from former customers of Wilson Milk Company obtained when that company sold its evaporated milk business to Dean Milk Company, in Chicago. Witness Diehl, of Defiance Milk Products Company, testified that increases for both Defiance and Nashville Milk Company (a. subsidiary) were in part due to business gained from evaporated milk plants that had gone out of business. To a considerable extent, therefore, the increases were mere windfalls‘and cannot be expected to reoccur.on a regular basis. Sooner or later the full effect of respondent’s discriminatory price structure can be expected to take its full toll. It undoubtedly is a factor to be considered in this matter, although not a crucial one, that plants in the Midwest were disadvantaged as to the Eastern and Southeastern markets over plants located in the East and Southeast because of increased freight costs. Indicative of this is the difficulty which Dairyland Cooperative had in competing for markets in the East. The examiner, it is noted, placed considerable stress on respondent’s asserted freight advantage as a factor in his finding of 174. FEDERAL TRADE COMMISSION DECISIONS Opinion 62 F.T.C.

a lack of competitive injury. On this subject, the examiner found that as to 86% of the sales gained by respondent from the Midwest competitors, respondent had a clear freight advantage over these competitors due to more convenient plant locations.

The inference which the examiner seems to draw is that it was the freight advantage which enabled respondent to capture accounts from Midwest competitors, not the price discrimination. There is no good record support for any such finding or inference. The instances cited by the examiner are isolated examples and there is no clear over-all picture in the record as to the extent or the significance of possible freight advantages which respondent might have had over competitors. We note that even the examiner does not attempt to explain all the losses as being due to plant location advantage. Moreover, it is clear from the record, based on facts shown and the reasonable inferences to be drawn therefrom, that plant location advantage, if an element in the switching of customers, was only one of several considerations, and that another important element was the lower (discriminatory) prices on the private label product compared to Borden brand. In any event, we are here concerned more with the losses which may subsequently occur, and clearly, respondent with its discriminatory price structure has an effective device to obtain accounts from its smaller competitors, This record does not show a complete market picture for the evaporated milk industry, but it does sufficiently develop the competitive situation as between respondent and the Midwest competitors. Respondent by comparison to these competitors is a large and powerful concern. It has broad resources in that it sells a wide variety of food products both at home and abroad. Moreover, it sales of evaporated milk are principally under Borden brand, whereas the testifying competitors generally indicated that their evaporated milk sales were mostly private label. In other words, the testifying competitors were considerably more dependent upon private label evaporated milk sales than the respondent. .

Respondent’s prestige and power in the market is illustrated by th fact, as the examiner found, that private label customers came to respondent seeking a source of supply.

On the other hand, the Midwest competitors are small companies with relatively small sales volumes of evaporated milk compared to the sales of respondent. They maintain a rather precarious hold in the market place. As we have seen, sales for evaporated milk diminished in the period disclosed by the record. Since 1950, at least ten concerns, mostly in the Midwest, have discontinued production of evaporated milk. There are no new concerns coming into the business. Under such circumstances, little is needed to shift the competitive THE BORDEN. CO. 175 130 Opinion balance. Respondent came into the market using a discriminatory pricing structure. This has put a severe strain on the smaller competitors as some of them testified. In fact, the discontinuance of Dairyland Cooperative is tied to respondent’s expansion in the field and its use of discriminatory prices. The testifying Midwest competitors all lost accounts to the respondent and it appears that the shift of business has been permanent.

In this market setting, respondent’s price discrimination is a clear threat to the entire competition provided by the Midwest concerns. If the price discrimination is continued, the elimination or the serious impairment of competition from small competitors in the industry is likely. This is enough to satisfy the injury requirement of the Act. We conclude that the effect of respondent’s discriminatory pricing may be substantially to lessen or to injure, destroy or prevent competition with respondent, .e., there is a likelihood of substantial competitive injury in the primary line.

There is also a showing in the record that the effect of the discrimination may be to lessen or to injure, destroy or prevent competition with customers of the person who granted the discrimination. This would be competition with respondent’s wholesale customers and with its retail customers. In Federal Trade Commission v. Morton Salt Co., supra, it was sufficient to justify a finding of the prescribed effect that some merchants had to pay more for like goods than their competitors.

Here the differences in prices to customers, including competing customers, is well documented by the evidence. The following are examples:

Customer Date Borden brand Private label : delivered price f.o.b. price Hartley Grocery, Columbia, 8.C. ;

(wholesaler) ___._...---.------------ 7/18/57 6.45 |------------ Biddle Purchasing Co. at Thomas & Howard, Columbia, S.C. (wholesaler)--; 7/18/57 |------------ 14,9051 Rawl Distributing Co., Columbia, 5.C.

(wholesaler) _...-.----------------- 7] 8/57 6.45 |_----------- Raw! Distributing Co., Columbia, 8.C__| 3/ 4/58 6.60 |.------------ Biddle Purchasing Co. at Thomas & P Howard, Columbia, SC woe ee eens 2/ 4/58 |_----------- 5. 0289 iggly Wiggly Carolina Co., Inc., . ia. S.C, ain retailer 1/10/58 |_----------- 5. 0227 Columbia, 8.C. (chain retailer)_..---- { 3) 7/58 (once 1 9436 1The record shows that in July 1957, Thomas & Howard of Chester, South Carolina, the purchasing affiliate of the Thomas & Howard organization, on one order paid Biddle Purchasing Co. $5.04 per case and billed the order to Thomas & Howard of Columbia, South Carolina, at a $.17 per case markup to cover cost of labels and handling for a total of $5.22 per case.

176 FEDERAL TRADE. COMMISSION DECISIONS Opinion 62 F.T.C.

The testimony from wholesalers as well as retailers disclosed the extremely low or nonexistent profit margins on evaporated milk. In most instances, wholesalers and retailers testified that evaporated milk was handled for accommodation to customers and not for profit. In fact, evaporated milk is used as a loss leader which indicates that discriminatory prices made it difficult for the unfavored customers to compete not only because of higher prices on that item but because it would tend to draw away customers for other products as well. Wholesale and retail witnesses testified to the effect that a lower price from the producer, such as the price on respondent’s private label goods, would have been of great value in improving profit margins and assisting in meeting the competition on this item. The following is illustrative of pertinent testimony on the subject: Woodrow W. Power, Power Food Store, Inc., Columbia, South Carolina (retailer) :

Q. Now, you mentioned a short while ago, Mr. Power, you are in competition with various other stores in your vicinity like Piggly-Wiggly, A&P, Colonial and the like. Now, I assume that you follow their sales advertising policies and their merchandising policies? A. Yes.

Q. Have you found them advertising private label milk at a price less than that charged by you for brand label? A. Yes.

Q. Or for any evaporated milk which you handle? A. Yes, Q. Have you found that you could meet. that prices that is charged by them? A. No, sir, I can’t buy it that cheap.

Q. Well, if you were able to obtain the private label evaporated milk from Hartley or Merchants at a price say of $5.25, $5.80, would you be interested in it? A. Yes.

Daniel Shumpert, Shumpert Food Sales, West Columbia, South Carolina (retailer) :

Q. Why do you say a nickel or a dime would have been of help? In other words, any differential of a cost of a nickel or a dime for private label. A. It puts me in a position to meet competition prices more. The lower I can buy the cheaper I can sell it.

Harold A. McFeely, R. P. Turney & Company, Greer, South Carolina (wholesale grocery) :

-° THE BORDEN CO. 177 130 oe Opinion Q. Well, is the explanation you have just made, does it apply to the reason or the reason why you would have been interested in the private label evaporated milk? Just exactly why would the private label have been important to you? A. I sell government agencies, state and local county quite a bit of merchandise for their chain gang camps and prisons and I have never been able to get that business due to the fact that I had only advertised brands to quote on and in checking at the offices I find that this milk under this label in one particular case has been getting the business for a year or so. Q. Do you remember the name on the label? A. I couldn’t touch it. Yes. Red and White, put out by Thomas & Howard is a brand I see in Greenville now in the County Home and various different institutions and it is sold to them on the basis of what you said a few minutes ago, $5.25 or $5.80, this milk is sold at 25 to 30 cents a case profit and when I quoted $6.60 I did not receive any business and I was out of line over a dollar per ease. So if I had secured the business at $6.60 it wouldn’t have meant anything, but if I had had the private label milk I could have competed in the market and would have been able to get the business with that price. It has been shown, in short, that some purchasers have paid less than their competitors for purchases of like goods from respondent and that difference is, in the circumstances, substantial. We conclude, therefore, that the effect of respondent’s price descrimination may be substantially to lessen or to injure, destroy or prevent competition with respondent’s customers.

We hold that the examiner erred in his determination that the record failed to show competitive injury as prescribed under Section 2(a) of the amended Clayton Act.

IV. Cost Justification Defense Respondent has sought to cost justify the price discrimination at issue in this proceeding.” It has introduced into the record a cost study which the examiner after some modification, has accepted as full justification for the challenged differences in price. A summary of respondent’s cost study as it appears in the initial decision is as follows:

7The proviso in Section 2(a) relating to cost justification reads: “Provided, That nothing herein contained shall prevent differentials which make only due allowance for differences in the cost of manufacture, sale, or delivery resulting from the differing methods or quantities in which such commodities are to such purchasers sold or delivered :”. Opinion 62 F.T.C.

Respondent's Cost Analysis, 1957 [Average per case] Borden brand | Private label | Difference Gross sales___.-.---.-------.------------ $6. 4046 $5. 1743 $1. 2303 Less Sales Deductions: Damaged Goods---- . 0112 . 0027 . 0085. Cash Discount Offered......._-.._.------- . 1279 |_-- ee . 1279 Net Sales_....--.---.-------_----- 6. 2655 5. 1716 1, 0939 Costs:

Labels and Cartons__._.._....-.-.-_-- . 1789 . 13876 . 0413 Primary Freight...-...-..-..-.---_-- . 3684 . 0188 . 3496. Secondary Freight___.........-..__._- . 0112 |____._e eee . 0112 Reserve Storage_.......-...-.-._.---- . 0690 |_--_-- eee . 0690 Consignment Storage_._....-.-------- . 03805 |---------- . 0805 Investment Cost___..-.-.-.-.--.----- . 0972 . 0568 . 0404 Premium Label Redemption____-_.---- . 2316 |---------- . 2316. Advertising.___-_-.-.---------------- 1247 jee --_---- . 1247 Sales Department__---_-.-.---------- . 3163 . 0009 . 3154 Brokers’ Commissions...-....-.-.---- . 0427 |. ee . 0427 Promotion Department___-__--------- . 0189 . 0128 . 0066 Clerical.....-.---_--_--..------------ . 0151 . 0062 . 0089: Total___-..-.--..--.-.------------ 1. 5045 . 2326 1, 2719 Difference in Cost_.....--.--.-.----------|----------j|---------- 1. 2719 Difference in Price___-_-----.------- Leu-u[----------]---------- 1. 0989 Excess of cost difference over price difference..._...-.---.-----.----|-.--------|---------- . 1780: The figure on this table which respondent seeks to cost justify is the average price difference per case of $1.0939. For the year 1957, this is the difference between the average price per case for Borden brand of $6.2655 and the average price per case for private label of $5.1716. The total cost figures shown on the table are the average cost per case for the Borden brand and the average cost per case for the private label for 1957. The average cost difference shown by the study is $1.2719, which exceeds the average price difference of $1.0939 by 0.1780. This study is inadequate and unacceptable because of the use of broad averaging. In addition, respondent has listed certain items as expense items which cannot properly be used for cost justification under the Robinson-Patman Act.

Broad averaging in the study has resulted in distortions in prices as well as costs. The price discrimination charged in this proceeding is concerned with various particular markets and specific transactions. For instance, in the plant area of Chester, South Carolina, in 1957, while Borden brand purchasers such as Raw] Distributing Company, Columbia, South Carolina, and Associated Grocers Mutual of Carolina, Charlotte, North Carolina, were paying prices at different times of $6.45 and $6.60 per case, private label purchasers, with whom the THE BORDEN CO. 179 130 Opinion Borden brand purchasers or their customers competed, were paying the lower prices such as $4.8942 per case in June, $4.9051 per case in July, $4.9210 in August, and soon. The price competition which the Borden brand customers faced was not the average private label price for 1957 of $5.1716 but rather the lower actual prices above mentioned. The use of broad averages may show an apparent justification on the average, but it levels the extremes and ignores specific markets or transactions where the greater differences may result in the lessening of. competition.

Not all averaging is objectionable. For instance, in Sylvania Electrie Products, Inc., et al., 51 F.T.C. 282 (1954), the Commission, in connection with radio receiving tubes, approved a cost study which compared the aggregate price difference with the aggregate cost difference on the entire complement of tubes sold by the respondent. In — that case, the lack of uniformity in the price spread was held to be of no competitive significance. That is not the case here. The competitive significance is illustrated by the above example involving the plant area of Chester, South Carolina.

A question of averaging costs for customer classes was recently considered by the Supreme Court of the United States in United States v. Borden Co., 370 U.S. 460 (1962). There the court accepted the principle that some grouping is permissible in connection with cost justification under the proviso in Section 2(a). It further stated, however, that this is not to say that price differentials can be justified on the basis of arbitrary classifications or even classifications which are representative of the numerical majority of the individual members. The court said: “A balance is struck by the use of classes for cost justification which are composed of members of such selfsameness as to make the averaging of the cost of dealing with the group a valid and reasonable indicium of the cost of dealing with any specific member.” (Footnote omitted.) United States v. Borden Co., supra, at 469; cf. Champion Spark Club Co., 50 F.T.C. 30, 48 (1953); Standard Ow Company, 41 F.T.C. 268, 276-277 (1945), reversed on other grounds, 233 F. 2d 649 [6 S. & D. 6] (7th Cir. 1956) ; Znternational Salt Co., et al., 49 F.T.C. 188, 153-155 ; Thompson Products, Inc., 55 F.T.C. 1252, 1264 (1959) ; Advisory Committee on Cost Justification Report to the Federal Trade Commission (F.T.C. Mimeo. 8, 1956). In the Borden case, the court rejected the cost defense because of the failure of the appellee to show sufficient homogeneity in the classifications. The cost defense in this proceeding is defective for a like reason. Respondent failed to use any customer classification in its study despite the fact that it sells to a wide variety of customer groups, e.g., chain retailers, wholesalers, cooperatives and other subgroups, among which its costs differed.

180. FEDERAL TRADE COMMISSION DECISIONS Opinion 62 F.T.C.

An example would be the differences in selling expenses between jobbers and retailers. Salesmen calling on jobbers were described by one witness as largely order takers. This is in contrast to the many promotional services performed by salesmen calling on retailers. To take another example, the difference claimed for Sales Department expense between Borden brand and private label is $0.3163, a figure which alone considerably exceeds the claimed excess justification of $0.1780. However, these expenses were not the same for all customers. There were three distinct groups so far as the Sales Department expense was concerned: those where no salesmen called (e.g., small stores doing under $200,000 annually) ; stores where salesmen’s activities were restricted (some chains would not allow salesmen to do any stock arranging); and those where the salesmen performed the full range of in-store service activities such as building floor displays and arranging the stock.

For the Sales Department expense, therefore, the costs, if any, were incurred in different amounts for the different groups of customers, and the use of an average figure created a substantial distortion in the cost study. Average cost figures were likewise used for such items as labels, storage and freight, and, as to these, it appears that such costs would vary among different customers. Accordingly, it was incorrect for the purpose of the cost study to average all such costs together without distinctions as to the customer groups.

Respondent’s cost study fails for other reasons. For instance, it claims an “Investment Cost” difference of $0.0404 per case. Respondent apparently kept larger inventories of Borden brand evaporated milk than of the private label. In its analysis, it concludes that the money invested at 8% resulted in an inventory cost of $0.0835 per case for Borden brand and an inventory cost of $0.0257 per case for private jabel.2 The fallacy in this position is that the so-called “Investment Cost” is not an actual, incurred cost at all; it amounts to a return on capital investment. Accordingly, this item is rejected for cost justification purposes. Cf. Thompson Products, Inc., 55 F.T.C. 1252, 1265-1266 (1959).

Another item of cost claimed by respondent is the brokers’ commission. This item is also rejected. In our view a savings in cost resulting from the elimination of brokers’ commissions are not allowable cost savings under Section 2(a). Cf. Federal Trade Commission v. Henry Broch & Co., 363 U.S. 166, 171 N. 18 [6 S. & D. 800] (1960). 8 The cost analysis set forth above refers to “Investment Costs” of $0.0972 and $0.0568 for Borden brand and private label, respectively. These figures include claimed additional amounts for investment in accounts receivable. The figures for investment in inventories alone are $0.0835 for Borden brand and $0.0257 for private label. THE BORDEN CO. 181 130 Opinion We conclude that respondent’s cost analysis is inadequate to cost justify its discriminatory prices and that the examiner erred in his conclusion that respondent had shown full cost justification. The hearing examiner erred in dismissing the complaint. The record fully supports a finding of price discrimination in violation of Section 2(a) of the Clayton Act, as amended, and an order to cease and desist the practice should be entered. It is necessary, therefore, to consider the form of such cease and desist order. V. Form of Order While this matter involves primary line injury to competition (as well as injury to competition with respondent’s customers), it was . not a geographic price difference which resulted in such injury. Rather, it was the different prices quoted for the like products sold under the Borden brand and under private label without regard to geography. Thus, the type of order which would regulate the relationship of prices geographically does not appear to be necessary in this case to correct the violation found. To put it another way, the price discrimination found is not the result of differences in price which may exist between plant locations such as those in the South and those in the Midwest. It results from the price discriminations occurring between brands in each market where private label is sold in competition with Borden brand. To eliminate such price discrimination so far as it is not justified will put the Midwest competitors on an equal competitive footing in regard to the sale of private label. An effective order to prevent such price discrimination between Borden brand and private label customers will remove the cause of the adverse competitive effects in the primary line as found herein. It will also prevent the injury to competition in the lines of commerce in which respondent’s customers are engaged. In the circumstances of this case, we do not believe it necessary to enter an order of any broader scope.

There are readily recognizable actual cost differences between Borden brand and private label which will justify differences in price. We have previously outlined the principles to be employed in determining the differences which may be so justified. It will be necessary for respondent, if it chooses to rely on cost justification, to first classify its customers in groups of reasonable homogeneity and to base its differences in price on the cost savings for each such group. » %49-5387—67——_13 Findings 62 F.T.C.

The prohibition we will enter in this case will order respondent in connection with the sale of food products in commerce to cease and desist from discriminating in the price of such products of like grade and quality by selling to any purchaser at net prices higher than the net prices charged any other purchaser who, in fact, competes with the purchaser paying the higher prices or with a customer of the purchaser paying the higher prices. Respondent’s appeal is denied and the appeal of counsel supporting the complaint is granted. The initial decision of the hearing examiner is vacated and set aside and we are issuing our own findings, conclusions and proposed order to cease and desist in lieu thereof. Commissioner Elman dissented to the decision herein and Commissioners Anderson and Higginbotham did not participate in the decision herein.

Frnpines as TO THE Facts, Conciusions, AND ProposEeD ORDER Novemper 28, 1962 Pursuant to the provisions of an Act of Congress entitled “An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes”, approved October 15, 1914 (the Clayton Act), as amended by the Robinson-Patman Act, approved June 19, 1986 (15 U.S.C., Sec. 13), the Federal Trade Commission on April 22, 1958, issued and subsequently served upon respondent its ’ complaint in this proceeding, charging said respondent with violation of subsection (a) of Section 2 of the Clayton Act, as amended. Respondent’s answer to the complaint was filed June 23, 1958S. Hearings were held before a hearing examiner of the Commission and testimony and other evidence in support of and in opposition to the allegations of the complaint were received into the record. The hearing examiner, in his initial decision filed December 15, 1961, held that the acts and practices of the respondent, as found in his initial decision, were not in violation of the law as charged and he accordingly ordered the complaint dismissed. Counsel supporting the complaint and respondent have filed cross-appeals. The Commission having considered said appeals and the briefs and oral argument in support thereof and in opposition thereto, and the entire record herein, and having granted the appeal of counsel supporting the complaint and denied the respondent’s appeal, and having vacated and set aside the initial decision, now makes this its findings as to the facts, conclusions drawn therefrom and proposed order, which, together with the accompanying opinion, shall THE BORDEN CO. 183 130 Findings be in lieu of the findings, conclusions and order contained in the said initial decision.

FINDINGS AS TO THE FACTS 1. Respondent, The Borden Company, is a corporation organized, existing and doing business under the laws of the State of New Jersey, with its principal office and place of business located at 350 Madison Avenue, New York 17, New York.

2. The respondent is engaged in the manufacture, processing, distribution and sale of an extensive variety of food, dairy and chemical products in the United States and abroad. Its total sales in 1957 amounted to $931,220,662. The only product with which we are here concerned is evaporated milk. Substantial quantities of this product have been shipped from respondent’s various plants to purchasers thereof located in states other than the states of manufacture. In 1956, respondent’s sales of evaporated milk exceeded $30,000,000. 3. Respondent has been producing and selling Borden brand evaporated milk since 1892. The respondent’s carload and pool-car delivered prices for Borden brand evaporated milk during the period of time included in the complaint were as follows: Per case tall 488 January 1, 1956, to May 14, 1956___ : $6. 05 May 15, 1956, to March 29, 1957___.--_-___-_------_----- 6. 30 March 80, 1957, to November 18, 1957. 6. 45 November 19, 1957, to March 31, 1958 ~- : -- 6.60 The less-than-carload prices throughout this period of time were 5 cents higher per case of tall 48s. The terms of sale have included a cash discount of 2 percent if paid within 10 days after sale, and a swell allowance of one-tenth of 1 percent to cover damaged goods sold to retail buyers. Such sales of Borden brand evaporated milk were made principally to wholesalers or jobbers, and to chainstores. 4. In about 1938, the respondent began packing its evaporated milk under the private ‘labels of the purchasers as well as under its own Borden brand. During the period of time with which we are concerned, January 1, 1956, to March 31, 1958, the prices of such milk were determined by’ a pricing formula applicable to all of respondent’sprivate label customers. This formula included the cost of the buyer’s label, the cost of hauling the milk from the dairy farm to respondent's plant, the average monthly cost of the milk, and, finally, a factor referred to as “COTM,” or “Cost Other Than Milk,” which included the cost of additives such as Vitamin D, the cost of cans, the plant processing, overhead cost, and a gross margin or profit factor, The 184. FEDERAL TRADE COMMISSION DECISIONS Findings 62 F.T.C.

respondent’s private label prices determined in accordance with the foregoing formula, sometimes referred to as the “Cost plus pricing formula,” were net f.o.b. plant. No cash or other discount was allowed the purchaser of private label milk, and all purchasers buying from the sale plant at or about the same time paid the same price. These prices, however, varied from one to another of respondent’s plants, and from month to month in conformance with the changing price of milk paid to the farmers. A further factor of variation was respondent’s periodic revision of its gross margin of profit, which was reviewed approximately every six months, and adjusted to the changing conditions of respondent’s general operation. 5. In the course and conduct of its aforesaid business, respondent has been and is now engaged in commerce, as “commerce” is defined inthe Clayton Act, as amended.

6. The evidence shows that there was no difference in the physical composition or quality of the evaporated milk sold and delivered by the Borden Company under its own label, and that sold f.o.b. plant under the private labels of its customers. In both instances the milk was processed in the same manner to meet both Federal standards and Borden’s own quality standards. Milk which was qualitatively the same was placed in cans which were qualitatively the same. The method of processing the raw milk fixed both its quality and its grade, which could not thereafter be changed, either by attaching to the various cans labels bearing different brand names, or by selling the variously labeled cans at different prices. Respondent’s evaporated milk, regardless of how it was labeled or at what price it may have been sold, either at respondent’s plant or in the market place, was milk of “like grade and quality” within the meaning of Section 2(a) of the Clayton Act, as amended.

7. Numerous invoices in the record showing sales to different customers disclose that during the period of time included in the complaint, the f.o.b. price of respondent’s private label evaporated milk at its various plants was consistently and substantially lower than the delivered price of respondent’s Borden brand evaporated milk. The transactions evidenced by these invoices occurred at one or another of respondent’s nine plants, located, respectively, at Fort Scott, Kansas; Wellsboro, Pennsylvania; Modesto, California; Albany, Oregon; Dixon, Illinois; New London, Wisconsin; Perrinton, Michigan; Lewisburg, Tennessee; and Chester, South Carolina. The prices of Borden brand and private label brand evaporated milk prevailing at two of respondent’s plants during the time involved illustrate the differences in price, as follows:

THE BORDEN CO. 185 130 Findings Chester, South Carolina, plant Delivered price, F.o.b. price, pri- Borden brand milk vate label milk (per case) (per case) 1957:

June___.-_----------------------------- $6. 45 $4. 8942 July___.------------------------------ 6. 45 4. 9051 August_._..--------------------------- 6. 45 4, 9210 September__.__-.---------------------- 6. 45 4, 8660 October___._-_-.-.-------------------- 6. 45 4. 8166 November_._._-.-------------+-------- 6. 45 4, 9361 December-_-.---.-.-------------------- 6. 60 4, 9741 January._...-------------------------- 6. 60 5. 0227 February ._.--.------------------------ 6. 60 5. 0289 March__._-..----.-------------------- 6. 60 4, 9436 Lewisburg, Tennessee, plant Delivered price, F.o.b. price, pri- Borden brand milk | vate label milk (per case) (per case) 1956:

. _ August.___._-.-.---------------------- $6. 30 $4. 7363 September___-_.----------------------- 6. 30 4, 81988 ; 6. 30 4, 8321 October______.-.-------.-------------- 6. 30 4, 7718 6. 30 4, 8418 November_._-._.-------.-------------- 6. 30 4, 7411 6. 30 4, 8211 6. 30 4. 8311 1957:

January _.._.__..-.-.------------------ 6. 30 4, 9837 6. 30 5. 0737 February ......-..-.------------------- 6. 30 5. 0478 6. 30 4, 9628 6. 30 5. 0578 March.._.....--_--------------------- 6. 30 4, 9766 6. 30 4, 8966 6. 30 4, 9666 6. 30 4, 9866 6. 30 5. 0566 April__....2-2-------- e+ -------- 6. 45 4, 8742 6. 45 4, 9542 May-_----..-------------------------+- 6. 45 4, 8389 6. 45 4, 9189 June..____----.-------- +--+ -- +--+ -- 6. 45 4. 8749 July___--------2------------- = ----- 6. 45 4, 9232 6. 45 4, 8332 August_.....-------------------------- 6. 45 4. 8327 September____...---------------------- 6. 45 4, 8744 October__.-__--.---_.------------------ 6. 45 4. 9738 November___-_--_---------+------------ 6. 45 4, 966 December. ___..----------------------- 6. 60 4.999 1958:

January _....-_---.-------------------- 6. 60 5. 0273 February - 6. 60 5. 0072 March_____-_..--_--------------------- 6. 60 4. 9436 6. 60 4, 9188 Findings 62 F.T.C.

The record shows that these differentials are not accounted for by differences in the cost of transportation arising from the f.o.b. deliveries and the destination deliveries.

8, It is found that respondent, while engaged in commerce and in the course of such commerce, discriminated in price between different purchasers of commodities of like grade and quality. 9, Representatives of seven relatively small canners of evaporated milk located in the Midwest testified in support of the complaint. Although each of these seven milk canners sold evaporated milk both under their own labels and under private labels, by far the larger percentage of their evaporated milk business consisted of the sale of private label milk. None of them advertised or sold their product on a national level, and all of them sold their private label evaporated milk, with minor exceptions, on a delivered-price basis. ‘These companies all competed with respondent in the sale of evaporated milk. These and other Midwestern competitors will sometimes hereinafter be referred to as the Midwest competitors. 10. These testifying Midwest competitors and their plant locations are as follows:

Company and Plant Locations Page Milk Company, Merrill, Wisconsin, and Coffeyville, Kansas (Page). United Dairy Company, Barnesville, Lodi and Waterford, Obio (United). Westerville Creamery Company, Covington, Ohio (Westerville). Gehl Guernsey Farms, Germantown, Wisconsin (Gehl). Dairyland Cooperative Association, Juneau, Wisconsin (Dairyland). Defiance Milk Products Company, Defiance, Ohio (Defiance). Nashville Milk Company, Nashville, Obio, a wholly owned subsidiary of Defiance (Nashville).

11. Sales volumes on a tall can basis for the testifying Midwest competitors individually and for the respondent for the years 1955— 1957 were as follows:

Packer 1955 1956 1957 Page...--------------------------- 720, 884 726, 443 735, 803 United____-_----------------------- 887, 651 1, 041, 041 958, 3738 Westerville......------------------ 701, 847 593, 739 589, 242. Gehl_____-.----------------------- 108, 924 168, 479 285, 544 Dairyland_..---------------------- 25, 766 49, 404 *None Defiance_._.__--.----------------- 739, 886 699, 953 694, 166 Nashville._.....------------------- 132, 863 150, 645 158, 811 Respondent. ---------------------- 5, 285, 852 5, 010, 205 5, 419, 108 *Discontinued evaporated-milk production in April 1957. THE BORDEN CO. 187 130 Findings United States Department of Agriculture Dairy Statistics in the record show supply and distribution (which approximates total commercial sales) of canned evaporated milk in the United States as follows:

{In millions of pounds] 1950_-_-_----_-__- 2, 720 | 1958_-__.----- 2, 407 | 1956_--.----_.---_ 2, 257 1951_.---_----_--_- 2, 456 | 1954_.--_--_______ 2, 862 | 1957_---- 2, 204 1952___------____. 2, 406 | 1955__-..-------___ 2, 297 On the basis of 4814 pounds to the tall case, the total sales volumes in tall cases for the most recent three years of those mentioned were: 1955, 52,804,598 ; 1956, 51,862,069; 1957, 50,666,667. 12. The record also reveals that in recent years a number of companies have gone out of the evaporated milk business. The concerns which have discontinued the production of evaporated milk since 1950 include the following: , _ Dairyland Cooperative Association (Dairyland Cooperative), Juneau, Wisconsin (discontinued April 1957).

Amboy Milk Company, Amboy, Illinois (discontinued early in 1958). Dean Milk Company (discontinued 1955 or 1956). Fort Dodge Creamery Company.

Rochester Dairy Company, Rochester, Minnesota (discontinued 1954 or 1955).

Hillpoint Creamery Company, Reedsburg, Wisconsin. Dairyland Distributors Cooperative, Watertown, Wisconsin. Producers Creamery, Springfield, Missouri (discontinued in 1956). Reich McJunkin, Meadville, Pennsylvania.

Wilson Milk Company, Indianapolis, Indiana. Also, between 1956 and 1958, Consolidated Badger Cooperative restricted its evaporated milk operation to Wisconsin and the upper part of Michigan. There have been no new concerns going into the evaporated milk business.

13. When respondent expanded its operations and sales in the private label evaporated milk field beginning about 1956, Midwest competitors began to lose customers and sales to respondent. In certain instances, sales were lost to respondent indirectly. Some of the lost customers switching to respondent’s private label evaporated milk made their purchases of the product through Biddle Purchasing Company, New York City, an organization which performs a buying service for wholesale grocers. A partial list of specific accounts lost includes:

Findings 62 F.T.C.

Competitors: Account lost Page___.--___. Kembell Grocery Co., Fort Worth, Texas. United_________. The Penn Fruit Co., Philadelphia, Pennsylvania. Brockton Public Markets, Brockton, Massachusetts. Westerville_____- Colonial Stores, Thomasville, Georgia. Thomas & Howard Co., Columbia, South Carolina. Gehl.___---- Central Retailer Owned Grocers, Chicago, Illinois. Dixie Home Stores, Greenville, South Carolina. Dairyland______. The Penn Fruit Co., Philadelphia, Pennsylvania. Klein’s Supermarket, St. Paul, Minnesota.

Defiance____.___ Central Retailer Owned Grocers, Chicago, Illinois. Colonial Stores, Raleigh, North Carolina.

Nashville_______. Central Retailer Owned Grocers, Chicago, Illinois. Colonial Stores, Thomasville, Georgia.

Winn Dixie, Tampa, Florida, and others for various of the above competitors.

14. The full amounts of the losses by Midwest competitors to respondent can only be estimated based on the prior purchases of each lost account. By so doing, the estimated loss was at least 241,815 cases, and the actual loss may well have been higher. The sales losses were as follows for each testifying Midwest competitor : Cases lost Competitor: to respondent Page. - 8, 650 United - - 14, 168 Westerville. 38, 397 Gehl_ - 25, 434 Dairyland_ - 22, 320 Defiance. 72, 806 Nashville a a 65, 040 Total ---- - 241, 815 15. The loss of business was substantial, particularly for some of the competitors. For instance, Dairyland Cooperative, which subsequently discontinued evaporated milk production, lost the Topco Associates’ account in 1956 to respondent. The total purchases through this account in 1956 were $22,320. Dairyland Cooperative’s total evaporated milk sales in 1956 were only 49,404 cases. The loss was about one-half its sales for the period. Witness DeMaster testified that Dairyland Cooperative’s decline in sales and eventual discontinuance of business was due to the freight rate advantage of plants to the East. However, it was not until the time that respondent expanded in the private label field, applied its discriminatory prices and took a substantial share of the firm’s business that it finally discontinued production of the product. Although other factors apparently were involved, the finding is that respondent’s price structure to a significant extent led to Dairyland’s discontinuance.

THE BORDEN CO. 189 180 Findings 16. The entry and expansion of respondent in the private label field and its pricing methods has put severe pressure on its Midwest competitors. Mr. Page, of Page Dairy Company, testified : * * * The entry of the Borden Company into the private label business and the manner in which they have been operating has placed a severe competitive pressure on the entire unadvertised brand of private label milk structure and that has, in my opinion, largely been felt in the way, as far as we are concerned, has largely been felt in the way of a lowered market price with which we must contend.

Mr. Anderson, of United Dairy Company, referred to the same situation in his testimony as follows:

The competition has forced our prices down from the level we had previous to that and some of the competition has been selling on a different basis, on an f.o.b. basis and it is made highly competitive because of those factors. 17. Certain of the testifying competitors gained in sales volume in the period covered by the complaint. At least part of these increases, however, was obtained from other Midwest companies which had ceased operations. Witness Page, of Page Dairy Company, testified that he attributed the increase of his company principally to trade that had previously been handled by Producers Creamery of Cabool, Missouri, which company went out of business. Witness Anderson, of United Dairy Company, testified that the increase of that company was accounted for by additional business received from former customers of Wilson Milk Company obtained when that company sold its evaporated milk business to Dean Milk Company, of Chicago. Witness Diehl, of Defiance Milk Products Co., testified that increases for both Defiance and Nashville Milk Company (a subsidiary) were in part due to business gained from evaporated milk plants that had gone out of business. To a considerable extent, therefore, the increases were mere windfalls and cannot be expected to reoccur on a regular basis. Sooner or later the full effect of respondent’s discriminatory price structure can be expected to take its full toll. 18. It undoubtedly is a factor to be considered in this matter, although not a crucial one, that plants in the Midwest were disadvantaged as to the Eastern and Southeastern markets over plants located in the East and Southeast because of increased freight costs. Indicative of this is the difficulty which Dairyland Cooperative had in competing for markets in the East. However, there is no clear over-all picture in the record as to the extent or the significance of possible freight advantages which respondent might have had over competitors. It is clear from the record, based on facts shown and the reasonable inferences to be drawn therefrom, that plant location advantage, if an element in the switching of customers to respondent, was only one of several considerations, and that another important element was the Findings 62 F.T.C.

lower (discriminatory) prices on the private label product compared to Borden brand.

19. This record does not show a complete market picture for the evaporated milk industry, but it does develop the competitive situation as between respondent and the Midwest competitors. Respondent by comparison to these competitors is a large and powerful concern. It has broad resources in that it sells a wide variety of food products both at home and abroad. Moreover, its sales of evaporated milk are principally under Borden brand, whereas the testifying competitors generally indicated that their evaporated milk sales were mostly private label. In other words, the testifying competitors were considerably more dependent upon private label evaporated milk sales than the respondent.

20. Respondent’s prestige and power in the market is illustrated by the fact that private label customers came to respondent seeking a source of supply. On the other hand, the Midwest competitors are small companies with relatively small sales volumes of evaporated milk compared to the sales of respondent. They maintain a rather precarious hold in the market place. As we have seen, sales for evaporated milk diminished in the period disclosed by the record. Since 1950, at least ten concerns, mostly in the Midwest, have discontinued production of evaporated milk. There are no new concerns coming into the business. Under such circumstances, little is needed to shift the competitive balance. Respondent came into the market using a discriminatory pricing structure. This has put a severe strain on the smaller competitors as some of them testified. In fact, the discontinuance of Dairyland Cooperative is tied to respondent’s expansion in the field and its use of discriminatory prices. The testifying Midwest competitors all lost accounts to the respondent and it appears that the shift of business has been permanent.

21. In this market setting, respondent’s price discrimination is a clear threat to the entire competition provided by the Midwest concerns. Ifthe price discrimination is continued, the elimination or the serious impairment of competition from small competitors in the industry is likely. This is enough to satisfy the injury requirement of the Act. We find and conclude that the effect of respondent’s discriminatory pricing may be substantially to lessen or to injure, destroy or prevent competition with respondent, i.e., there is a likelihood or a reasonable probability of substantial competitive injury in the primary line.

22. There is also a showing in the record that the effect of the discrimination may be substantially to lessen or to injure, destroy or prevent competition with customers of the person who granted the discrimination. This would be competition with respondent’s whole- THE BORDEN CO. 191 130 Findings sale customers and with its retail customers. The differences in prices to customers, including competing customers, is well documented by the evidence. The following are examples:

Customer Date Borden brand | Private label delivered price] f.o.b. price* Hartley Grocery, Columbia, §.C. 6.45 |_.-------- (wholesaler) __....---.-.-.--------- July 18, 1957 Biddle Purchasing Co., at Thomas & Howard, Columbia, §.C. (wholesaler)__| July 18,1957 |_.-.----_- **4, 9051 Rawl Distributing Co., Columbia, S.C.

(wholesaler) _......--...-.----.----| July 8, 1957 6.45 |_--------- Rawl Distributing Co., Columbia, S.C_._| Mar. 4, 1958 6.60 |_.-------- Biddle Purchasing Co., at Thomas & Howard, Columbia, 8.C_...--_-_-___-- Feb. 4,19858 |.-_-_-__-- 5. 0289 Piggly Wiggly Carolina Co., Ince., {fan- 10, 1958 |_-..------ 5. 0227 Columbia, $.C. (chain retailer). Mar. 7,1958 |.-___-__-- 4, 9436 *Prices do not include cost of labels.

**The purchase in this instance was made by Thomas & Howard, Chester, S.C., for Chester & Howard at Columbia, S.C., through the Biddle Purchasing Co Biddle was paid $5.04 per case and] Thomas & Hows ard, Columbia, S.C., was billed by its affiliate at a $0.17 per case markup to cover cost of labels and handling for a total of $5.21 per case.

23. The testimony from wholesalers as well as retailers disclosed the extremely low or nonexistent profit margins on evaporated milk. In most instances, wholesalers and retailers testified that evaporated milk was handled for accommodation to customers and not for profit. In fact, evaporated milk is used as a loss leader which indicates that discriminatory prices made it difficult for the unfavored customers to compete not only because of higher prices on that item but because it would tend to draw away customers for other products as well. Wholesale and retail witnesses testified to the effect that a lower price from the producer, such as the price on respondent’s private label goods, would have been of great value in improving profit margins and assisting in meeting the competition on this item. The following is illustrative of pertinent testimony on the subject: Woodrow W. Power, Power Food Store, Inc., Columbia, South Carolina (retailer) (R. 454) :

Q. Now, you mentioned a short while ago, Mr. Power, you are in competition with various other stores in your vicinity like Piggley Wiggley, A&P, Colonial and the like. Now, I assume that you follow their sales advertising policies and their merchandising policies? A. Yes.

Q. Have you found them advertising private label milk at a price less than that charged by you for brand label? , A. Yes.

Q. Or for any evaporated milk which you handle? A. Yes.

Findings 62 F.T.C.

Q. Have you found that you could meet that price that is charged by them? A. No, sir, I can’t buy it that cheap.

Q. Well, if you were able to obtain the private label evaporated milk from Hartley or Merchants at a price say of $5.25, $5.30, would you be interested in it? A. Yes.

Daniel Shumpert, Shumpert Food Sales, West Columbia, South Carolina (retailer) (R. 478):

Q. Why do you say a nickel or a dime would have been of help? In other words, any differential of a cost of a nickel or a dime for private label. A. It puts me in a position to meet competition prices more. The lower I can buy the cheaper I can sell it.

Harold A. McFeely, R. P. Turney & Company, Greer, South Carolina (wholesale grocery) (R. 563, 564) :

Q. Well, is the explanation you have just made, does it apply to the reason or the reason why you would have been interested in the private label evaporated milk? Just exactly why would the private label have been important to you? A. I sell government agencies, state and local county quite a bit of merchandise for their chain gang camps and prisons and I have never been able to get that business due to the fact that I had only advertised brands to quote on and in checking at the offices I find that this milk under this label in one particular case has been getting the business for a year or so. Q. Do you remember the name on the label? A. I couldn’t touch it. Yes, Red and White, put out by Thomas & Howard is a brand I see in Greenville now in the County Home and various different institutions and it is sold to them on the basis of what you said a few minutes ago, $5.25 or $5.30, this milk is sold at 25 to 30 cents a case profit and when I quoted $6.60 I did not receive any business and I was out of line over a dollar per case. So if I had secured the business at $6.60 it wouldn’t have meant anything, but if I had had the private label milk I could have competed in the market and would have been able to get the business with that price. 24. It has been shown, in short, that some purchasers have paid less than their competitors for purchases of like goods from respondent and that the difference is, in the circumstances, substantial. We find and conclude, therefore, that the effect of respondent’s price discrimination may be substantially to lessen or two injure, destroy or prevent competition with respondent’s customers.

25. Respondent has submitted a cost study in an attempt to cost justify the price discrimination case shown pursuant to the cost proviso in Section 2(a). The finding is that respondent’s cost study is inadequate and unacceptable primarily because of the broad averaging employed. It is also found that the alleged items of expense appearing as “Investment Cost” and “Brokers’ Commissions” were improperly listed as costs for the purpose of cost justification under the amended Clayton Act.

THE BORDEN CO. 193 130 Opinion CONCLUSIONS The Federal Trade Commission has jurisdiction of the subject matter of this proceeding and of the respondent. The acts and practices of the respondent, as herein found, violate subsection (a) of Section 2 of the Clayton Act, as amended.

PROPOSED ORDER Itis ordered, That respondent, The Borden Company, a corporation, its officers, representatives, agents and employees, directly or through any corporate or other device in, or in connection with, the sale of food products in commerce, as “commerce” is defined in the amended Clayton Act, do forthwith cease and desist from discriminating in the price of such products of like grade and quality by selling to any purchaser at a price higher than the price charged any other purchaser who, in fact, competes with the purchaser paying the higher price or with a customer of the purchaser paying the higher price. The term “price” as used in this order means the net price after all discounts, including cash discount, rebates or other allowances, including damaged goods allowance, have been deducted. It is further ordered, That respondent, The Borden Company, shall, within sixty (60) days after service upon it of this order, file with the Commission a report, in writing, setting forth in detail the manner and form in which it has complied with the order to cease and desist. Commissioner Elman dissenting and Commissioners Anderson and Higginbotham not participating.

Opinion on Responpvent’s OpsEcrions TO ProroseD ORDER JANUARY 30, 19638 Respondent, as provided in the Commission’s order issued November 28, 1962, has filed its objections to the Commission’s proposed order, a statement of its supporting reasons and its alternative form of order. Counsel supporting the complaint has filed a reply thereto, and respondent has also filed a further statement. Respondent first requests that the Commission delete “food products” and substitute “evaporated milk.” Evaporated milk, as the record shows, is but one of a number of food products manufactured and sold by respondent. Respondent sells food items such as Borden’s Malted Milk, Borden’s None-Such Mince Meat, Borden’s Instant Hot Chocolate, Borden’s Instant Coffee and Borden’s Starlac (a powdered milk product), toname just a few. Borden’s line of food products also includes items in the dairy field such as cheese, ice cream and fluid milk and other special products such as infant foods. Since the same or a Final Order 62 F.T.C.

similar price discrimination practice could be used as well for such other products, the order, to be effective, was made to include all “food products.” See WViresk Industries, Inc. v. Federal Trade Commission, 278 F. 2d 337, 343 [6 S. & D. 727] (7th Cir. 1960), cert. denied 364 US. 883; Vanity Fair Paper Mills, Inc. v. Federal Trade Commission, 311 F. 2d 480 [7 S. & D. 588] (2d Cir. 1962), 31 L.W. 2284. Respondent’s request to narrow the order to cover only evaporated milk is rejected. Respondent suggests the inclusion in the order of the following words: “in any case where (a) the lower price undercuts the price at which the purchaser buying at such lower price may buy from another seller, and (b) the lower price has not been offered to the purchaser buying at the higher price.” This modification is rejected as inappropriate in light of the facts in this case and the type of order issued. Respondent lastly requests that the following definition be included in the order: “The term ‘purchaser’ as used in this order means the person to whom the respondent sells and from whom the respondent receives payment.” It asserts that this suggested modification is for the purpose of clarifying a claimed ambiguity as to the meaning of the proposed order. The order as written covers price discriminations where the purchaser paying the higher price or his customer competes with the purchaser paying the lower price. We believe this order is clear and explicit in its application to the facts of this case. In the instance respondent mentions as resulting in the asserted ambiguity, the Commission found that wholesaler Thomas & Howard purchased the shipment in question through Biddle Purchasing Company. An order defining purchaser as requested could be interpreted as excluding the actual purchaser where payment is made through an agent or representative. That would be an inappropriate result. If a question should arise in the future as to the relationship between respondent and a party from which it receives payment for the shipment of goods, the matter can best be resolved under regular compliance procedures upon the basis of the facts - shown in the particular instance. We, therefore, reject the respondent’s request for defining purchaser in the order. Commissioner Elman dissented to the decision herein and Commissioners Anderson and Higginbotham did not participate in the decision herein.

Finan Orver Respondent having filed, pursuant to the Commission’s order of November 28, 1962, objections to the Commission’s proposed order in this proceeding, reasons in support thereof, and a proposed alternative order, complaint counsel having filed a reply to the objections and respondent having filed a further statement with respect thereto; and L & M INTERNATIONAL, INC., ET AL. 195.

130 Complaint The Commission, for the reasons stated in the accompanying opinion, having rejected respondent’s objections and having further determined that its proposed order to cease and desist should be issued as the final order of the Commission :

It is ordered, That respondent, The Borden Company, a corporation, its officers, representatives, agents and employees, directly or through any corporate or other device, in, or in connection with, the sale of food products in commerce, as “commerce” is defined in the amended Clayton Act, do forthwith cease and desist from discriminating in the price of such products of like grade and quality by selling to any purchaser at a price higher than the price charged any other purchaser who, in fact, competes with the purchaser paying the higher price or with a customer of the purchaser paying the higher price. The term “price” as used ‘in this order means the net price after all discounts, including cash discount, rebates or other allowances, including damaged goods allowance, have been deducted. lt is further ordered, That respondent, The Borden Company, a corporation, shall, within sixty (60) days after service upon it of this order, file with the Commission a report, in writing, setting forth in detail the manner and form in which it has complied with the order to cease and desist set forth herein.

Commissioner Elman dissenting and Commissioners Anderson and Higginbotham not participating.