Amendment to Trade Regulation Rule Concerning Retail Food Store Advertising and Marketing Practices

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BILUNG CODE 7510-01-M FEDERAL TRADE COMMISSION 16 CFR Part 424 Amendment to Trade Regulation Rule Concerning Retail Food Store Advertising and Marketing Practices AGENCY: Federal Trade Commission. ACTION: Final amendments to trade regulation rule.________________________ s u m m a r y: The Federal Trade Commission issues a final amendment to 16 CFR part 424, which is retitled Retail Food Store Advertising and Marketing Practices as amended. The trade regulation rule, as amended, requires retail food stores to have adequate stock to meet reasonable demand for items advertised for sale at specified prices unless the store publishes in the advertisement a clear and adequate disclosure that quantities are limited. Additionally, the amended rule provides that, even when stores do not publish a limited quantity disclaimer, it is not a violation of the rule, when unavailability of an advertised item does occur, if the store (1) ordered sufficient quantities of the item to meet reasonably anticipated demand; (2) offers a raincheck for the unavailable item; (3) offers a substitute for the unavailable item at the advertised price or at a comparable price reduction; or (4) offers other compensation at least equal to the advertised value.

This notice contains a Statement of Basis and Purpose for the amendments to the Rule, which incorporates a regulatory analysis, and the text of the Rule as amended.

EFFECTIVE DATE: August 28,1989. ADDRESS: Requests for copies of the Rule and the Statement of Basis and Purpose should be sent to the Public Reference Branch, Federal Trade Commission, 6th Street and Pennsylvania Avenue NW., Washington, DC 20580.

FOR FURTHER INFORMATION CONTACT: Walter Gross, Division of Service Industry Practices, Bureau of Consumer Protection, Federal Trade Commission, Washington, DC 20580, (202) 326-3319. List of Subjects in Part 424 Retail food stores, Trade rules. / Rule8 and Regulations By direction of the Commission. Donald S. Clark, Secretary.

STATEMENT OF BASIS AND PURPOSE I. Introduction A. Overview o f the Rule The Commission promulgated the Retail Food Store Advertising and Marketing Practices Rule 1 in May, 1971 concluding that "on the basis of the entire public record * * * the issuance of the Trade Regulation Rule with respect to the unavailability and mispricing of advertised food and grocery products is required by that record, and is in the public interest.” 2 The Rule required retail food stores to have every advertised item readily available for sale at or below the advertised price. If an advertised item was not available, the Rule required that grocers be able to document that they ordered and received sufficient quantities of the item to meet reasonably anticipated demand. The Rule permitted disclosures of some restrictions on availability, such as "Available only at stores featuring delicatessen departments.” 8 Between 1973 and 1978, the Commission entered nine cease and desist orders against food chains charged with failing to have advertised items available. Some of the complaints in these cases charged violations of the Rule; others charged that conduct in violation of the principles expressed in the Rule violated section 5 of the Federal Trade Commission Act.4 1 16 CFR part 424 (hereinafter cited as “the Rule” or “the current Rule”). * 38 FR 8777 (hereinafter cited as “SBP”). * The Rule included an exception to the general availability requirement—a provision permitting “clear and conspicuous disclosure * * * as to all exceptions and/or limitations or restrictions with respect to stores, products or prices otherwise included within the advertisements.” A 1975 staff interpretation of the Rule’s disclosure provision concluded that advertisements containing a notice that supplies of a number of items available at each store location, would not excuse a retailer from the Rule's requirement that retailers must have sufficient quantities on hand to meet demand. 4 Food Fair Stores, Inc., 90 F.T.C. 491 (1977); Fisher Foods, Inc.. 90 F.T.C. 473 (1977); Shop Rite Foods. Inc., 90 F.T.C. 500 (1977); Kroger Co., 90 F.T.C. 459 (1977); Mayfair Supermarkets, Inc., 87 F.T.C. 286 (1976); Pacific Gamble-Robinson Co.. 88 F.T.C. 1034 (1975); Baza’r, Inc., 86 F.T.C. 1028 (1975); The Great Atlantic and Pacific Tea Company, Inc., 85 F.T.C. 601 (1975); Albertsons, Inc., 85 F.T.C. 500 (1975). Two additional Orders. Safeway Stores, Inc., 91 F.T.C. 975 (1978), and Fred Meyer, Inc, 87 F.T. C. 112 (1976) dealt only with mispricing.

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3iî457 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations III! IiH I.....nirriir n r m wr------« t u — nnriiM » . i i . . ■» _________________ The Commission is promulgating the amended Rule in order to reduce costs on the retail food industry that are passed along to consumers. The Commission has concluded that these costs, though difficult to measure precisely, exceed the benefits the original Rule may have provided to consumers. The Commission has also concluded that the amended Rule will not significantly reduce consumer protection because injury caused by such instances of unexpected unavailability as do occur will be substantially mitigated by the amended Rule’s requirement that consumers be offered rainchecks or comparable substitute items.

B. Background o f this Proceeding In 1980, the Commission published 8 for comment A Study of Consumer Response to the Availability of Advertised Specials, which describes the results of a survey that was conducted for the Commission by an independent research organization, Market Facts, Inc.6 The findings of the Market Facts Study suggested that consumers realize little, if any, benefit as a result of the Rule. Comments by various grocers on the published Study indicated that costs of complying with the Rule were far in excess of any benefits that had been identified.7 On December 10,1984, the Commission published an Advance Notice of Proposed Rulemaking (“ANPR”).® The ANPR indicated that the Commission was seeking further information on the costs and benefits of the current Rule as well as comments on whether the Commission should repeal the Rule, 8 45 FR 59634 (1980).

6 Market Facts, Inc., A Study of Consumer Response to the Availability of Advertised Specials, (1979) R-B-l* (hereinafter cited as "Market Facts Study” or “Study”).

*In this document, references made to material contained in the rulemaking record are made in the footnotes using the following abbreviations: Tr.—The transcript of the hearings. HX.—Exhibits presented and accepted into evidence at the hearings. R.—Materials submitted by the Commission staff or interested parties as well as materials placed on the record at the direction of the Presiding Officer. References to documents contained in the written (“R” portion) of the rulemaking record show the category in which the document was placed, the number of the document, and the internal page number of the document on which tke cited reference appears. The reference number for the rulemaking record itself is 215-65. 1 See Bureau of Consumer Protection, Federal Trade Commission, Retail Food Store Advertising and Marketing Practices: Final Staff Report to the Federal Trade Commission on Proposed Amended Trade Regulation Ride 7,9 (1986) R -O -l, (hereinafter cited as "Staff Report” in text, "S.R.” in notes).

* 49 FR 48059 (1984).

amend it or make no change.® Comments received in response to both the ANPR and the staffs economic analysis indicated strong consumer opposition to repeal of the Rule. The staff subsequently recommended that the Commission reduce the costs imposed by the Rule by amending its provisions to allow grocers greater flexibility in disclosing in advertising when there are only limited quantities of advertised items and to permit additional defenses to unavailability.10 The Commission then published a Notice of Proposed Rulemaking (“NPR”) on October 24,1985.11 The major amendments proposed in the NPR permitted grocers to (1) publish clear and adequate limited quantity disclosures in their advertising and (2) defend against instances of unavailability by demonstrating that they provide rainchecks, substitutions of items of comparablevalue or other compensation at least equal to the advertised value.

A ninety-day comment period on the NPR concluded on January 24,1986. The Commission received 35 comments on the NPR, including two from industry trade associations, three from retail grocers, seven from state, federal and local government agencies, three from consumer groups and 20 from individual consumers.

On April 1 and 2,1986, public hearings on the Rule were held in Washington, DC. Two parties, the Food Marketing Institute (“FMI”), a trade association representing approximately 1,500 wholesale and retail grocers, and Consumers Union, applied for and were granted designation as interested parties to participate in the hearings. Eight witnesses, four for the Staff and four for industry, testified at the hearings. Consumers Union decided not to present any witnesses, but did conduct crossexamination of both staff witnesses and industry witnesses.

In December, 1986, the staff published its Final Report, recommending, with one minor adjustment, the adoption of the proposed amendments.12 In an • See Joint Memorandum from the Bureau of Consumer Protection and the Bureau of Economics to the Federal Trade Commission, Staff Report on the Retail Food Store Advertising and Marketing Practices Trade Regulation Rule, 16 CFR part 424, (July 25,1984) R-B-23 (hereinafter cited as “1984 Staff Memorandum”).

10 See Joint Memorandum from the Bureau of Consumer Protection and the Bureau of Economics to Federal Trade Commission, Retail Food Store Advertising and Marketing Practices Proposed Amendment of Trade Regulation Rule, (August 29, 1985) R-B-67 (hereinafter cited as “1985 Staff Memorandum”).

1150 FR 43224 (1985) R-A-3. 12 S.R., supra n.7 at 7. accompanying statement, the Bureau Director indicated that he favored repealing the Rule because the record evidence demonstrated that retail food stores appear to have adequate incentives to avoid unavailability even without the presence of an FTC rule.13 On January 20,1987, the Presiding Officer published his Report, in which he recommended amendments to the Rule that deviated substantially from those that the Commission had initially proposed and staff had subsequently recommended in its Staff Report.14 Twenty-one comments were received during a ninety-day comment period on both reports that ended on March 24, 1987: two from industry trade groups, one from a federal agency, three from state and local consumer agencies, one from an academic/staff consultant, one from the publisher of a newsletter for specialty dealers in the consumer electronics industry and thirteen from individual consumers.

On December 1,1987, the Bureau of Consumer Protection forwarded its final recommendations to the Commission on this proposed rulemaking. Two members of the rulemaking staff favored amending the Rule, while one favored repeal. The Assistant Director for Service Industry Practices also favored amendment. The Bureau Director favored repeal as did the Bureau of Economics,18 On April 19,1988, after reviewing the rulemaking record as a whole, the Commission voted three to two to amend the Rule as the majority of the rulemaking staff had proposed. n. Basis for Amended Rule A. The Legal Standard fo r Amending the Rule Section 18(d)(2) of the FTC Act states that “[a] substantive amendment to, or repeal of, a rule promulgated under subsection (a)(1)(B) shall be prescribed * * * in the same manner as a rule under such subsection.” That section also provides that an amendment or repeal of a Section 18 rule shall be “subject to judicial review, in the same manner as” any other Section 18 rule. Section 18(e)(3) provides that a rule may be judicially reviewed under either a 18 Id. at Appendix E.

14 Henry B. Cabell, Report of the Presiding Officer on Proposed Trade Regulation Rule: Retail Food Store Advertising and Marketing Practices (1987), R -P -l (hereinafter cited as “P.O.R."). 18 See Memorandum from William C. MacLeod, Director, Bureau of Consumer Protection, to the Commission (November 30,1987). See also FTC Press Release, “Consumer Protection and Economics Directors Recommend Repealing Food Store Advertising Rule; Staff Sees Basis For Either Repealing or Amending Rule” (April 19,1988).

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35458 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations substantial evidence standard or, in accordance with 5 U.S.C. 706(2)(A), an arbitrary and capricious standard. According to section 18(e)(3), all factual matters upon which the amendment is based should be supported by substantial evidence in the rulemaking record.

In addition to this statutory requirement the Commission should "articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” 16 Since the courts have noted that there is a presumption against changes to an existing course of action, the Commission should "supply reasoned analysis for the change beyond that which may be required when an agency does not act in the first instance.” 17 If the Commission’s decision to amend or repeal a rule is based upon factual findings, those findings should be supported by substantial evidence. If the decision to amend or repeal is based on policy grounds, the Commission should articulate its reasoning so that it is clear it is not acting arbitrarily or capriciously.

The Commission adopted the original Rule in 1971, on the basis of a record containing survey evidence that indicated overall unavailability rates of 11 percent of advertised items and overpricing rates of between 3.0 percent and 4.6 percent in the ten leading food chains.18 The Commission’s current rulemaking standards might require a more persuasive record before imposing an industry-wide Rule.1® However, given that the Rule is in place, these same standards now require "a preponderance of substantial reliable evidence” in support of any proposed change to the Rule.

In the case of this rulemaking, the Commission has concluded that there is substantial evidence to support a finding that the costs of complying with the original Rule far outweigh its benefits. 18 Motor Vehicle Manufacturer’s Ass’n. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 42-43,103 S.CL 2856, 2866-67 (1983). 11 Id. at 2866.

»• SBP, supra n. 2 at 8777-78. 18 The Commission has indicated that before it will promulgate a Rule, it will first assure that the rulemaking record contains “a preponderance of substantial reliable evidence” in support of the Rule. Initially, it will require substantial evidence for the factual propositions underlying a determination that an existing practice is unfair or deceptive. Additionally, the Commission will consider the following questions in deciding to promulgate a Rule: (1) Is the act or practice prevalent? (2) Does a significant harm exist? (3) Will the proposed Rule reduce that harm? and (4) Will the benefits of the Rule exceed its costs? Statement of Basis and Purpose, Credit Practices TRR, 49 FR 7740 (March 1,1984).

Moreover, the Commission believes that the amendments it has adopted will reduce these costs while serving to ensure that consumers will still be protected from losses associated with unavailability of advertised items. B. The Benefits o f the Original Rule One means of determining the benefits of the Rule is to measure the extent to which it may have been effective in reducing unavailability of advertised specials that existed prior to the Rule and then to estimate the actual consumer dollars saved as a result of that reduction. The rulemaking record in this matter contains evidence on this issue in the form of retail food store unavailability surveys that were conducted before and after the Rule was promulgated, as well as academic research that permits the conversion of the differences in unavailability rates into consumer dollars. This section first compares pre-Rule and post-Rule survey rates of unavailability and then, using the findings from the academic research, estimates the maximum level of likely savings that consumers have realized as a result of the Rule.

A second means of determining consumer benefits is to survey consumers as to how the unavailability of advertised products affects them and how much they value availability of these products as compared with other attributes of retail grocery stores. Using the data from that survey of consumers regarding unavailability, a separate estimate of consumer benefits is generated.

1. Pre-Rule and Post-Rule Measures of Unavailability a.

Survey R ates o f Unavailability. In 1967-68, as part of a larger study of food store selling practices conducted in Washington, DC and San Francisco, California, staff surveyed retail food stores’ shelves for the presence of advertised items.20 This survey indicated an average overall unavailability rate in the two metropolitan areas studied of 11 percent.21 This study was the primary 20 Bureau of Economics, Federal Trade Commission, Economic Report on Food Chain Selling Practices in the District of Columbia and San Francisco 1 (1969) R-I-61 (hereinafter cited as “Market Basket Survey"). The survey covered an average of 65 advertised items in each of 137 stores in the Washington, DC and San Francisco sales areas.

21 In Washington, DC, the staff found chain store unavailability rates to be 23 percent in low-income areas and 11 percent in high-income areas, with an overall rate of 14.4 percent In San Francisco, where there was no such discrepancy between low-income and high-income areas, staff found an overall rate of six percent. Overall, a total of 11 percent of the items were found to be unavailable. basis for promulgation of the original Rule.22 In contrast, the record evidence indicates that unavailability rates in the period after the Rule was promulgated have been cut in half. In 1973, Commission staff surveyed unavailability and mispricing of advertised items in 640 retail food stores of leading grocery store chains in 40 Standard Metropolitan Statistical Areas (“SMSA”).28 The overall average unavailability rate was 5.5 percent.24 A recent survey, conducted in the Borough of Manhattan of New York City by the Better Business Bureau of Metropolitan New York, Inc., in 1985, showed an unavailability rate (4.6%) consistent with previous post-Rule studies.25 Only one study, which was conducted in New Jersey in 1980, showed post-Rule unavailability rates to be higher (6.8%) than rates found in the studies already mentioned.26 It should be noted, however, that in this study, surveyors did not ask store personnel, as they did in later studies, about items they could not find on the shelves. Presumably, some items not found on the shelves may have been in the back of the store or located elsewhere in the sales area. This survey was criticized by industry members as being unsound methodologically. See S.R., supra n. 7 at 19, n. 41. While the failure to ask routinely for items not found on the shelves could have resulted in a slight overstatement of actual unavailability rates, it is unlikely that this oversight resulted in any substantial distortion of the results. In a similar study conducted by the Better Business Bureau of Metropolitan New York, Inc., surveyors did ask for items they could not find. Of the 480 items checked, only two out of 22 items not found on the shelves were in storage. Comment of Better Business Bureau of Metropolitan New York (1986) R -H -l (“NYBBB 1986”). It does appear, however, that in order to account for differences between pre- and post-Rule methodologies, the overall pre-Rule unavailability rate should be adjusted slightly downward. 22 SBP, supra n. 2 at 8777-78. 23 Statement of Michael Lynch, Bureau of Economics, Federal Trade Commission, HX. 12, Exhibit 2 (1973 Commission Survey). Four stores from each of the four leading chains in each SMSA were picked at random. An item was considered unavailable if it could not be found anywhere in the sales area of the store and was not available on request from any part of the store not open to the public. Id.

24 Id. Primarily on the basis of this survey, the Commission issued complaints against eleven supermarket chains alleging high unavailability rates in nine of them. See discussion supra at § II. A. An analysis of the unavailability rates contained in mandatory reports filed by the stores under orders as a result of these actions (“compliance reports”), submitted mostly in 1978 shows unavailability rates ranging from 0.3 percent to six percent and an average reported rate of 2.4 percent. However, because in many cases the order provisions requiring the surveys permitted the chain named in the order to determine the time and place of the surveys of its own stores, staff estimated that the true overall rates were closer to four percent S.R., supra n. 7 at 21.

28 S.R., supra n. 7 at 22. 28 Id. at 22-23. A similar study conducted in 1978 by the same agency had found the overall Continued

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Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations 35459 On the basis of the comparison of pre- Rule and post-Rule survey rates, it appears that overall unavailability rates have been reduced by about 50 percent to current levels of about five percent since the Rule’s promulgation. Although other factors, such as the introduction of computerized inventory records, may have served to reduce unavailability somewhat, evidence as to the measures that stores have taken to assure Rule compliance 27 leads the Commission to conclude that this reduction can be attributed primarily to the Rule and the resulting enforcement actions brought in the mid-seventies. Accordingly, benefits that may result from the original Rule can be measured in terms of the reduction in consumer losses from pre- Rule levels of unavailability of about 10 percent to post-Rule levels of unavailability of about five percent b.

The Ferguson Study. 28 In 1980, academic researchers from the Marketing Department of the University of Alabama reported on a simulation study that estimated losses from unavailability of items featured in a typical retail food store ad. This research, referred to herein as the Ferguson Study, provides the basis for a direct measurement of Rule benefits by providing a basis for estimating an aggregate annual loss incurred by customers confronted with unavailability.2 9 The simulation technique used in the Ferguson Study permitted the researchers to calculate the losses incurred by consumers at various levels of unavailability.80 Comparing losses unavailability rate to be five percent. Id. However, little is known concerning the methodology used in either of these studies. For example, the methodology does not reveal whether shoppers asked store personnel for items that they could not find on the shelves.

27 See discussion infra at section Ü.C. 28 Ferguson, Mason and Wilkinson, Simulating Food Shoppers’ Losses as a Result of Supermarket Unavailability, 11 Decision Sciences 535 (1980), R -I- 40 (hereinafter cited as "the Ferguson Study"). 20 The Study researchers generated the data on shopper losses by simulating a year’s worth of typical shopping transactions at a supermarket believed to be representative in terms of size and sales volume. The design of the simulation model was based on previously obtained information about management’s stocking policies, store sales volume, the number and size of transactions, customer demographics, shopping patterns, and customer and management responses io unavailability. The items purchased in the simulation were derived from an actual advertisement of the supermarket, typical of the number and variety of items featured in the weekly grocery advertising of that market. The Ferguson loss calculation does not take into account the time and aggravation expended by shoppers encountering unavailability because of the difficulty in quantifying such factors. Id. at 544 n. 7. To obtain the weekly per shopper gain, the average gain for each transaction in the simulation generated by an unavailability level near that which existed prior to the Rule with losses generated by an unavailability level approximating the post-Rule unavailability level results in a new benefit per consumer of less than one cent per shopper per week.31 This estimate takes into account only the savings realized through the avoidance of trip losses (“the trip gain”), which are losses that result from the expense of wasted trips to retail outlets for advertised items that are unavailable. The price savings on advertised specials (“the savings gain”)—which to the individual consumer shopping for that special may seem important—are not included in the benefits calculation because consumers in the aggregate do not actually realize a savings from the purchase of items on special. This is because grocers compensate for losses they incur from price reductions by increasing prices elsewhere or reducing services.82 2. The Consumer Survey Regarding Unavailability A survey of consumer attitudes and perceptions of unavailability commissioned by the staff, die Market Facts Study,88 addressed such issues as is multiplied by the average number of weekly transactions made by an average shopper (1.5). See Progressive Grocer, 48th Annual Report of the Grocery Industry (1981), R-I-55. The resulting per week gain ($0,008) is then converted to an annual figure by multiplying the average number of supermarkets in 1980 (28,680) times the average number of customers per supermarket (about 4000) as reported in Progressive Grocer, 49th Annual Report of the Grocery Industry, 5 (1982), R-B-42. This result is then multiplied by the average gain per week per shopper and converted to 1985 dollars (see below) to produce an annual figure of $48 million.

All benefits and costs estimates are converted to 1985 dollars using the consumer price index in order to make them comparable to each other. The conversion formula follows: Amount Year Y Dollars = (Amt in Year X Dollars) (CPI of Year Y) divided by (CPI of Year X). 31 See S.R., supra n. 7 at 80-82. The Presiding Officer criticized the omission of savings gains and the justification therefor. He concluded that “Staff has averaged away the benefits for the individual consumer.” P.O.R., supra n. 14 at 100. However, these individual consumer gains are not as significant as critics may think. First the more that individual shoppers exclusively shop for bargains, the more other shoppers will have to absorb increased prices. The benefit to those individual shoppers thus becomes a loss to the other shoppers and the net benefit is still zero. Second, it is unlikely that many consumers actually save substantial sums on the yearly food budget by shopping specials.

32 See S.R., supra n. 7 at 80-81. The savings gain per shopper per week is approximately 2.6 cents. 83 Supra n. 6.

(1) the degree to which consumers experience unavailability, (2) the ability of consumers to take corrective action when they encounter unavailability, (3) the extent to which consumers consider unavailability to be a problem, and (4) the value consumers place on availability.84 Consumer responses to these questions produced the following results:

—More than eight out of ten consumers have experienced at least occasional unavailability; a typical encounter usually results in the consumer either doing without the item, buying a comparable item at the regular price or going elsewhere to get the item. Most consumers indicated that they are not significantly inconvenienced by unavailability.

—Seven out of ten consumers have access to several stores that compete for their business by means of newspaper advertising.86 of the more than half of the respondents who had encotmtered a store with “too few of its advertised items available,” most would respond by either paying less attention to that store’s advertising or shopping there less often.

—When asked to rank by importance various store attributes, consumers ranked availability of advertised items seventh out of 21 factors, behind quality of produce, quality of meat, overall price, amount of savings of advertised items, variety of items and friendly, helpful store personnel.

—Consumers report that they are willing to accept availability levels as low as 70 percent rather than experience either a one percent increase in prices, reduced savings on advertised specials, an increase in cashier overcharge mistakes, or a significant reduction in consumer services.86 34 The Study is based on a sample taken from a universe of 65,000 households comprising the Market Facts Mail Panel, demographically balanced to represent U.S. consumers and the U.S. population as a whole. The sample was chosen randomly from a universe of all panel members. The sample consisted of 3,036 households, each of which was mailed a questionnaire with instructions that it should be completed by the household member who does at least half of the shopping, to insure that it was completed by the most experienced shopper. Questionnaires were returned by 2,563 respondents, representing an 84 percent response rate. 38 The study also found that consumers regularly read food store advertising and most of them pay some attention to featured items in those ads. 36 The Study also reported that consumers generally were unwilling to give up any other store attributes—some arguably much lower in value than a one percent price hike—to assure higher availability rates. For example, generally, it was more important to consumers to maintain the same level of items advertised than to have them available 70, 80, 90 or even 100 percent of the time; Continued

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35460 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1889 / Rules and Regulations — ■ ii mi 11 m !■ ~n~i i b i b w hi mt ii iH rrri ^ vunM 'wiii*» m l »»' In light of the findings of the Market Facts Study, that, in general, consumers do not object to availability going as low as 70 percent, then even a decrease to the 90 percent pre-Rule levels would not appear to pose a major problem. Moreover, the Market Facts Study indicates that while most consumers have experienced unavailability of advertised items, they have alternative food stores available to them and would switch to them if their regular store had too few of its advertised items available. Under the circumstances, therefore, the Commission concludes that the Market Facts Study indicates that, in general, the Rule has provided relatively small benefits to most consumers. 3. Conclusion Based on the two studies relied on in assessing Rule benefits, the Commission finds that the measurable benefits to consumers under the Rule are less than one cent per week per shopper and, in the aggregate, range no higher than $48 million per year for all supermarket shoppers. Consumers may also realize additional—albeit unquantifiable— benefits, inasmuch as the Rule’s assurance of availability saves consumers the aggravation expended when an advertised product proves unavailable.87 C. The Costs o f the Original Rule According to the record evidence, most food retailers feel compelled to take precautions that they would otherwise not take in the ordinary course of business to avoid inadvertent violations of the Rule. They take extraordinary measures to ensure that they have sufficient inventory of advertised items on hand to satisfy the last customer on the last day of the sale. These measures include maintaining inventory cushions over and above what is needed to meet reasonably anticipated demand, performing additional checks of retail shelves, and creating and maintaining records of their cumulative monitoring activities. These measures result in costs to the food retailers that are attributable solely to the Rule. This section analyzes the direct costs of these efforts. Evidence of the magnitude of these costs is provided by estimates from five separate consumers also placed more value in having 80 percent of regularly stocked non-advertised items available than 100 percent of advertised items. Market Facts Study, supra n. 8 at 24. See supra n. 29. See also infra at section II.D where the Commission concludes that the magnitude of the unquantified transactional costs are de minimis supermarket chains.38 In addition, the Commission staffs own independent analysis of the costs produced by investing in excess inventory, using data from the Ferguson Study, is also set forth. This independent analysis, developed by Michael Lynch, a staff economist in the FTC’s Bureau of Economics, generally supports the supermarket chains’ estimates of inventory costs.89 For purposes of this analysis, industry cost data are broken down into four expense categories: (1) Increased inventories to reduce unavailability (“inventory costs”); (2) extra internal monitoring of shelf stock and back room inventories to reduce ordering and pricing errors (“monitoring costs”); (3) compiling and monitoring extra records to prove compliance (“recordkeeping costs”); and (4) extra legal advice and consultation as well as extra monitoring by outside auditors and the like (“legal and survey costs”).40 The Table at Appendix A to this statement breaks out cost data (stated in 1985 dollars) by source and expense category. 1. Inventory Costs The record indicates that one of the more costly measures that stores use to avoid inadvertently violating the Rule is to purchase and stock more inventory of All per store cost figures have been converted to 1985 dollars. See supra no. 30. 88 See Statement of Michael Lynch, Bureau of Economics, Federal Trade Commission, Exhibit 13 (1986) HX-12, R-LL-1.

The industry cost data includes data submitted by the Food Marketing Institute (FMI) on behalf of three supermarket chains, identified in the record only as Company A, Company B, and Company C, and data submitted separately by Safeway, Inc., Kroger Stores, Inc. and Albertsons, Inc. However, a number of factors indicate that Safeway is Company A in FMI’s submission. See S.R., supra n. 7 at 92. Thus they are treated as one ("Company A / Safeway”) for purposes of this analysis. Although the retail food industry alleged that their costs were indeed incremental costs attributable solely to Rule compliance, some commenters were skeptical that the chains could demonstrate successfully their basis for distinguishing alleged incremental costs from costs incurred in the ordinary course of doing business. The Presiding Officer also believed that the industry cost data were not reliable. P.O.R., supra n. 14 at 97. Staff, however, carefully probed industry witnesses at the hearings to determine the methodologies the chains used to identify and quantify their costs. See S.R., supra n. 7 at 111-112. In some instances, staff recalculated cost components of some stores that it believed to be based upon erroneous accounting principles. Id. at 98-99 and 101-102. In the Commission’s opinion, industry witnesses provided generally objective criteria for their costs, and each chain that submitted cost figures for the record demonstrated that it had an objective basis from which it estimated incremental Rule compliance costs. As adjusted by staff, the figures may be relied upon to support a finding as to the magnitude of costs to the industry for Rule compliance.

40 S.R., supra n. 7 at 93. advertised products than they realistically expect to sell. This measure results in both the cost of investing in (or carrying) excess inventory 41 (“inventory investment costs”) and the monetary loss that stores incur when the excess inventory in perishables, e.g., meat and produce, spoils or is reduced below cost for quick sale before it spoils (“spoilage and distress costs”).42 As staffs independent analysis of inventory costs demonstrates,48 the cost of stocking inventory cushions in perishable items can be extremely high. This is because these products have a very limited shelf life and, if not sold quickly, will spoil and must be discarded at a total loss. In order to reduce losses from spoilage, grocers attempt to sell excess inventory in perishables below their costs to move them quickly (“distress selling”). The extent to which grocers incur losses from spoilage or distress selling, constitutes a second type of cost attributable to the perceived need to stock inventory cushions for advertised items. Staff estimates from industry figures that these costs range from $1,697 to $6,789 per store annually.44 2. Monitoring Costs Monitoring costs represent the labor cost of having in-store personnel and supervisory personnel perform extra checks to see that advertised items are in stock and priced correctly.48 As a 41 When retailers purchase extra inventory for advertised items that they do not expect to sell during the sales periods, they either have to borrow the money or invest capital that otherwise would be earning money for them. Either the amount of interest paid for the loan or the amount of money that stores could realize had that capital been invested at prevailing interest rates represents the inventory investment cost to the retailer. Of course, except for perishables that spoil or that are reduced below cost for quick sale, stores eventually will sell the excess inventory at the normal profit margin. For that reason the amount of money actually borrowed or invested is not a cost to the stores because ultimately they will recoup that expenditure. However, the fact that grocers eventually will earn a profit on the excess inventory does not offset the lost interest. Retailers, as long as they remain in business, must invest continually in new inventory cushions for their weekly advertising specials. Accordingly, they always will have an amount of capital tied up in excess inventory; even as they are recouping capital previously invested, they are investing new capital. Thus, the loss of interest on the average amount of capital invested in the excess inventory cushion represents the retailer’s inventory investment cost. 48 These costs varied widely (from $356 per store to $4,778 per store) and some were subject to controversy. See discussion in S.R., supra n. 7 at 97- 103 for an explanation of how they were derived. 48 See infra at section II.D. See also testimony of Michael Lynch, Staff Economist, Bureau of Economics, Tr. at 298-301. 44 See S.R., supra n. 7 at 95. 48 Id. at 107-08.

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Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations 35461 matter of good business practice, food retailers regularly monitor inventory levels to ensure that they have adequate stock. In order to ensure Rule compliance, however, they make these checks more often than would be required in the regular course of business.46 Staff estimates from industry figures that annual per store monitoring costs ranged from $2,268 to $8,830.

3. Recordkeeping Costs Recordkeeping costs are the costs food retailers incur to develop and compile records to show that they ordered and had delivered sufficient quantities of advertised items to meet reasonably anticipated demand in order to defend themselves against any charges that they violated the Rule. Food retailers indicated that recordkeeping costs exist at both the store level where these records are developed and at the central office level where the records generally are compiled and stored. Staff estimates from industry figures that annual recordkeeping costs ranged from $52 to $2,312 per store.

4. Legal and Survey Costs This cost category includes the cost of legal services used in connection with Rule compliance or defense (the legal costs). It also includes the cost of audits of Rule compliance by independent firms that some stores retain (the survey costs). Staff estimates from industry figures that such costs ranged from $12 to $249 annually.47 5. Indirect Costs The indirect costs of the Rule are mainly opportunity costs, i.e., costs that are the result of the lost opportunities from action not taken. These indirect costs may occur because the threat of penalties resulting from a Rule violation may inhibit some types of food store advertising. As a result, food stores may advertise fewer items, run fewer specials or change the types of products they advertise. For example, food stores may advertise new products less often because demand for them may be hard to predict. They may be reluctant to advertise produce or other perishables, because at the end of the sale period, unsold items may spoil or need to be sold at distress prices. They may restrict their advertising of items with limited demand, such as ethnic items, because all stores would have to carry the item regardless of the segmented demand. They may advertise directly delivered 46 M a t 107, n. 283.

47 Id. at 109-10.

items, such as beer and soft drinks, less often because deliveries from many independent suppliers are more difficult to coordinate than deliveries from the store’s warehouse. They also may advertise less frequently items available in limited quantity, such as products on “deal”, because they may not be able to guarantee quantities sufficient to meet demand. While these costs are real, they are not readily quantifiable and thus are not included in die cost-benefit calculation.46 D. Cost/Benefit Comparison On the basis of the various estimates of costs of Rule compliance as compared with the estimates of maximum benefits under the Rule, the Commission concludes that the costs of complying with this Rule gready exceed the benefits. Depending upon which food retailers’ cost figures are used and assuming benefits of a magnitude indicated by the Ferguson Study, the record indicates that the costs imposed by the Rule exceed its benefits by ratios that range from over 2 Vi to one to nearly eight to one.49 If the sum of the averages for each cost category is used, the ratio of costs to benefits is more than five to one.80 Moreover, staffs independent analysis of the data used in the Ferguson Study demonstrates that the costs of reducing survey rates of unavailability by investing in excess inventory can result in costs that exceed benefits by an overwhelming margin.61 48 See infra at section U.D, where the Commission concludes that these costs are de minimis. 40 Staff estimated maximum direct benefits under the Rule to be $48 million per year. The lowest overall estimate of annual costs (based on the submission of the only grocery store chain that did not attempt to estimate its inventory costs) was approximately $132 million when extrapolated industrywide. On the high side of the range are costs extrapolated to the industry at about $370 million. Even selecting the lowest costs in each category and extrapolating their total to an industrywide figure results in costs of about $126 million per year.

80 Staff estimated that the total of the averages for all cost categories is approximately $319 million, or, converted to a per customer per week basis, S.3 cents. To obtain the per customer per week cost, the industrywide cost per year was divided by the number of supermarket shoppers in 1980,114.7 million, see S.R., supra n. 7 at 82, n. 231, and then divided by the 52 weeks in a year. As previously noted, die maximum benefit was estimated by staff to be only 0.8 cents per customer per week. 81 From the raw data supporting the Ferguson Study, staff used the annual demand levels generated by the Study to project annual costs of inventory cushions for a store that chooses to invest in extra inventory in amounts sufficient to lower unavailability from pre- to post-Rule levels. See SJR., supra n. 7 at 104-05. Carrying inventories at two standard increments above the normal level reduces survey unavailability rates from a level approximating the pre-Rule level to that approximating the post-Rule level. Such a practice results in inventory investment costs on a per store As previously noted, there are both benefits and costs, indirect in nature and difficult to quantify, that are not included in the cost benefit calculation.52 On the benefits side of the equation are unquantified “transactional costs,” or costs in the form of wasted time and frustration that result when an advertised item is unavailable.63 On the cost side are the “indirect costs” of lost information, e.g., information lost as a result of food retailers’ avoiding advertising of certain categories of products—meat, produce, new products, etc.—because it may be difficult to accurately predict demand for them or assure adequate inventories.54 Record evidence indicates that savings from avoiding transactional costs are de minimis. Both the Market Facts Study and the Ferguson Study indicate that the overwhelming majority of consumers who have encountered unavailability report minimal inconvenience as a result. In the Ferguson Study, 83 percent of shoppers who encountered unavailability indicated that they did not experience significant inconvenience.55 Likewise, the independent surveys supporting the Market Facts findings revealed that 74 percent of shoppers who encountered unavailability experienced little or no inconvenience (44 percent reported none), while only three percent reported “great inconvenience.”

The indirect costs of limited information about items specially reduced in price are also minor. Indeed, if specials are not advertised, consumers may not realize the savings available had they known about and purchased those items at reduced prices. However, these “savings gains” do not affect the cost-benefit calculus inasmuch as grocers must raise other prices or reduce services to compensate for these price reductions.56 Thus, the actual loss in basis (in 1985 dollars) of $639 and spoilage/ distressing costs of $29,045. These reductions would produce benefits of only $1149. Id. at 104-07. As staff notes, the figures as generated should not be considered actual costs of a typical store, however, since actual costs depend upon all strategies that an individual chain might adopt to achieve Rule compliance. These figures are based upon reliable data, however, and confirm that the inventory figures produced by industry are reasonable cost estimates. 88 The Presiding Officer claimed that the existence of both costs and benefits that could not be quantified rendered the entire cost-benefit analysis unreliable P.O.R., supra n. 14 at 53. 83 See supra n. 29.

84 See discussion supra at § ILC.5. 88 HX. 5 at 8.

88 See discussion supra at § H.D.

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35462 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 this respect is limited to the information itself, not the savings to be gained from knowing it. Thus, for example, the loss occasioned by a grocer’s failure to advertise a new breakfast cereal at a reduced introductory price is the information tha+ a new product exists, not the savings to be realized from purchasing it.

After considering all of the options for correcting this imbalance, including repeal of the Rule, the Commission has concluded that amending the Rule as proposed will substantially reduce costs while preserving the benefits that accrue to consumers from increased availability.

E. L eg a l Basis fo r Amending the Rule As previously noted, the basis for amending the Rule is the record evidence that the cost of complying with the Rule substantially exceeds the benefits. Given this basis for action, the Commission is adopting measures that should substantially mitigate or eliminate the compliance costs. There is also substantial evidence in the current rulemaking record that, under the Commission’s deception standard, failing to have adequate supplies of advertised products on hand in sufficient quantities to meet reasonably anticipated demand is deceptive.87 The Commission’s deception standard requires that there be a representation, omission or practice that is material and likely to mislead consumers acting reasonably under the circumstances.58 Certainly, there is little dispute that a retail food store ad listing items on sale at specified prices is a material representation. What remains to be determined, therefore, is whether the record contains substantial evidence that consumers who shop for items featured in the ad and find them unavailable are reasonably misled. The Market Study contains substantial evidence that would provide a basis for concluding that failing to have sufficient quantities of advertised items on hand to meet anticipated demand misleads many consumers. The Study indicates that a substantial portion of the public (34%) expect that grocers will not run out of advertised goods unless there are qualifications or limitations as to their availability 87 This does not mean that grocers are expected to meet a 100 percent availability standard. Even the original Rule indicated that it “will consider * * * all circumstances surrounding non-delivery of advertised products which were actually ordered in quantities sufficient to meet reasonably anticipated demands, but were beyond the advertisers’ control.” 88 Cliffdale Associates, Inc., 103 F.T.C. 110,164-65 (1984).

expressed in the ad.89 Moreover, according to the same study, 30 percent of consumers consider it very important and an additional 48 percent find it somewhat important that they be able to find all advertised items on the last day of a sale.60 The Market Facts Study also found that 87 percent of consumers actually experienced unavailability in recent years even when post-Rule unavailability levels of five rather than ten percent were believed to prevail.61 More significantly, at this same post- Rule level, 56 percent of consumers found a store that had levels of unavailability that they considered too high.62 In summary, the Commission concludes that there is substantial evidence in the current record that unavailability of advertised items would constitute a deceptive practice.63 The 89 Market Facts Study, supra n. 6 at Table 16. 90 Id. at Table 9. This notion that advertisers have on hand sufficient quantities of advertised merchandise to meet reasonably anticipated demand is not unique to the Rule. It is a direct extension of principles expressed in the Commission’s Guides Against Bait Advertising (16 CFR 238.3(c)) as well as decision in litigated cases. See, e.g., The Great Atlantic and Pacific Tea Company, Inc., 85 F.T.C. 601 (1975). The Market Facts findings that 34 percent of consumers expect 100 percent availability can also be reasonably read as a statement that they expected ^ -»ater than 90 percent availability. Unfortunately, the survey did not allow consumers to choose levels between 90 percent and 100 percent availability. Consumers responding to the survey were asked to indicate how many items out of ten advertised that they expected to find at the store. Consumers who typically shop in a market that features weekly advertising of over 200 items per store may have selected ten out of ten items only because they expected more than 90 percent availability. Expecting more than 90 percent is not unrealistic, particularly in an environment where at the time of the stn'-ey the average availability rate may have been 9a nst Tliis evidence could also reasonably be interpreted to mean that these consumers do not expect that grocers who run out of stock of advertised items should necessarily be punished for violating laws against deception unless they are unwilling, when unavilability occurs, to offer rainchecks or substitute items, as the amended Rule would require. According to this analysis, it is not unreasonable for consumers to expect—in the absence of disclaimers—that compensation will be offered in cases when unavailability does occur. 91 Supra n. 6 at 29.

92 Id.

99 This discussion is not meant to exhaust the possible instances in which unqualified retail food store advertising might be found deceptive. That determination would be affected by the number of factors that go beyond an analysis of the average level of unavailability. There are possible instances in which much lower average levels of unavailability might still be deceptive to consumers, as where a store substantially under-orders turkeys featured in advertisements placed just before Thanksgiving. The fact that the store may have in stock all of the other items it advertises would not prevent the Commission from examining whether consumers were, in fact, deceived by the ad. / Rules and Regulations amendments that the Commission is promulgating, therefore, retain basic protection against deception while eliminating die need for grocers to adopt costly compliance measures against the possibility of inadvertent unavailability of advertised items.

III. Section-by-Section Analysis A. Introduction The Rule as amended contains two new provisions that should reduce the costs imposed by the original Rule significantly. Both of the amendment proposals are intended to relieve any uncertainty about Rule compliance, by making explicit the steps that a grocery food retailer can take to defend against a charge of unavailability. B. D isclosure Amendment: Section 424.1 Unfair or D eceptive Practices 64 This section sets out the basic requirement of the Rule that stores have in stock and readily available for sale the items that they advertised. The major change in the section from the original Rule is its allowance for a broader use of limited availability disclosures in advertising. Specifically, if the ads disclose that supplies of the advertised product are limited or available for sale only at some outlets, § 424.1 creates an exception to the requirement that stores have in stock the items that they advertise. Under this exception, as long as an advertisement • covered by the Rule contained a clear and adequate disclosure of limited availability, the food retailer would not violate the Rule by failing to have adequate supplies of the advertised product on hand during the entire duration of the sale period. The disclosure would have to specify, however, whether the limitation on availability was the result of limited quantities or limited outlets. This disclosure provision is adapted from the Commission’s Guidelines Against Bait Advertising 65 and is intended (1) to emphasize that under the amended Rule, food retailers still will not be permitted to engage in bait advertising and (2) to ensure that consumers will not be deceived about the availability of 94 This section first defines the unfair or deceptive practice that the amended Rule addresses as, basically, advertising products for sale at a stated price when the advertised products are not in stock and readily available to customers during the effective period of the advertisement. This satisfies the requirement of the Second Circuit Court of Appeals decision in Katharine Gibbs School, Inc. v. FTC, 612 F. 2d 658 (1979), that the Commission define with specificity in the rule itself the unfair or deceptive acts or practices that the rule prohibits. 9818 CFR 283.3(c) (1986).

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advertised items when availability is limited.

At the same time, by allowing grocers greater latitude to advertise items with limited availability, the disclosure amendment should eliminate the costs associated with the current Rule’s discouraging advertising of items in limited supply (such as closeout specials, seasonal products and special purchase items), products of interest only in certain neighborhoods and those items with particularly high carrying costs (such as perishables). The amendment should encourage food retailers to disseminate more information to consumers and increase the number of advertised specials on a variety of products, to the benefit of both consumers and food retailers. Moreover, since the cost savings realized through this amendment would be reflected in reduced prices or improved services or both, consumers would realize an additional benefit from the amendment.66 C. D efenses: Section 424.2 This section sets out the four defenses to a Rule violation that excuse any failure of a store to have in stock the items they advertise. The first defense— that the advertised products were ordered in adequate time for delivery in quantities sufficient to meet reasonably anticipated demand—is based on a defense to unavailability that was included in the original Rule. Unlike the original Rule, the amended Rule does not require that stores maintain records demonstrating that the order had been made. This defense recognizes that there 88 Many members of the retail grocery industry who commented on the proposed amendments felt that this section allows grocers greater flexibility in deciding whether to use limited availability disclosures. They noted that the availability of such disclosures gives retailers opportunities to convey useful information and pass on valuable savings to consumers on a variety of products, the advertising of which is restricted by the stringent availability and disclosure requirements of the current Rule. See, e g., Comment of the Food Marketing Institute 9 (1985) R-B-58 ("FM I1985”); Saldin.Tr. 190,191. Specifically, those who favored the amendment believed that it will encourage food retailers to increase the number and type of products advertised and offer more specials on such products. See, e.g., FMI 1985 at 9; Comment of National Grocers Association 3 (1986) R-E-2 ("NGA 1986”); Saldin, Tr. 190,191; Comment of Albertson’s, Inc. 2 (1988) R-D-2 (“Albertson’s 1986”). Secondly, industry representatives supported the fact that the disclosure amendment gives retailers the discretion to use general disclosures in limiting availability, noting that retailers need the flexibility to decide whether to use general or specific disclosures, claiming that the circumstances that prevail when an ad is published are sometimes difficult to predict at the time that the commitment is made to run the ad. See, e.g., Comment bf Food Marketing Institute 6-7 (1986) R -E -l (“FMI 1986’’); Comment of the Kroger Co. 2-3 (1986) R-D-3 ("Kroger 1988’’); Saldin, Tr. 201, 204.

54, No. 165 / Monday, August 28, 1989 may be situations where the failure to have advertised items in stock was beyond the store’s control. The amended Rule provides three additional defenses against a charge of unavailability for grocers who offer consumers appropriate alternative compensation—a raincheck, a substitute item of comparable value or other compensation at least equal to the value of the advertised item—for the unavailable item.67 By allowing food retailers to offer a raincheck or comparable value substitute when they run out of an advertised item, the amendment should eliminate virtually all of the nonproductive costs associated with compliance efforts under the current Rule.68 Stores can abandon the overkill measures of stocking excessive inventory or performing duplicative shelf inspections and opt for far less costly measures of providing rainchecks and substitutions which many if not most of them already provide in the ordinary course of doing business. As in the case of the disclosure amendment, the benefit of lowered costs of compliance can then be passed on to consumers.69 Additionally, by providing for an offer of compensation equal to that of the advertised savings in the event of unavailability, the amendment seeks to ensure that consumers will not be denied the benefit of any bargain 87 This policy, it is argued, is well accepted by consumers. See, e.g„ Statement of Dr. Timothy Hammonds, Senior Vice President, Food Marketing Institute 5 (1986), HX. 8; FMI 1985, supra n. 66 at 11, 12; Hicks, Tr. 255-256. Evidence of consumer acceptance of rainchecks as a remedy for unavailability is on the record. The Market Facts Study found that 60 percent of the consumers questioned felt rainchecks constituted a satisfactory remedy in the case of unavailability. Market Facts, supra n. 6 at 32-33. Similarly, a 1980 study conducted by the National Association of Supermarket Shoppers indicated that 67 percent of the respondents found rainchecks to be a sufficient remedy when an advertised item is unavailable. Comment of the National Association of Supermarket Shoppers, Attachment 2 at 6 (1980) R - B-55 (“NASS Survey”). And finally, a 1978 study of consumer behavior with respect to rainchecks by Wilkinson et al., found that 82 percent of shoppers who received rainchecks redeemed them. Moreover, 83 percent of this group indicated they were able to redeem their rainchecks on their first return trip to the store. The remainder of the respondents indicated that no more than two trips were necessary to redeem the raincheck. Statement of Dr. ). B. Wilkinson, Associate Professor of Marketing, University of Akron, at Exhibit 6,156-57 (1986) HX. 68 Industry commenters noted that the availability of such a defense would eliminate most of the overkill costs imposed by the Rule’s strict availability requirements—in particular the burdensome costs attributable to both over-ordering of inventory and recordkeeping. See, e.g.. Statement of Dean Hicks, Vice President The Kroger Co. at 1, 2 (1986) HX. 8; Hammonds, HX. 1 at 4. 88 See, e.g., Albertson’s 1988, supra n. 66 at 1. / Rules and Regulations 35463 advertising on which they relied in making their shopping choice.70 IV. Alternatives Considered A. Maintain the Status Quo The Commission could choose to take no action and leave the current Rule in place. For all of the reasons already set out in this statement, a majority of the Commission believes that the costs of complying with the original Rule greatly exceed its benefits. The Rule imposes costly burdens on grocers in the form of investment in unnecessary inventory and excessive monitoring and recordkeeping costs. These costs are ultimately passed along to consumers in the form of higher prices or reduced services. Savings that have been realized by consumers are principally the result of reduction in the number of unsuccessful trips made to purchase items that are not in stock. These savings, or benefits, are only a small fraction of the costs that the Rule imposes.

B. R epeal the Rule Another alternative that the Commission considered was to repeal the Rule and handle individual instances of deceptive advertising of unavailable products on a case-by-case basis. If the Rule were repealed, food retailers should be able to avoid all of the costs that they now incur as a result of the 70 Industry representatives emphasized that the amendment achieves a balance between the need to reduce the excessive compliance costs associated with the current Rule and the need to preserve consumer benefits realized under the Rule. See, e.g., FMI 1986, supra n. 66 at 1; Comment of Safeway Stores, Inc., 2 (1986) R-D -l (“Safeway 1986”). They also noted that in permitting such defenses, the proposed Rule would encourage a “sound, pro­ consumer business practice,” by reinforcing the already well-established policy among grocery retailers of offering the types of compensation provided for in the amendment in the event an advertised item is unavailable. As support for this point, the Food Marketing Institute cited a 1982 survey of its members to determine what type of compensation grocers offer in the event of unavailability, noting that all 341 retailers responding to the survey—regardless of size—had established a policy or program to handle out-of­ stocks for advertised items, the most common being issuance of rainchecks (95%), an offer of substitute merchandise (75%) and a combination of a raincheck and substitute offer (48%). The amended Rule also allows food retailers to offer “other compensation at least equal to the advertised value" whenever advertised items subject to the rule are unavailable. This contemplates that, when reduced price specials are involved, rather than offer rainchecks or substitutions, the retailer might choose to reduce the customer's total bill by the difference between the regular price and the advertised price. Alternatively, under this provision, the retailer might choose to provide the customer with savings coupons for comparable products that, when redeemed, would produce a similar savings gain to the customer.

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35464 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations Rule's requirements. Consumers would ultimately benefit to the extent that these costs are no longer passed along to them. Consumers would also benefit from being able to receive more information through advertising about the availability of reduced price specials on products that food retailers do not regularly feature under the current Rule either because they are available in limited quantities or because it is difficult for food retailers to predict demand for them. Increasing the flow of price information to consumers should lower the time costs of shoppers, encourage competition and lower the prices of these goods.

In the Rule’s absence, however, food retailers might lack clear guidance on what standards the Commission would use in enforcing the general prohibition on deceptive advertising. In the face of this uncertainty, advertisers might continue to incur some of these costs, for example, by ordering excessive inventory or maintaining records that they would not maintain in the ordinary course of business, costs that would ultimately be passed along to consumers.

Additionally, repeal of the Rule might encourage some food retailers to take advantage of the elimination of specific regulation in the area and engage in practices that are intended to deceive the public since the immediate threat of civil penalties would have been eliminated. While existing market forces would probably hold the number of such perpetrators down, repeal of the Rule might remove a deterrent factor and tempt unscrupulous grocers to risk the reduced consequences of deceptive claims.

Amending the Rule as proposed would eliminate virtually all of the cost3 of complying with the current Rule and impose no significant new costs.71 While there are differences in costs savings between amendment and repeal, they are so small as to be de minimis. Moreover, the Rule as amended provides die certainty that food retailers may need in order to avoid inadvertent law violations. It also retains the deterrent impact of civil penalties for rule violations. In effect it reduces costs almost as much as repeal of the Rule would while retaining the positive advantages of having a rule in place. Accordingly, the Commission believes ” One of the assumptions fundamental to the Commission's decision to propose amending die Rule was that the amendments would eliminate virtually all of the industry compliance costs. This assumption has been confirmed by the industry representatives who participated in the Rulemaking. See Testimony of Dr. Timothy Hammonds. Senior Vice President FM1, Tr. at 11, 20-21. that amending the Rule is preferable to repealing it.

C. M odify the Amendments Several comments that were received on the proposed amendments contained suggestions for modifying them in ways that the commenters believed would either make them more helpful to consumers or foreclose food retailers from taking advantage of what were perceived to be overly broad exceptions to liability. Additionally, the Presiding Officer recommended several modifications to the proposed amendments to bring about the same result. This section sets forth those suggested modifications and the < Commission’s conclusions regarding them.

1. Modifications to the Disclosure Amendment Limited quantity disclosures are intended to provide food retailers with a means for advertising products that may not be available in quantities sufficient to satisfy anticipated demand, and for which rainchecks or substitutions are not possible or practical. A single clear and adequate limited quantity disclaimer applicable to all items featured in an ad serves as a defense to liability under the Rule for unavailability of any single featured item, and relieves the food retailer of any obligation to give out rainchecks or otherwise compensate consumers for the unavailable item. Although it may not be deceptive to use general disclaimers for advertised products that the grocer can readily restock, neither would such action promote informed consumer choice or customer convenience.7* Such broad general disclaimers fail to inform consumers which items truly were limited in quantity and which were in plentiful supply.

The Presiding Officer recommended a rule amendment that requires that a limited quantity disclosure accompany "Evidence in the rulemaking record indicate» that toe larger supermarkets are able to replenish exhausted inventories for most products several time a week, if not daily. See Hammonds, Tr. 45,73- 74. Consequently, it does not appear that these stores need to make limited quantity disclosures except in certain exceptional situations such as seasonal closeouts or special purchases. Spokespersons for two leading grocery chains testified, moreover, that limited quantity disclosures would be appropriate only in the limited circumstances described above. See Saidin, Tr. 190- 191; Hicks, Tr. 243-45,260-261. One grocer went so far as to say he saw no reason for using limited quantity disclosures for items that a store regularly stocks. See Hicks, Tr. 280. Thus, even without a restriction on limited quantity disclosures in an amended rule, it does not appear necessary or likely that retailers will uniformly use the disclosure option for all item advertised. each individual item to which it applies.73 Although this approach eliminates the opportunity for grocers to use broad general disclaimers for everything advertised and may be of some value to consumers, there is no evidentiary basis in the record for adopting it While broad general disclaimers are not as helpful or informative to consumers as more specific ones, there is no evidence that the public is deceived by them. Trade Regulation Rules can only be imposed if they are reasonably necessary to prevent unfairness or deception. Likewise, fencing-in measures may be included in such Rules only if the record demonstrates a likelihood that without them consumers will be deceived or misled.74 No such record exists here, so the Presiding Officer’s proposal cannot be justified.75 As long as consumers are informed that not all products may be in sufficient supply to meet actual demand, they are on notice that there is some risk of unavailability at that particular store. They will be likely to include that factor among the variables they consider when deciding where to shop. Since it would not generally be deceptive to advertise in this manner, there is no justification for attempting to curtail such advertising through modifying the amendment. Several commenters also urged adoption of a specific numeric quantity requirement to discourage grocers from using limited quantity disclaimers where their supply of an advertised item is extremely low.78 Under such a requirement, the food retailer would have to disclose the minimum quantity of items available at each store for any advertised item that was subject to a minimum quantity disclaimer. The Commission has decided not to promulgate such a provision because it would impose costly impediments to using limited quantity disclaimers for "P.O.R., supra n. 14 at 115. "Katharine Gibbs School, Inc. v. FTC. 612 F.2d 658 (2d Cir. 1979], reh’g denied. 627 F.2d 758 (2d Cir. 1980).

"This approach would not permit grocers any flexibility to use a general disclaimer in circumstances that would not hamper customer convenience. For example, such a requirement might discourage grocers from advertising end-ofseason closeout sales or other groups of specials that are indeed available only in limited quantities. Such promotions may feature several items, all of which are limited to supplies on hand. Grocers may wish to run special advertising or highlight a portion of more general advertising to promote such sales. In such circumstances, a single clear and adequate disclosure that is clearly applicable to a readily identifiable set or subset of items would fully inform consumers. Requiring that a disclaimer accompany each item advertised would likely restrict consumers’ opportunities to leam of such specials. T* See eg* Comment of Consumers Union 7 (1986), R-H-3 ("CU 1986”).

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Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations 35435 any purpose and consequently frustrate the function of the amendment to increase the advertising of limited quantity items that are not now advertised. Furthermore, such disclosures would not be informative to consumers because stores are likely to understate the minimum quantity available and because consumers would not know how quickly the supply would be exhausted.77 Finally, they are unnecessary because possible abuses of the Rule’s exception for less specific disclosures can be addressed through section 5 of the FTC Act.78 Some commenters also suggested that disclaimers concerning availability limited to certain outlets be more specific than the amendment would require. They said that a disclosure declaring only that advertised products are "not available at all stores" does not sufficiently inform consumers of the store locations where such items may be unavailable.79 The Commission believes, however, that requiring grocers to list all store locations where a particular product can be found (or, in the alternative, where it cannot be found) would consume too much costly advertising space. The current Rule restricts limited outlet disclaimers to notifying consumers of limited availability either by a common location or by a common characteristic, e.g., “not available at stores in Maryland,” or “available only in stores with delicatessen departments.” However, there was no evidence presented during the rulemaking hearings that consumers are harmed if grocers clearly disclose that “not all items are available at all stores.” Consumers confronting that disclaimer are put on notice that certain items may not be carried at all stores and they can call ahead if availability of a particular item is important to their decision as to where to shop.80 77 Stores might avoid disclosing their best estimate of actual quantity for fear of inadvertently overstating it 78 The Commission agrees that grocers should not use general limited quantity disclaimers to disguise severely restricted quantities of merchandise that will only satisfy the first few customers who seek the items. The amended Rule does not preclude an action for unfair and deceptive advertising under Section 5 of the FTC Act for engaging in such a practice. If there are grocers who may be tempted to employ such tactics, they would still be in violation of Section 5 of the FTC Act for engaging in bait advertising and subject to a Commission enforcement action.

78 See, e.g., C U 1986, supra n. 76 at 7. See also Comment of Public Voice for Food and Health Policy 3 (1986) R-H-2 (“Public Voice 1986”). 80 Disclosing more detailed information, such as listing the locations that carry a particular item may well benefit consumers. But the record does not provide a basis for concluding that such a requirement is necessary to prevent unfairness or deception. Stores should recognize the benefits of 2. Modifications to the Defenses Amendment This amendment permits food retailers to defend against a charge of unavailability by offering any one of the alternative forms of compensation, and thereby relieves the food retailer of the obligation to demonstrate that he or she ordered sufficient quantities to meet reasonably anticipated demand. Some commenters recommended modifying the proposed Rule to incorporate a minimum stocking requirement as a pre­ condition to the raincheck or comparable value substitute defenses. They argued that this modification would protect consumers against potentially deceptive advertising and assure reasonable levels of availability, while significantly reducing the recordkeeping and inventory costs associated with meeting the “last unit of demand” under the current Rule.81 Similarly, the Presiding Officer’s substitute amendment would impose a proviso that the offer of rainchecks or substitutions would constitute a valid defense only in situations where the food retailer ordered sufficient quantities of the unavailable item to meet reasonably anticipated demand. His revision explicitly deletes the requirement for recordkeeping by the food retailer.82 Making the new defenses in an amended Rule conditional upon first ordering or having in stock sufficient quantities to meet reasonably anticipated demand or imposing some other minimum stocking requirement preserves the need for food retailers to continue to overstock and perform monitoring and recordkeeping over and above that which is done in the ordinary course of business. The mere fact that the Presiding Officer’s recommendation would remove the specific documentation requirement in the current Rule does not remove entirely the burdens imposed by the Rule. Under his suggested modification, grocers may 8till reasonably perceive the need to continue some or all of the costly measures they are currently employing or in order to avoid the risk of civil penalty liability.83 Moreover, other costs could increase whenever the requirement resulted in stores having ordered more inventory than they could sell. The result would be at least a partial frustration of the goal of the proposed amendments—lowering the disclosing that information voluntarily rather than risk annoying potential customers. 81 See CU 1986, supra n. 78 at 8. 82 P.O.R., supra n. 14 at 114-18. See also id at 107. 88 See Comment of Sullivan, FMI, R-Q-17 at 8. cost of complying with the Rule. Mandating such pre-conditions to the availability of the raincheck and substitution defenses, then, cannot be justified either to prevent deception— since rainchecks and substitutions will serve as acceptable substitutes for and incentives against unavailability—or to reduce costs.

Finally, such requirements would have the likely effect of imposing costs on an industry that the record evidence demonstrates already has- incentives to stock as much inventory of advertised merchandise as is necessary to meet demand. There has never been any evidence to suggest that food retailers engage in systematic and deliberate understocking of advertised items.84 Nevertheless, there is at least the concern on the part of some commenters that, but for the Rule, some grocers would indeed engage in a form of bait and switch advertising, i.e„ advertising attractive prices for items that they knew they did not have in sufficient quantities to meet the anticipated demand. The proposed amendments do not relieve grocers from liability for stockouts that are the result of deliberately understocking advertised items without disclosing that quantities are limited. As the Commission has already observed, such behavior will subject food retailers to liability through administrative or injunctive proceedings under section 5 of the FTC Act. Bait advertising, as defined in the Commission’s Guides Against Bait Advertising, would still be actionable under section 5 regardless of whether rainchecks or substitutions were offered. The amendment gives food retailers, rather than consumers, both the right to choose the form of alternative compensation when an advertised item is unavailable, and the right to determine what constitutes a comparable substitute. Some comments noted that, depending upon the particular circumstances surrounding the purchase, the consumer may have a preference for one type of compensation and should not be forced to accept an undesirable alternative to the advertised item.85 Other commenters pointed out that allowing food retailers to choose the type of compensation provides them opportunities to substitute lower quality 84 See 1985 Staff Memorandum, supra n. 10 at 4. See also 1984 Staff Memorandum, supra n. 9 at 9-15. 88 See, e.g., Comment of California Department of Justice, 3 (1985) R-I-78 (“California 1985”); Comment of the Alaska Office of the Attorney General 3 (1986) R-J-7 (“Alaska 1986”); Comment of Public Voice for Food and Health Policy 3 (1986) R - H-2 (“Public Voice 1986").

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35466 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations items for the advertised items in order to increase profits.88 In view of these concerns, these commenters suggested modifying the amendment to allow consumers the option of choosing the preferable method of compensation, and in the case of a substitute, the option to decide what constitutes a “comparable” substitute.87 The Presiding Officer’s modified rule would require that, where the unavailable item was one that was regularly stocked, the customer would be given the opportunity to elect to receive a raincheck over any other compensation that the food retailer might offer.88 The Commission does not believe that a requirement that the customer have an option between a raincheck and a store designated substitute is necessary. Industry spokespersons were unanimous in indicating that customer satisfaction is the ultimate goal whenever unavailability of advertised products arises; thus, when a customer expresses a preference for a raincheck or substitute item, store managers do their best to accommodate the customer.88 Given the highly competitive nature of the grocery industry and the considerable and uncontroverted record testimony that stores are motivated to satisfy their customers, there is no reason to doubt this contention. It would appear, therefore, that one-on-one negotiation between the customer and the store is the best means for settling the matter when the customer prefers that the store exercise its raincheck policy instead of its substitution policy. Another modification suggested by some commenters would require that any food retailer relying on the raincheck defense must reorder the item in question promptly 80 and notify customers when it is again in stock.81 88 See, e.g., Comment of George Washington University National Law Center 10-11 (1985) R—B-59 (“GW U1985”).

•T See, eg., Alaska 1986. supra n. 85 at 3; Comment of United Food and Commercial Workers International Union AFL-CIO & CLC 3 (1985) R -B- 54; Comment of Suffolk County 1 (1985) R-I-80, Comment of the United States Office of Consumer Affairs 3 (1985) R-B-51. See also Wilkinson and Mason. Dissatisfaction and Complaining Behavior as a Result of Unavailable Advertised Food Specials, 3 1 J. of Consumer Policy 43,49 (1979), R -I- 39 (only 83 percent of those shoppers offered a substitute accepted it, with 44 percent of these indicating that the reason for turning down the substitute offer was that it was not comparable in value to the unavailable advertised item). •• P.O.R., supra n. 14 at 116. •• Hammonds, Tr. 50; Hicks, Tr. 255,259. *° Alaska 1986, supra n. 85 at 3. ®i Comment of Vermont Attorney General 5, (1986) R-J-8 ("Vermont 1938"). The Presiding Officer would impose a "reasonable time” requirement for food retailers’ redeeming rainchecks.98 Such a requirement would be burdensome and complicate Rule compliance.98 Use of vague terms such as “reasonable time" or “promptly” does not provide needed regulatory certainty in order for food retailers to know when they must resort to extraordinary compliance measures and when they can avoid them. Moreover, there is convincing record evidence that the great majority of supermarket shoppers are able to redeem their rainchecks on the next regular visit to the market.94 Furthermore, representatives of the grocery industry testified that most supermarkets are able to replenish supplies for most products, if not on a daily basis, certainly within the week.95 Accordingly, there does not appear to be a need for elaborate standards governing the issuance and redemption of rainchecks. Such requirements, if imposed, would add to the costs without appreciably improving the benefits. Consumers who might have to make a special trip to redeem a raincheck can always call ahead to make sure that the rainchecked item has been restocked. V. Other Matters A. Cost-Benefit Analysis In this section the Commission considers the projected benefits and effects of the amended Rule that it is promulgating.

1. Effect on Consumers Consumers are likely to benefit from the amended Rule in two principal ways. First, any savings in compliance costs that food retailers realize from this Rule are likely to be passed along to them.98 Second, by allowing stores to advertise limited-quantity bargain items, the amended Rule permits consumers to receive more price and product information than they received under the original Rule.

More importantly, the amended Rule should not reduce consumer protection. The Market Facts study indicates that the great majority of consumers can and ®2.P.OJL, supra n. 14 at 116. See, eg., Hammonds Statement, supra n. 67, at 7.

•4 See, eg., Ferguson Study, supra n. 28 at 545; Figure 2, n. d; Market Facts Study, supra n. 6 at 32. 88 See, eg., Hammonds, Tr. 73-74; Saidin, Tr. 251. 88 With regard to savings passed along, it is unlikely that they will be significant to many individual consumers. The annual costs of complying with the original rule were only a few cents, per consumer, per week. However, average annual savings for all shoppers are more significant, exceeding the maximum estimate of consumer benefits by more than $250 million. do punish stores if they consistently have too few items available to satisfy demand. This, in conjunction with the Rule’s continued requirement that stores have in stock the items that they advertise, should provide substantial incentives to stock those items in adequate quantities. Accordingly, it is unlikely that unavailability levels will rise to any significant degree. What should be eliminated, however, are the excess monitoring and inventory costs that stores pass along to consumers.97 2. Effect on Industry Members Substituting the requirements of the amended Rule for those of the original Rule should result in a substantial net gain for food retailers.98 The 87 The Commission has also taken into consideration how amending this Rule might affect the poor and the elderly. These groups, it is argued, lack the mobility of the general public to punish stores that have high levels of unavailability by shopping elsewhere, and must stretch limited budgets by searching for and buying advertised grocery specials. See Comment of New York City Department of Consumer Affairs (1983), R-Q-20. The staff noted, however, that the current Rule may not benefit the poor any more than any other class of shopper. See, Final Staff Memorandum to the Commission, September 4,1987, at 16. The Market Facts Study indicates that the poor are, in fact less cost conscious with respect to grocery purchases than the average shopper, and, furthermore, that they do not encounter unavailability any more often than other groups. [Supra n. 4 at 39.) On the other hand, record evidence with regard to the shopping habits of the elderly shows that this group is indeed more cost conscious than other shoppers and, therefore, more likely than others to shop for advertised specials. Additionally, they are less likely than others to encounter unavailability, reflecting, perhaps, more diligent efforts to follow­ up after finding shelf stock depleted. They are, however, equally as likely as others to find stores with too few items available and considerably less likely than others to shop elsewhere as a consequence. [Id. at 38-39.) Nevertheless, staff noted that rainchecks should serve as adequate substitutes when the elderly encounter unavailability, and, since their immobility locks them into their regular market for shopping advertised specials, they will not have to make special trips to redeem them. Additionally, staff noted that, in most cases, the elderly will be able to rely on shoppers in their regular markets to keep grocers alert to inventory levels lest they lose those more mobile shoppers to competitors. See Final Staff Memorandum, supra at 16-17. 88 All of the food retailers that addressed the effect of amendment on their compliance costs agreed that the amendments would reduce these costs significantly. Hammonds, Tr. 21; Kroger Cost Item Chart (1986) HX. 9A. R-LL-1; Saidin, Tr. 173, 218-219. Nevertheless, while food retailers agreed that the proposed amendments would substantially reduce costs, they emphasized that they prefer repeal. See FM I1986, supra n. 66, at 9; Comment of the Kroger Co., by Arthur L. Ferguson, Senior Counsel, at 3 (1985) R-B-63; Comment of Albertson’s, Inc. 2-3 (1985) R-B-52; Safeway 1986, supra n. 70, at 1-2.

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Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 / Rules and Regulations 35467 amendments would eliminate or reduce over-ordering of advertised items because grocers could (1) offer rainchecks or adequate compensation if demand exceeded what they reasonably expected and (2) use disclosures of limitations on ad items to avoid carrying excessive inventories. Thus, the amendments would allow grocers to eliminate or reduce substantially the costs associated with carrying extra inventories.

Moreover, excess recordkeeping and monitoring costs could be eliminated under the amendments. Instead of conducting audits and compiling records to prove Rule compliance, grocers could use, under the amended rule, a limited quantity disclosure or a raincheck or substitute item policy as a defense to a Rule violation.

A reduction in the number and types of items advertised is an indirect cost of the restrictions imposed by the current Rule. The amendments may also reduce this cost by eliminating the disincentive to advertise items that are in limited supply. For example, grocers could advertise close-outs and other items available in limited supply if they either disclosed the limitation or offered rainchecks or other adequate compensation if supplies ran out. Although grocers would incur the costs of administering raincheck and substitution policies, the evidence indicates that the need to keep customers satisfied leads many stores to do so in any event. The Food Marketing Institute survey indicates that 94 percent of those grocers surveyed already have a raincheck policy in effect and 75 percent have a substitution policy." Since these policies currently are not defenses to Rule violations, grocers would not use them if they were not cost-effective.100 Finally, although grocers would incur the cost of ensuring that proper disclosures were made, they would likely incur these costs whether the Rule were repealed or amended. 3. Effect on Small Businesses The amended Rule should reduce the burdens on small businesses as well as major grocery chains.101 There is, to be sure, a greater burden the more that a store advertises and the greater the variety of products in the store’s inventory. Smaller food retailers are not ** FMI1985, supra n. 66, at 12. 100 The small percentage of grocers who currently do not have either of these policies in effect would incur only a one time start-up cost in addition to their small ongoing administrative costs. See Hammonds, Tr. 34-35.

101 See, e.g., Hammonds, Tr. 77, 78; Comment of U.S. Small Business Administration at 1, 3, 5 (1986), R-J-2.

likely to advertise as frequently as the larger grocery chains. Furthermore, when the smaller food retailers do advertise, they are not likely to feature hundreds of products in their ads. Thus, small businesses are likely to have incurred burdens under the original Rule that are proportional to their size. The same is likely to be true for the amended Rule.

The Small Business Association, however, recommended that grocery stores with ten or fewer employees be completely excluded from coverage under the amended Rule, noting that the difference in compliance costs for the very small grocery store presents an excellent argument for making a regulatory distinction between the two.10* While this suggestion may have merit, there is little or no evidence on the record as to what the effect of such an exclusion might be.

4. Effect on State Law Amending the Rule may have some impact on state enforcement of unavailability laws.108 In approximately half of the states, interpretations of section 5(a)(1) of the FTC Act are considered in interpreting state law.104 Even in jurisdictions where such is not the case, state courts may look to FTC interpretations on their own initiative. It is also likely that pressure will be exerted on legislatures to bring state law into line with the amended FTC Rule. In a few additional jurisdictions, state law provides that acts or practices that are subject to and comply with rules and regulations or statutes enforced by the FTC or other federal agencies are exempt from state enforcement.108 Some states have filed comments that note this outcome and seek to avoid it.10« xhe Commission believes, however, that since this Rule, as amended, should result in a net consumer benefit and eliminate costs that are now passed on to consumers, it is appropriate that the defenses that it contains should extend to state and local enforcement to the extent that state or local law requires. 108 id.

10* See 1985 Staff Memorandum, supra n. 10 at 28-29.

104 Id.

»°* Id.

100 A number of government officials expressed the general concern that any modification of the Rule could have serious implications for state and local laws, which make specific exceptions or create defenses based on the Rule. See, e.g., Vermont 1986. supra n. 91 at 1-2; Comment of Iowa Department of Justice, Attachment at 4 (1986), R -J- 4.

B. Final Regulatory Analysis The final regulatory analysis 107 of this Rule amendment has been integrated into the Statement of Basis and Purpose, as allowed by statute.108 Accordingly, title 16, part 424 of the Code of Federal Regulations is revised to read as follows:

PART 424— RETAIL FOOD STORE ADVERTISING AND MARKETING PRACTICES Sec.

424.1 Unfair or deceptive acts or practices. 424.2 Defenses.

Authority: 88 Stat. 2193, as amended: 15 U.S.C. 57a(a)(l)(B).

§ 424.1 Unfair or deceptive acts or practices.

In connection with the sale of offering for sale by retail food stores of food, grocery products or other merchandise to consumers in or affecting commerce as “commerce” is defined in section 4 of the Federal Trade Commission Act, 15 U.S.C. 44, it is an unfair or deceptive act or practice in violation of section 5(a)(1) of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1), to offer any such products for sale at a stated price, by means of an advertisement disseminated in an area served by any stores which are covered by the advertisement, if those stores do not have the advertised products in stock and readily available to customers during the effective period of the advertisement, unless the advertisement clearly and adequately discloses that supplies of the advertised products are limited or the advertised products are available only at some outlets. § 424.2 Defenses.

No violation of § 424.1 shall be found if:

(a) The advertised products were ordered in adequate time for delivery in quantities sufficient to meet reasonably anticipated demand;

(b) The food retailer offers a “raincheck" for the advertised products; (c) The food retailer offers at the advertised price or at a comparable price reduction a similar product that is at least comparable in value to the advertised product; or 107 The statute requires that the analysis contain (1) a statement of the need for and objectives of the rule; (2) a summary of the issues raised by public comments, a summary of the agency’s assessment of such issues, and a statement of the changes made in the rule as a result of those comments; and (3) a description of the significant alternatives to the rule considered and the reasons for rejecting each alternative. 5 U.S.C. 604. 108 5 U.S.C. 605(a).

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35468 Federal Register / Vol. 54, No. 165 / Monday, August 28, 1989 (d) The food retailer offers other compensation at least equal to the advertised value.

Dissenting Statement of Commissioner Calvani I dissent from the Commission’s decision today to amend the Retail Food Store Advertising and Marketing Practices Trade Regulation Rule (the Unavailability Rule). The Commission has acknowledged today that the original Unavailability Rule is not justified, and approved amendments designed to lower its costs to grocers. However, in my view, common sense tells us that in the highly competitive grocery store business, where consumers return week after week to the same store, any supermarket that frustrates its customers through unavailability of advertised items will not long keep those customers. In other words, it is clear to me that existing market forces adequately police unavailability, and that, therefore, no Federal Trade Commission rule is necessary, amended or otherwise. The Commission’s action today to retain even an amended Unavailability Rule does not conform to common sense.

Statement of Commissioner Andrew }. Strenio, Jr., Retail Food Store Advertising and Marketing Practices Rule Although revising the“Unavailability Rule” has a certain intuitive appeal, there is insufficient evidence on the record to conclude that these changes will result in net consumer benefits. Accordingly, I could not support amending the Rule in this manner. However, now that the step has been taken, it is to be hoped that experience will bear out the optimistic expectations of the Commission majority.

[FR Doc. 89-20166 Filed 8-25-89; 8:45 am]