Editor’s note: This post first ran on September 4, 2012. Recent discussions merit a re-post.
There is a great deal of talk concerning the upcoming price increases and their effects on the market. I have received e-mails from several of you regarding this round of increases as Nielsen All Channel scans show volumes are flat, but pricing is up 2.7%. In fact, volumes have dropped from +1.2% to flat over the last year. Note too, that the amount of beer sold on promotion is down. A prelude to the upcoming price increases?
In the mid 70’s, Coors Brewing Company was reprimanded and placed under a two-year moratorium regarding price discussions when a conversation between the brewery and a wholesaler was recorded by the later. From that point forward, the talks on pricing between wholesalers and vendors always included the words “recommended” or “suggested” in the discussions, and all price letters to wholesalers had the language “we recognize your right as an independent wholesaler” and “businesses to set your prices accordingly.”
Leegin Creative Leather Products, Inc. v. PSKS, Inc. 551 U.S. 877 (2007), is a US antitrust case in which the United States Supreme Court reversed the 96-year-old doctrine that vertical price restraints were illegal per se under Section 1 of the Sherman Act. The aforementioned case replaced the older doctrine with the rule of reason. Resale price maintenance (RPM) is the practice whereby a manufacturer and its distributors agree that the distributors will sell the manufacturer’s product at certain prices: at or above a price floor, or, at or below a price ceiling. If a reseller (distributor) refuses to maintain prices, either openly or covertly, the manufacturer may stop doing business with the said wholesaler. This marked a dramatic shift in how attorneys and enforcement agencies addressed the legality of contractual minimum pricing and essentially allowed the reestablishment of resale price maintenance in the U.S. in most commercial situations.
It is safe to say that the courts will weigh in on this topic in the future. Actually, it is somewhat surprising that this has not been a topic of discussion between all parties given the aggressive pricing in recent years. Perhaps the recession put this on the back burner. Wholesalers, in almost every situation, made sure they communicated their “minimum” GP. From the vendor’s perspective, pricing models today are usually worked backward by working off the markets’ chain leader(s) and their pricing, adding in the wholesalers GP, and then, if there is a profit, that, too, is included. All taxes, freight, etc. are included. At Warsteiner, we analyzed each wholesaler’s contribution to our overall financial success. If the PTR was non-competitive then our numbers were negative. In all cases, profitability was volume driven. So is it better to sell 10 cases at 30% or 1,000 cases at 24%? This brings me back to our case.
How the major breweries approach pricing will probably be still considered antitrust, which would still be illegal. With the smaller breweries, however, such discussion could be considered anticompetitive. This changes the dynamics of the discussion. Either way, Leegin Creative Leather Products, Inc. v. PSKS, Inc. has changed the pricing paradigm. Get ready. Remember though, if your price point for beer is so high no one will purchase your product. So what good does it do you?
Alliances and partnerships produce stability when they reflect realities and interests.