July 2017 Archives

FTC Labeling Rules Foster Monopoly

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Since 1966, any item sold in American stores has been labeled with the name and address of the company making, distributing, or purveying the product. This requirement originated with the Fair Packaging and Labeling Act, which set forth clear standards of disclosure for both groceries and other merchandise. According to the text of the statute, the direct provision of this information to the consumer is "essential to the fair and efficient functioning of a free market economy." 15 U.S.C. §1451. However, though the Federal Trade Commission has enforced this rule for over fifty years, an important exemption in the statute has precluded the true transactional transparency Congress attempted to implement.

The current federal regulations on the subject, promulgated by the FTC pursuant to this law, specify that packaging must "specify conspicuously the name and place of business of the manufacturer, packer, or distributor. Where the consumer commodity is not manufactured by the person whose name appears on the label, the name shall be qualified... such as 'Manufactured for __,' 'Distributed by ___," or any other wording that expresses the facts." However, the identities of such wholesalers and jobbers are likely of secondary importance to the consumer, as these organizations have no ultimate responsibility for defects in their goods and no effect on competition among producers. Since manufacturers are not compelled by any law to disclose their names and locations, the eventual buyer has no way of determining the true source of a given product. A legal framework allowing citizens to access information on distributors and middlemen, while imposing no absolute requisites on manufacturers, clearly fails to achieve the goals set forth by the legislature.

Exploitation of this loophole has become commonplace. Basic commodities such as milk and purified water are often marketed under the names of distinct distributors but bottled in identical receptacles, indicating that "different" brands often originate from the same plant. Generic versions of ubiquitous items, such as breakfast cereals, cheeses and butters, paper towels, chips, soaps and shampoos, canned foods, first aid items, cookies, laundry detergents, crackers, and sodas, are frequently manufactured by the same company as other store-brand equivalents and the trademarked alternative. Even items represented as fresh or locally made can be marketed in this same way: the bread sold at Walmart bakeries nationwide, for instance, is advertised as "freshly baked every day," but the raw dough from which it is made is actually purchased in bulk from Pillsbury (this fact has not been disclosed by Walmart, but can be easily verified by checking the item's listing on a store receipt).

This statutory scheme provides about as much valuable information as an automobile adorned in several places with the insignia of its dealership but bearing no indication of its make. The most obvious inconvenience in this hypothetical case would fall upon the purchaser, for whom the safety, quality and origin of the vehicle would not be ascertainable. The industry as a whole would also suffer, however - as distinct cars created and competitively marketed by separate companies would coagulate into an indistinguishable Brand, it would become nearly impossible to determine whether a variety of options were still available to the customer. Though such an occurrence may seem patently impossible, this is in fact the situation presently confronted by antitrust enforcement under the FTC rules.

Monopoly in the manufacturing sector is difficult to disband and nearly impossible for the consumer to detect, since companies frequently refuse to disclose the names of their licensees or subordinate production divisions. Although the DOJ and the FTC both have investigative powers that could compel disclosure, the majority of their suits commence with complaints from consumers or competitors - who, in many cases, cannot obtain the necessary evidence or information to prove specific instances of misconduct. For those reasons, consolidation at the very top of the supply chain continues nearly unfettered, and the resulting price inflation is routinely passed along through several middlemen to an unknowing public. As Justice Brandeis once said, when stressing the importance of transparency in his landmark work Other People's Money, "Sunlight is the best of disinfectants; electric light is the most effective policeman... It is now recognized in the simplest merchandising, that there should be full disclosures. The archaic doctrine of caveat emptor is vanishing." One hundred and four years later, this principle has yet to be accepted by regulators and politicians. 

Conscious Commitment: The Trust in Your Pantry

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Trian.jpgPart 5 of 5 in a series, "The History of Antitrust"

In the one hundred and twenty-seven years that have elapsed since the passage of the Sherman Act, our nation has experienced countless social and political changes and enforcement of this law has fluctuated with the times. The administration of Theodore Roosevelt marked the pinnacle of public awareness of the subject; after ten years of unfettered consolidation resulted in the Great Depression, uncompromising regulation of the trusts became a staple of New Deal policy; and in the prosperity of postwar America, though the public largely lost interest in the issue of antitrust, it remained a significant mainstay of our capitalist economy. However, during the social upheaval that took place in the 1960s, the goal of a truly free market lost its place in the platforms of both parties.

The Democrats adopted the vision of Lyndon Johnson's "Great Society;" though the facets of this policy dealing with civil rights, education, and environmental protection were undoubtedly beneficial, its economic framework virtually ignored the issue of monopolization and instead relied on welfare programs and public spending to achieve equality. This system effectively relieved corporations of their core social responsibilities - to provide citizens with stable employment at fair wages and quality goods at fair prices - and instead shifted those responsibilities to the taxpayer. The Republicans, meanwhile, entirely abandoned their traditional emphasis on fiscal freedom and prioritized the interests of consolidated industry above those of their constituents. In the decades that followed, the viewpoints of these factions grew increasingly entrenched and the fundamental incompatibility of the two perspectives led to our present polarization. In 2017, as Democrats call for socialistic measures such as single-payer health insurance or a $15 minimum wage and Republicans doggedly maintain the status quo of rampant oligopoly in the healthcare, national defense, agriculture, and communications industries, the breach between both sides is steadily widening - and the solution that restored prosperity in the 1930s and allowed for the economic well-being of the mid-century, that protected both citizens and legitimate enterprise from untrammeled restraint of trade, has been isolated in the center of the political spectrum.

This trend affects society at all levels - from things that only indirectly affect most Americans, such as the cost of federal projects such as the improvement of cell phone networks or the maintenance of the military, to matters that impact local communities, such as the exorbitant amount your state pays each year for school lunches or highway repairs, to your own personal range of choices every time you restock your pantry.

The story of your groceries begins with an obscure investment company, Trian Partners, incorporated in Delaware and principally conducting business in New York. This firm is headed by billionaire and Wendy's Chairman of the Board Nelson Peltz and run by a tight-knit group of individuals prominent in the grocery industry. Peltz himself, in addition to his control of Wendy's, is a director of Kraft Heinz and its spin-off group Mondelez International. Together, these companies own products such as the Nabisco line of snacks, including Oreos, Ritz crackers, Fig Newtons, Nilla wafers, Premium saltines, Wheat and Vegetable Thins, Nutter Butter, Honey Maid, Cheese Nips, and even French cookie brand LU; candies and desserts including Cadbury chocolates, Trident gum, Swedish Fish, Jet-Puffed marshmallows, Toblerone, Sour Patch Kids, Twist, Mallomars, Stride, Dentyne, Milka chocolates, and Jell-O; meat brands such as Oscar Mayer, Ball Park hot dogs, and Lunchables, as well as the popular Boca line of vegetarian alternatives; drinks such as MiO, Tang, Wyler's, Kool-Aid, Crystal Light, Country Time and Capri-Sun; Gevalia and Maxwell House coffee, as well as all Starbucks products sold in stores; condiments like Heinz ketchup, A1 sauce, Kraft salad dressings, and Miracle Whip; dairy products including Cracker Barrel, Kraft Macaroni and Cheese, Cheez Whiz, Easy Cheese, Kraft Singles, Philadelphia Cream Cheese, Velveeta, and a nearly complete monopoly on parmesan cheese; Ore-Ida fries; and Planters nuts. In addition, Mondelez board member Josh A. Frank and former Heinz CEO William R. Johnson are now partners at Trian, further cementing this group's control over the snack titan.

However, Trian's dominance does not end there. Its partners are heavily involved in other aspects of the supply chain as well - Peltz and Frank are both directors of food-service giant Sysco, and Trian also owns over two million shares of national retail store Family Dollar. In addition, they are also a major player in the soft drink industry. Their control over the Dr. Pepper Snapple Group (DPSG) has been well-documented in securities filings and acquisitions over the past decade. By the beginning of this century, products such as Royal Crown Cola, Snapple, and Stewart's Root Beer were owned by the parent company of Wendy's, of which Peltz, his son Matthew, and his son-in-law Edward Garden are all directors. These assets were sold in 2000 to Cadbury Schweppes - notably, the buyer is an important portion of the Mondelez/Kraft/Heinz conglomerate, indicating that this group may have been simply shuffling their subsidiaries rather than selling them - before the drink brands were eventually acquired by the parent company of Dr. Pepper. However, this second sale did not end Trian's interest in these products. Documents from 2008 show that 18.2 million shares in the DPSG were distributed among Peltz, Garden, several "straw" companies with names such as "Trian Partners Parallel Fund I" (the numeral in the name signifying that there are at least four of them), and two other Trian subsidiaries incorporated in the Cayman Islands. During these same years, Cadbury Schweppes also bought the entirety of the Dr. Pepper/7 Up Bottling Corp. and added it to the Kraft portfolio - though this acquisition was spun off in 2007 with Peltz' full support, there is no evidence that Trian members have significantly divested from it in the following years.

Recently, Trian has further strengthened their oligopoly of the consumer snack industry by quietly accumulating a significant stake in PepsiCo and subsequently utilizing that interest to eliminate competitors. Though PepsiCo is best known for its line of sodas, it is also the parent company of Frito-Lay, Quaker cereals, Tropicana, and Gatorade, assets that could complete Trian's virtual monopoly on the snack industry if controlled by Trian. The group's fiscal choices and personal connections vividly illustrate that a close bond was in fact forged between the companies in recent years. As of 2013, Trian had reportedly invested $1.3 billion dollars in PepsiCo, and was publicly using their role as shareholders to attempt to control the latter. Interestingly, Trian's employees are also closely connected to the soft drink titan - former PepsiCo CEO Michael D. White, who had worked there for twenty-nine years before becoming a partner at Trian, reported ownership of over two hundred thousand shares in the company after his most recent sale of PepsiCo stock. Another partner, William R. Johnson of Heinz, is a PepsiCo stockholder and a current member of the board. These influential members of the Trian ring may have influenced a 2009 agreement between PepsiCo and the Dr. Pepper Snapple Group, in which PepsiCo agreed to pay DPSG $900 million dollars for the privilege of bottling their products. Though the companies claimed that this contract would reduce the cost of soda to the consumer and be "mutually beneficial," independent company Mahaska Bottling sees the matter differently.

In a complaint filed under the Sherman Act last year, Mahaska alleges that collusion between PepsiCo, the Dr. Pepper Snapple Group, and Trian investment Family Dollar has led to price-fixing and monopolization. According to the plaintiffs, the increase in commerce experienced by PepsiCo after the DPSG deal gave them an unprecedented market share in soft drinks, and PepsiCo subsequently attempted to use this power to eradicate competition. As part of this plan, Family Dollar - of which Trian partner and Peltz' son-in-law Edward Garden was then a director - agreed last year to temporarily lower its soda prices to below bottling cost, refusing to carry any Pepsi or DPSG products until these new prices were met. The only bottlers capable of producing under those conditions happened to be directly owned by PepsiCo, and consumers' demands were supplied by them until Mahaska was driven from the market entirely. The words of the complaint concisely summarize this scheme:

"PepsiCo and PBC entered into an unlawful pricing arrangement with Family Dollar covering not only PepsiCo products but also DPSG products and unlawfully instructing Mahaska to discontinue all DPSG service to Family Dollar... so that they can subsequently raise prices in Mahaska's territories."

This case is still pending in the Southern District of Iowa, and is expected to go to trial at some point this year. Though at first glance, it may appear to be a relatively routine pricing dispute, even the most cursory investigation of the circumstances reveals that such concerted actions are not consistent with healthy competition - rather, the Mahaska dispute is one of the few visible instances of a decades-long, industry-wide attempt to corner the American supermarket.

Read the fourth installment of this series, "The New Deal and a New Start"

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