Kroger Plans To Upend How it Organizes Booze in Stores

Mark Willingham Uncategorized

Kroger Plans To Upend How it Organizes Booze in Stores

NASDAQ

By Tripp Mickle and Ilan Brat

January 29, 2016

Kroger Co. has started a booze-fueled brawl with the alcohol industry with a plan to change how the country’s

largest supermarket chain organizes beer, wine, and liquor on its store shelves.

The proposal would do away with a decades-old system in which the biggest alcohol producers such as AnheuserBusch

InBev NV and Diageo PLC were tapped by Kroger and other grocers to be “category captains,” dispensing

advice and influence about how much shelf space and prominence to give brands ranging from Budweiser to

Robert Mondavi to Smirnoff.

It also asks the alcohol companies–not Kroger–to pay Southern for the service. Previously, manufacturers financed

their own analysis. Southern said other retailers, some of whom have been inquiring about the program, could be

included in the new arrangement. Southern declined to disclose which grocers asked about the program.

Several large supermarket chains contacted for this story declined to comment or didn’t respond to a request from

comment.

Retail consultant Jim Hertel, senior vice president at Willard Bishop, a unit of Inmar Inc., said that if the program

succeeds others may emulate it, especially large retailers such as Albertsons Cos., and Ahold NV and Delhaize

Group, which are merging. “People will look at this, if it’s successful, and figure out if it’s something the industry

rallies around, ” Mr. Hertel said.

The proposal has sparked a brouhaha between Kroger, which wants to simplify its system for managing the beer,

wine and liquor section of its supermarkets, and the alcohol manufacturers, which would lose power and could

incur new expenses.

Kroger wants to be able to rearrange store shelves more frequently to reflect changing consumer tastes by adding

fast-moving, new craft brands such as Not Your Father’s Root Beer, and making seasonal changes like shifting space

in August from heavy Chardonnays to light Pinot Noirs.

Kroger currently makes these changes up to twice a year, but it is executed inconsistently across its outlets. “Our

goal is to better respond to customer needs and more quickly bring new, innovative adult beverages to market,”

said Kroger spokesman Keith Dailey.

The liquor, wine and beer industry prefer the existing system in which they have more direct say in shelf placement.

This can significantly influence sales. They also object to the fact that, for the first time, the new system would ask

the alcohol industry to pay quarterly fees based, in part, on how much volume a store carries.

NABCA Daily News Update (1/29/2016) 9

In a rare show of agreement across the alcohol industry, trade associations representing liquor, wine and beer, and

several alcohol-distributor groups all sent letters to federal regulators last month questioning the legality of the

Kroger plan. Prohibition-era laws ban alcohol manufacturers from giving retailers anything of value to keep them

from marketing too aggressively.

“It appears, among other things, to run afoul of the prohibitions related to providing items of value to a retailer,”

wrote the Distilled Spirits Council of the United States and Wine Institute. The Alcohol and Tobacco Tax and Trade

Bureau, which regulates the industry, said it is reviewing the matter.

Brewers Association Director Paul Gatza, who represents craft brewers, say it is a “pay-to-play” system. If Kroger’s

plan is approved, “what stops every other grocer from doing the same thing?” he asked. “Then it costs a lot of

money to get on the shelves.”

Craft brewers are especially wary. They fear the plan will cut into their margins and squeeze them off the shelf. ”

For a start-up company, good luck trying to get into Kroger with this plan,” Mr. Gatza said.

A spokesman for Southern said the fees would be voluntary and are designed to offset the estimated $12 million it

would cost annually to provide shelf-planning services for Kroger. He said manufacturers who don’t pay into the

program wouldn’t be “adversely affected.”

Mr. Dailey said the new plan is legal because the fees would be voluntary and would be paid to Southern, a

distributor. He said Kroger wouldn’t profit from the program. “This absolutely is not an introduction of slotting

fees,” he added.

Southern said it would re-evaluate the program if no one, or too few, pay for the service. Kroger said it selected

Southern partly because it believes the company could provide unbiased advice. It is unclear whether this was an

open- bid process.

Manufacturers of products such as peanut butter and toothpaste are accustomed to paying some supermarkets socalled

“slotting fees” to stock new products.

Securing approval for the program won’t be easy. In addition to the Alcohol and Tobacco Tax and Trade Bureau,

Kroger and Southern also must ensure the program complies with state laws. In Ohio, the Division of Liquor Control

last month said it believes the program would violate a state law banning manufacturers from providing something

of value to retailers.

Southern and Kroger plan to meet with Ohio regulators in the near future. Southern said the regulators didn’t have

all the facts of the new plan.

Kroger has the highest concentration of stores in some parts of the Midwest, the South, the Pacific Northwest and

Southern California. It depends on state laws, but Kroger wants this change to apply to all stores.

Kroger made similar changes to its shelf planning for other store sections such as coffee and cereal 4 1/2 years ago.

Mr. Dailey said relying on one organization that isn’t a large manufacturer to analyze consumer data and

recommend changes to shelves has yielded big benefits. Packaged food sales from the stores’ center aisles have

increased at a time when other grocers are losing sales in that section to perishable foods sold on the perimeter, he

explained.

Packaged-goods manufacturers pay a mandatory fee to the independent organization planning the shelves in the

rest of center of the store, Mr. Dailey said.

NABCA Daily News Update (1/29/2016) 10

Several large packaged food and household-care goods manufacturers contacted for this story declined to

comment on their relationship with Kroger.