Tobacco’s Latest Suit Highlights Tussle Over Shelf Space
Made of plastic and standing 6 feet tall, retail cigarette racks seem an unlikely flash point for a multimillion-dollar legal brawl among the titans of tobacco.
But war it is. Three of the country’s largest cigarette makers have accused industry leader Philip Morris Cos. of coercing retailers into placing its brands on the choice parts of custom-built display racks supplied by the company, relegating rivals to near-obscurity.
The skirmish is drawing new attention to the practice of paying for prime space on the nation’s retail shelves--a topic that federal antitrust cops are starting to scrutinize and that was the focus of a Senate hearing last week. And the litigation demonstrates how last year’s landmark settlement with state attorneys general is reshaping the super-competitive cigarette market.
Indeed, the rack battle is already getting ugly. In June, RJR Reynolds Tobacco Co., Lorillard Tobacco Co. and Brown & Williamson Tobacco Corp. won a court-ordered injunction halting parts of Philip Morris’ incentive campaign, called Retail Leaders. Signaling it would rather fight than retreat, Philip Morris has retained super-litigator David Boies, the hired gun leading the Justice Department’s case against Microsoft Corp.
According to experts, the lawsuit is the unintended offspring of the historic truce signed in November with 46 state attorneys general. As part of that deal, cigarette makers agreed to abandon stadium and billboard advertising, thus turning retail outlets--and racks in particular--into hot properties.
Meanwhile, cigarette makers are struggling to pay the $246 billion promised to states in the coming 25 years. But with the percentage of smokers flat at about 24% of the adult population, the industry has been forced to raise prices, which is leading to decreasing consumption.
So winning the attention of smokers has never been more important or more difficult, which, experts say, is why Philip Morris launched Retail Leaders last November.
At the top levels of participation, signing up for the Leaders program can mean payments from Philip Morris of as much as $1,000 per month, said one local store owner who declined to be identified. The exact amount hinges on the number of cartons sold.
Soon after Leaders launched, Reynolds filed suit, arguing that Philip Morris had violated antitrust law by making stores an offer they could ill afford to refuse. With Philip Morris commanding 50% of the market, retailers could either sign up or risk being undersold by those who had, Reynolds claimed.
And stores that enrolled were prohibited from discounting rival cigarettes during Philip Morris’ quarterly price promotions, Reynolds alleged. Most galling, the campaign required participants to place competing brands in the hard-to-see part of the racks, usually well below the counters.
Philip Morris has denied the allegations, saying that the program is simply a response to retailers who for years have been asking for better and more flexible display cases.
Philip Morris officials declined to discuss the particulars of Retail Leaders. The injunction by Judge Frank Bullock, issued in late June, blocks some of the more restrictive elements of the campaign and allows others to continue until a trial on the matter, now set for next year.
