These are strange times, in a period of rapid inflation, the last thing you would expect the government to do is to rap a company for successfully competing on the basis of low prices. And yet, that is precisely the practical effect of a preliminary decision by the Federal Trade Commission against the Kroger Co., one of the nation's largest supermarket chains.
This is one of those sad regulatory stories in which the process seems primarily to serve the regulators and the parasitic industries - consultants, law firms - that drive on regulation. It is not a story of evil, but one of subtle subversion. Rules acquire independent meaning and momentum, and regulation's ultimate goal of improving the public welfare gets lost in the suffle.
It's worth remembering that this is not always the case. In advertising, the government has clearly provided for some information that improves consumer choice and competition: gasoline mileage ratings, for example. Though the ratings may not always reflect actual driving experience, they do provide a common basis for comparison.
But the government cannot protect consumers against every slight imperfection in product performance or every strained advertising claim. The regulatory process' main liability is not that it is inherently power hungry, but that its standards are usually imprecise and absolutist. Once it tiptoes into a new regulatory area, government finds it difficult to impose limits on itself.
The result - as in the Kroger case - is often frivolous, wasteful and self-defeating.
Back in 1972, Kroger decided to change its corporate image from a high-priced "quality" chain to an aggressive price leader. It shifted its basic strategy, targeted prices in major markets to the lowest price competitors and established internal surveys to monitor compliance.
To all outward appearances, the corporate strategy succeeded admirably, profits rose sharply, and Kroger passed A&P as the nation's second-largest food chain, behind Safeway. Part of that success involved a highly promoted advertising campaign called "price patrol," in which Kroger had local checkers make weekly comparisons of about 150 brand-name articles - such as Hi-C fruit drinks or Betty Crocker cake mixes - sold by its major local competitors.
Then, resorting to massive advertising on television and in newspapers, Kroger blasted out the results. "For 74 straight weeks, the price patrol proves Kroger is the low-price leader," said an advertisement in Dallas. Or, "Here's documented proof that Kroger leads with low prices in Nashville."
Reading the ruling by FTC administrative law judge Montgomery K. Hyun, you might conclude that Kroger's advertisements represent massive deception. As Hyun points out, the price comparisons didn't include "private label" goods, meats, fresh fruits and vegetables, which together accounted for about half of Kroger's sales.
And the items weren't randomly selected. Merchandising managers picked the items to go on the "price patrol" lists, but they also knew which items benefited from so-called roller programs. These are programs in which major manufactures give temporary discounts on their products, which may or may not be "rolled" through to customers. Clearly, an opportunity for bias existed.
To highlight these flaws, though, is to miss a more important reality: as Hyun also indicated, Kroger was highly competitive in its prices and, by and large, its "price patrol represented a good-conscience effort to make comparisons."
Full lists comparisons were posted in stores for public viewing.When Kroger lost, it said so. When the comparisons shoppers made obvious pricing mistakes, Kroger eliminated the errors that worked to its advantage and kept those that didn't. "Roller" items may have been somewhat over-represented, but still apparently constituted only about 10 percent of the sample. Manufacturers are required to give the same discounts to all stores; if other stores had passed on the discounts, the distortion would have been minimal.
As for meat, its exlucsion may have been somewhat self-serving; the evidence is ambiguous about whether Kroger's meat prices exceeded the average. But including meat would have created huge technical problems, because quality differences obscure genuine price comparisons. The same difficulty applied to fruits, vegetables and private-label products.
Kroger's more elaborate (but less frequent) internal price surveillance system - which included surveys by an outside consulting firm - showed remarkable success in underpricing the competition. About 90 percent of the time, Kroger had more items (including meats) priced lower than competitors. But, if absolute truth in advertising is the standard, Kroger flunked. In about a fourth of the tests between 1973 and 1978, at least one competitor had more lower-priced items.
Hyun flunked Kroger, arguing that it didn't have a "reasonable basis" for making its advertising clain. Unfortunately, finding a "reasonable basis" isn't as simple as it sounds. The FTC staff spent years trying to devise a workable random sample for food price comparisons, but apparently concluded that quality differences made comprehensiveness impractical and expensive. Hyun conceded this, but nevertheless insisted that such a survey was required for any unqualified price comparisons.
Even if Kroger had acted totally irresponsibly, it's questionable whether this complaint should ever have been brought. As Robert Pitofsky - an FTC commissioner who once headed the agency's Bureau of Consumer Protection - wrote last year: "Where advertising fraud will be exposed by consumers sampling low-cost, repeat purchase items, there is less reason for the government to intervene. . . Much alleged deceptive pricing is almost certainly innocuous . . ."
Common sense. But government works differently. In 1972, the FTC adopted its "reasonable basis" theory, and new doctrines often lead quickly to unpredictable and silly results. With the FTC action pending, Kroger dropped its "price patrol" last year.