Supreme Court Hears Pricing Case; Future of Discounts Threatened
Your ability to buy discounted goods -- either online or at your local discount mall -- is threatened by a case the Supreme Court heard today.
A family-owned Texas boutique sued Leegin Creative Leather Products (Brighton brand) because Brighton stopped supplying products to the company in 2002. The Texas boutique's offense? It sold the products at 20 percent off, violating the "Brighton Retail Pricing and Promotion Policy."
An obscure (to most consumers) but wide-reaching 1911 Supreme Court decision said that a manufacturer cannot mandate the price a product sells for at retail. The Court ruled that such a restriction is anti-competitive. (Doh.)
Thus Brighton lost, to the tune of a $4 million penalty. The company appealed.
The Bush Administration, along with the National Association of Manufacturers, is supporting Brighton. Most of the Justices on the Supreme Court were appointed by Republicans, traditionally a party that is biased towards business. The fact that the Court agreed to hear the case suggests it is willing to revise or reverse the decision in Dr. Miles Medical Co v John D. Park & Sons Co.
On the side of the boutique: 36 state attorneys general and the Consumer Federation of America.
Back Story
The 1911 case got a boost from Congress in 1975.
According to the wire story, in 1975 Congress passed a bill that President Ford said, in his signing statement, would “make it illegal for manufacturers to fix the prices of consumer products sold by retailers.”
Nevertheless, many manufacturers have found ways around the decision. (With help from the FTC, perhaps?)
Note that many states regulate the minimum retail price of milk; these laws were passed to protect dairy farmers from having the bear the brunt of grocery store loss-leader pricing. Many states also regulate how rapidly the price of goods and services can rise during crises. These regulations are deemed to be for the public good.
If the Court overrules the jury verdict in this case, "MSRP" (manufacturer suggested retail price) could become not a "suggestion" but a "requirement." And folks, there ain't nothing we could do about it -- except petition Congress to make a law. (Heck, that's what Bush after losing all his Gitmo cases before the Supremes.)
I really don't get it. If the manufacturer requires retailers to sell at more costly prices, fewer items will be sold. Someone help me see how the manufacturer benefits in this scenario. (No, I don't buy the arguments presented by Brighton, below.)
The Legal Players
Who's arguing the case for Brighton? Washington lawyer Theodore Olson, who represented Texas Gov. George W. Bush in Bush vs. Gore, the Supreme Court case that decided the 2000 presidential election. Later, President Bush appointed Olson to be a US solicitor general; he is now in private (more lucrative) practice.
Oh, and Ping golf clubs is one of the firms weighing in on Brighton's behalf. They (cough-cough) claim that retail discounters are one of the reasons that US manufacturers are going offshore. With a straight face, no less!
Ping reportedly is operating under a section of anti-trust law (Colgate doctrine) that allows it to punish retailers who don't toe the line on its minimum pricing policy. In a perfect world, the Court would decide not that the Mile decision is wrong, but that Ping shouldn't have that kind of hold on the retailers that sell its products.
It looks like the anti-trust law is widely ignored. The attorney arguing the case for Kay's Kloset is Ken M. Peterson and the firm of Morris, Laing, Evans, Brock & Kennedy of Wichita, KS. Peterson was the attorney "for three independently owned stores that sold Nine West shoes, including one in Houston. In 2000, Nine West Group agreed to pay $34 million to settle civil charges brought by federal and state investigators who contended that it had illegally fixed shoe prices since 1988."
The State of Texas was on the side of consumers in the Nine West case. It is not one of the 36 states on the side of consumers in this battle.
Brighton's Actions and Arguments
Here's what happened (who gets to set the discount price), from WFAA, Dallas
While retailers were struggling after the 9/11 terrorist attacks, Leegin [Brighton] started giving discounts to airline and airport employees at a store at the Dallas/Fort Worth International Airport.
Mr. Smith and his wife wanted Kay's Kloset customers, many of them schoolteachers and homemakers, to get the discount too, Mr. Smith said.
Kay's Kloset dropped prices on Brighton-branded leather handbags, shoes and accessories, roughly matching the discount at the airport store. The store carried lots of Brighton inventory and promoted it heavily.
Then Leegin cut off the Smiths.
Wanna hear the argument Brighton is making? One argument is that the law is "premised upon the antiquated common-law rule" and that it "squarely conflicts with the modern economic understanding that resale price-maintenance agreements can have significant procompetitive effects."
Right. Manufacturer mandated retail price controls = "pro-competitive" market for consumers.
[This team has a score of economists lined to to parrot these arguments.]
More from San Diego Tribune:
[Brighton] says that by maintaining price consistency among its retailers, stores can offer improved customer service. The extra service, says the manufacturer, enables smaller stores to compete against rival brands sold by bigger cut-rate competitors.
Brighton has decided it knows better than its customers what their costs are and what profit margins are acceptable. It's treating a small boutique in a low-cost area exactly the same as a large chain or a boutique on Rodeo Drive or Madison Avenue. Give Me A Break.
Both arguments are, in my opinion, spurious. Iron-fisted control from the manufacturer gives them de facto vertical integration -- without the cost or risk.
Today we have far more -- not less -- concentration in "manufacturing" than we had in 1911. This is due not only to global corporations but to the buying up of brands by conglomerates. For example, today Dr. Miles would probably be a subsidiary of P&G.
Brighton says it doesn't want its brand to "degrade" and its "customers to feel cheated when they buy at the wrong moment." Oh -- they want to protect us from ourselves. How paternal.
I owe several Brighton items -- the first was a gift. I've even purchased Brighton on sale and at (gasp) a discount store. But I've now bought my last Brighton product.
What do you think?
Comments
This just confirms my latest suspicions that we as a people have no chance any more at free enterprise. It’s all wrapped up in PAC’s and big money not any more in back room deals. You should investigate the pharmaceutical companies and their contracts for medicines with the major drug retailers if you want a shock. Wake up America before you’re buried, we don’t have a chance.
Hmmm… Manufacturer sells to retailer at reduced (wholesale) rate. They get their money. Retailer marks product up 30-35% for normal sales price – decides to give 20% discount to it’s customers because manufacturer has allowed 20% to select group of customers only. Hmmm… ok for airline employees, NOT ok for small town boutique customers… Maybe a problem because it’s not a captive audience? The way I see it, the retailer has chosen to cut into their own pocket – not the manufacturers, in an effort to satisfy customers.
Unfortuntately for most Americans, what they don’t understand is corporate America is in control of our daily lives. Whether you are talking about retail pricing or healthcare costs or business.
Think about the fact that a customer in a boutique on Rodeo drive will gladly pay four times a products value anywhere else in the country because of “where” it is purchased. Why don’t the manufacturer’s gripe about that?
No matter how you look at it, America has become more about the “mighty dollar” than any other aspect of life.
D is right… Wake Up America! We have slept too long!
Mid- size manufacturers must provide retailers good products and the expectation of making a profit. This law is in place to protect the smaller distributor from being targeted by the big guys. Without the law, big “boxlmart”, could systematic give away one targeted lost leader item every week until the small store died. Why would anyone invest in inventory if the likely hood of another big box retailer was to give it away to run the smaller retailer out of business. The law allow the small independent business to live. If you don’t like a brand like “apple” that controls the price, don’t buy it. Buy a computer clone. But changing the law so any one can sell it at any price: is theft.
You need to peel back a few more layers and worry less about the scare tactics being raised about this case…If Leegin wins or loses this case nothing will change for them other than the fact they can “talk” to stores about pricing policies…instead of coldly cutting them off as soon as they hear of an infraction…this is crazy an no way for anyone to do business…have a part time employee make a mistake…sorry your are shut off and I cant talk to you about it. As far as the pricing aspect most quality lines have pricing policies…its real simple if Brighton wants to now charge too much for a handbag then that store goes and buys Coach…or from any of a thousand handbag suppliers…this is a huge market…not a monopoly…discounters like Walmart/Target will continue to do business as usual and offer discounts as will some better lines as well…their choice! But as a small retailer it sure is nice to know that you dont have to worry about the store next door running 40% off for the weekend on one of you top revenue producing lines and feel like you have to meet it…and as a customer its nice to know that you arent going to find a better deal the next day and feel ripped off…worse yet how about going to a resort and paying twice what you normally would…the pricing policy is there to protect the ultimate comsumer here too…this case is so far from a big business wanting to charge what it wants…if thats what you think you are missing the real issues.
Yes its true we all like to get a deal …but at what cost. I am a relativly small retailer who prides himself on having a service oriented shop.It has been harder and harder to do this in recent years because of out of control price slashing by new competitors.I could remain competitive and keep my bottom line where it is if I cut salaries and benifits ,fire employee’s or other drastic measures. What this ruling will do is eliminate shops that can only compete on price. When you have an online business that doesnt carry inventory but just drop ships and sells an item that costs them $100 for less than $110 this leaves retailers like me who try to provider service as well as benifits to employees in an impossible situation.The classic situation is also when people come to my store to get there questions answered and than buy online. Although retail cost will rise service will as well and I think it is a fair trade off .Having said this many distributors will refuse to set price because they feel it doesnt benifit themey are not willing to protect there customers .They actually want to see there retailers fight it out even if it destroys the value of there product. This is something I can not understand.
I welcome a response to my post
Hello, G:
I empathize with small business owners. However, “competition on price” is the foundation of Adam Smith’s “invisible hand” of economics … the one America’s so-called “free market” system is based.
Manufacturers have market power over sellers, in general, because there are more sellers than manufacturers — especially if what we’re talking about is a brand (another word for monopoly, although rarely used in that manner).
The courts said that manufacturers should not be able to dictate prices at the retail level — back when there was far less market concentration than there is today. I still think this ruling was wrong, from a societal welfare perspective.
ASAIK, no one has tried to fight manufacturer pricing based on scale (less per unit cost for greater volume purchases) — and that also contributes to a price squeeze for smaller firms.
I am very sorry that small retailers are being “squeezed” but it’s simple economics!!!! Obviously if you provide a good or service and you are making some kind of profit someone is going to open up a business and try to make a profit of their own. And if they do it more efficiently or less costly then unfortunately they will drive you out of business. This is the United States of America, our whole economy and system is based on the very fact that it is easy to start a business and be competitive, offer discounts and NOT be controlled by the government.
Microeconomics: When you charge a higher price for a good people will buy less of that good. If you charge less people will buy more. If that good is relatively ELASTIC meaning that there are MANY substitutes if you charge more, you will sell less, and you will make less of a profit (revenue). If you have an INELASTIC good, few substitutes, you can charge more, sell less but still make a larger profit (total revenue) than before.
By altering the market with regulation you will keep businesses going that would otherwise have “Gone out of Business” due to inefficiency and high costs. The overall effect to the Economy and Society is a negative one. In Microeconomics we call that Dead Weight Loss. Everyone will have to pay a slightly higher price for a good that COULD have been discounted and that money will go to a select few “small” retailers.
Robert Dotras
RJDotras@aol.com
The Supreme Court came to the correct decision in this matter. “Brands” have but a few tools to offer their distribution partners, and the ability to actually make “profit” is the most significant. What not discussed anywhere in the previous debates was just how much biz this “mom&pop” was doing with Brighton – well into 7 figures (their “average dealer” does @$50K a year, at cost). This one account was “sucking the oxygen” out of that market, and ultimately would have been their only door in all of North Texas. No doubt, they’ll do more business with 20 healthy accounts as opposed to 1 mega account. The internet and other electronic media have made the ability for a vendor to offer “geographic” exclusivity virtually impossible, which leaves removing the primary motive for buying “on line” our only course of attack to save our industry (that motive is discounting). Over the last 20 years, the number of independant jewelers in the USA has diminished by half, virtually all lost to rampant discounting. Many vendors could care less how much their product gets sold for, but those of us who want to make valuable contributions to our client’s business and help them survive these transitional times for retailers appreciate the thoughtfulness of this decision and welcome a (yeah – I’ll say it – here goes) MORE DIVERSE AND COMPETATIVE MARKET as a result. Those of us dependant on the small independant retailer really needed this tool.
mco -
Hi, Marc –
Thanks for your thoughts. However, I must quibble with your closing comment.
Rulings like this do not create a more competitive market … because there is a floor below which prices cannot go. Competitive markets do not have firms with the power to set price. Basic economic theory.
Kathy
Hi Kathy –
The “more competative and diverse market” comment is absolutely enhanced by the supreme court’s decision. The core case is a wonderful example of a situation where the wholesale manufacturer had no ability to control the pricing issue. The environment you espouse to would leave just one purveyor of all products (Walmart – who’s buying power is by far the most powerful on the planet – but they can’t buy from any vendor who has pricing restrictions – it would defeat their primary marketing strategy). If you want to have any kind of diversity or retailing options – there needs to be the kind of pricing dicipline that only a vendor can introduce into the market. The previous rules made it very hard for a vendor to challenge a dealer who wanted to emulate the old John Rockefeller premise that by undercutting all competition for a while – you’ll own a monopoly forever. Vendors have to have some control over the ultimate price the consumer pays, otherwise, they’ll be left dependant on the one dealer who can live with the smallest possible margins. Obviously you believe that profits are somehow evil – and ought be defeated wherever possible. It’s a bit like California’s prop 13 – the tax revolt of the 70’s. Seemed like a good idea at the time – today – California’s schools’s rank just slightly ahead of Louisiana and Arkansas. Be careful what you ask for – you’ll end up with no options but Walmart (and I really like Walmart – but not all the time !!!).
Hi, Mark!
First, I don’t think “profits” are evil. However, I also don’t like monopolies or monopoly rents. And I’m not a fan of Wal-Mart for a variety of economic and public policy reasons.
I won’t argue with your implication that the US economy is “imperfect” — because it is. I will, however, argue that in this case the market is NOT an oligopsony or monoposony, as you imply … ie, the vendor is not facing a limited number of buyers. There are LOTS of independent (non-chain) retailers selling Brighton — like the firm that was in this case.
OTOH, the retailers DO face a monopoly position re the product sold by this vendor: that’s what branding DOES. There is only one supplier for this particular product.
Now we can argue that the market for leather goods isn’t a monopoly — and I agree, but it’s not “perfect competition” either. There aren’t a LOT of vendors like Brighton but there are a LOT of retailers — and those retailers do not have market power relative to Brighton.
They have even LESS market power today than they did before, because of this SC ruling. In effect, the Court granted Brighton the right to vertically integrate on the backs of its retailers. I say if you want to vertically integrate, fine, but you take the risk and make all the capital investment, a la Apple, for example.
Hi Kathy –
Well – you’ve really just described what Brighton is doing (they – in essense – used their wholesale distribution, much as Tiffany’s did 12 years ago, to identify markets where their own stores would be successful – Tiffany’s then eliminated their wholesale division).Brighton is rapidly becoming the “Apple” model you requested.They’re opening their own stores as fast as they can.
This will become far more common – I expect to see Richemont eliminate much of it’s wholesale distribution pretty soon (they now have over 300 retail leases operating in the USA – and seem to be close to “pulling the plug” on a couple of thousand independant retailers who are quite dependant on them).
What’s happening here is the “rabble” of independant retailers are wildly inconsistant in maintaining the “retail value” of product – often ignoring tennants required by vendors to carry the goods. The effect of “discounting” as a way of differentiating your store from your competator ultimately corrodes a brand, and makes it impossible to sell to other retailers (I’ve spent three decades selling luxury goods – and know the real effect a “deep discounter” has on my ability to sell my product to anyone else – basically – it kills the appeal of my product to any other retailer).
What we’re seeing now is a growing trend of “brands” becoming retailers as a way of combatting what is really an unenforceable desire to have the product consistantly presented to all consumers through independant purveyors. You dislike Walmart – but your premise insures they’re the only survivors.
The number of independant jewelers in the USA has declined by over 50% in the last 30 years – and we predict those losses will continue for the foreseeable future. Had this Supreme Court decision come 20 years ago – much of the diversity in the independant retail jewelry industry might have been saved – as it stands now – look in most cities – and you’ll find one or two jewelers who have all the significant brands. They have those brands because they upheld their agreements with their suppliers and didn’t cannabalize the value of the brand through discounting. Alas – I think it may be too late to save even the few survivors – as the big groups all get into retailing themselves (and they all are).
the court made the right decision – it just came too late.
marc ofte
ps = given the rather academic language you use in describing this phenominon – I have to ask if you’ve ever dabbled in the business world – dependant on results for your income?
You sound more like a scholar than a business person (and those – I fear – are really different realities) – just curious.
Hi Again –
I read your bio –
ok – you’re from the academy –
(btw – one of my kids went to VT – great school !! – got another at William and Mary and one at VCU – my quest for poverty is utterly fulfilled!!)
I was taken by your premise about our debt level –
Bravo !! –
I too, am clueless about how to fix it (my vote would be to cut spending – but that’s a rather unlikely option – given the current group in DC – one where both sides of the aisle seem to feel that “more pork = job security” – there’s no one bringing any sense of responsibility to that equation).
so – while I think the SC is right – at least on one issue – so are you !!!
ain’t life grand !!
take care
marc ofte
Hi, Marc — I’m at the academy now, but that came after a long stint in business. Be careful of assumptions.
We’ll simply have to agree to disagree. I believe that the SCOTUS should not have overturned early 20th century law. Interestingly, this makes me the “conservative” and you the “radical” — since I’m arguing to “conserve” the law.
If a manufacturer wants to control the retail price of his product, let him invest the resources to be fully vertically integrated. Or LEASE the product to the retailer. Once a physical product (a “rival” product: if I own it, you can’t) is sold … then the OWNER of that product should be able to do whatever the hell he wishes with it. It’s the same sort of law that prevents public restaurants from discriminating against customers (you can come in but I can’t).
What if Random House told you that you didn’t have the right to sell your used copy to Half-Price Books?
Hi Kathy –
agree to disagree –
cool !!
and perhaps to refine your point in all this -much of the blame for pricing issues relates to vendors “overselling” their commodity – in essense leaving retailers in the untenable position of trying to sell something of “value” that their suppliers have provided to way too many competing retailers. Discounting becomes the only way to move product, and the consequences to the brand and the retailer are “lose/lose”.
As one of the horrible “vendors” trying to re-invent profit in an arena that by any measure has ruined the formula – I think the SC gave us some tools that will be helpful – maybe. It’s still a very challenged environment – for all the reasons outlined above, and a rather fragile economy that could easily be tipped into a full blown crisis (the current frontrunner in our presidential campaign is suggesting economic policies that will make Jimmy Carter look like an economic genious). There’s a lot of pressures on independant retailing today, and buying from vendors who will protect margins is absolutely critical in profound ways. The Court’s ruling gives us some ability to do that, but I really wish it had come 20 years ago.
by the way – conservatives do generally want “precident” to prevail, but the fundamentals of consevatism relate more to crafting an even playing field for all people and entities and rely more on personal responsibility than legislative (or court ordered) restrictions on our lives and our business. The 1911 ruling related to the creation of monopolies, that were found (rightfully) to be anti-competative and detrimental to the greater good of the population at large. Given that there are over 1200 significant watch companies in the world today (and many times that number of “wannabes), today’s realities make that ruling more than a little arcane. There’s no possibility, in today’s consumer market to craft the kind of monopolistic occurance that inspired the earlier decision (possible exception is microsoft – but that was clinton-reno’s sole venture into regulating business and they failed massively).
It’s quite simply not 1911 anymore.
so – agree to disagree – that’ll do –
be well –
marc ofte – ball watch usa (independant serving independants !!!)
A Wall Street Journal article (sub required) notes that “Manufacturers are embracing broad new legal powers that amount to a type of price-fixing — enabling them to set minimum prices on their products and force retailers to refrain from discounting.”
And how can they do this? Because of this SC ruling.
We – the vendor community – are certainly trying to assert some influence over pricing. The old formula of granting a retailer geographic exclusivity in exchange for compliance to pricing integrity has been broken for years. The last 15 years have seen the additional pressures of the internet, which more than any other factor in today’s retailing environment, has made “geographic exclusivity” virtually impossible. Today’s marketplace has devolved into a free-for-all where one dealer with a web-site can dictate pricing for the whole nation (is that fair to other dealers who may need larger margins to survive?). If our brands are to survive and have any validity for more than one retailer who feeds from the bottom of the margin muck,then we vendors have to set standards for our retailing partners. There will always be vendors who “dump”, and retailers who exceed discounting parameters, but w/o some way of insuring that our brands are capable of generating consistant margins for retailers, why would any fine jeweler want to carry the product? (btw – the average jeweler has wildly high expenses involved in operating their business – expert staff, premium locations, opulent fixtures, and huge ad budgets are all required to craft a “destination” these days – and their bottom line profitability after expenses averages @7% today – there’s not much room for error).
Many vendors today are trying save a retailing tradition (the carriage environment) by restraining pricing devaluation. If we’re unsuccessful – you’ll have to learn to enjoy the Wal-mart’s of the world, cause that’ll be all that’s left.
marc ofte – ball watch usa