THE RIGHT TO GREY GOODS?: Do 'grey imports' devalue brand equity or should retailers be allowed to source and sell goods at the lowest possible price?

This autumn the European Court is expected to make a landmark

ruling that could change the strategies of marketers and retailers

everywhere.



Levi's court battle with Tesco, which has been selling jeans imported on

the so-called 'grey market' at a discount, is raging on.



After an interim ruling in April gave no clear hint as to the favoured

party, the case is expected to culminate in September.



The case, which seeks to clarify whether EU retailers can legally sell

grey, or 'parallel', imports originally destined for a non-EU country,

has given rise to passionate arguments on both sides.



Retailers argue that consumers demand lower prices and that brands are

keeping EU prices artificially high. But brand owners say their own

investment in innovation and brand image, as well as quality control,

will be undermined should they lose control of distribution. As well as

damaging their own business, they argue that this is not in the

long-term interest of consumers (see box).



Although it is Levi's, Calvin Klein and Davidoff that have taken this

battle to the courts, the question is not restricted to luxury goods and

designer names.



Every brand - "from soap and razor blades to film" - could potentially

be affected by EU rulings on parallel imports, according to John Noble,

director of the British Brands Group, which represents branded goods

owners.



It doesn't help that the ongoing legal battle has become complicated

further by the interim ruling, which even grey market experts describe

as unintelligible and mystifying. Since grey-market goods first started

to appear in the early-90s, the legal pendulum has swung one way and

then the other, in favour of brand owners or retailers.



In 1998, a ruling on Silhouette sunglasses said retailers could not

import goods from outside Europe without the manufacturer's consent.



But in 1999, UK courts ruled that fragrance brand Davidoff had given

"implied" consent to its perfumes being imported from the Far East by

not "explicitly" forbidding their resale in Europe.



National court rulings



Since then, both parties have sought clarification. At the Levi's

interim ruling in April, the EU indicated that it would refer the matter

back to the national courts, and that parallel traders' rights should be

recognised by the law. Good news for retailers.



But it also indicated that the national courts cannot apply a "general

presumption" that the manufacturer has waived its rights to control

imports - in other words, a reversal of the 1999 case. Good news for

brand manufacturers.



The main reason Tesco was quick to shout victory in April is that UK

courts are likely to look favourably on parallel importers. The

government certainly does: Stephen Byers, former trade and industry

secretary, aggressively backed a campaign led by Sweden to overturn the

EU's current block on parallel imports for trademark goods.



Byers has also repeatedly called for lower prices on branded goods in

Britain, and early indications are that his successor at the DTI,

Patricia Hewitt, will do likewise.



But in yet another twist, the European Commission itself is against a

change in the regime. It has said that parallel imports inhibit

investment in new brands and may make trademark- holders withdraw

products from the market. Only one thing is certain: the issue is not

going to go away.



Retailers such as Tesco and Asda are confident about their justification

for selling branded goods sourced on the grey market. "We do it because

it's what our customers ask for. It's about the price the customer pays,

not the price the retailer pays," says David Miles, head of specialist

businesses at Asda, which sells a range of grey-market brands, from

Ray-Ban sunglasses to Armani fragrances.



"Brands argue that they have created an attitude and an ambience for

their products - but we don't believe this is consistent with the

location of purchase," he adds. "How can perfume brands say that

environment devalues the brand when consumers can buy these products off

a trolley in the gangway of an aircraft?"



The retailers' argument is endorsed by a growing anger among consumers

about 'rip-off Britain'. Consumers see that prices are higher in the UK

than the US or the rest of Europe and believe greedy brands are to

blame.



But British Brands Group's Noble argues that 'rip-off Britain' has

nothing to do with brand manufacturers. He agrees that the UK is

expensive, but says there are many reasons, such as lack of available

retail space and fuel costs. This means brands such as Gap are more

expensive, but actually less profitable, in the UK.



Alan Christie, vice-president of public affairs at Levi's, echoes this

claim. He says retailers such as Tesco are well aware there are price

differences due to different economic regimes around the world but are

"happy to perpetuate the myth that the retail price in the UK is set by

the manufacturer".



Negligible margins



The brand manufacturers' case has been furthered by research revealing

that the outcome for consumers of allowing parallel imports is on the

whole negligible. Products are, in the end, only about 2% cheaper.



"You have to look at whether retailers are selling these brands as

promotional items to get people into stores or selling them at a

consistent price," says Noble.



But the same study showed that should parallel imports become fair game,

there will be a major shift in profit from manufacturers to

retailers.



A study commissioned by the EU into the consequences of this change

shows that the effect on reducing prices is small - between 0% and 2% -

whereas the transfer of profits from manufacturers to traders is high -

up to 35%.



This is because retailers purchase the goods at low prices and can sell

them with at a reasonable mark-up, while still making the products

cheaper than an approved outlet.



Despite the slight discount, consumers are still far more willing to buy

discounted goods. Indeed, when questioned, by Taylor Nelson Sofres, an

overwhelming majority - 88% - of UK adults said they would rather buy

discounted Levi's from a supermarket than full-price at a Levi's

store.



Only 8% said they were prepared to pay the extra.



Companies such as Levi's, Calvin Klein and Microsoft have invested

millions in their advertising and marketing to create their brand image.

They argue that not only are brands devalued by becoming just another

supermarket item, but the retailers are profiting without making any

investment themselves.



Christie points out that while Asda and Sainsbury's created their own

'designer' clothing ranges, Tesco took the cheaper option in selling

someone else's. "Tesco knows exactly what it is doing; it is trying to

grow its non-food business."



Brand owners also believe supermarkets do not give the consumer the same

quality of service and advice they would get in an approved outlet.



"A brand is a combination of things, including the quality of product

and the retail experience," says Christie. "If you attack any of these

things, you change the consumer's perception of that brand."



Noble adds that undercutting approved retailers could threaten their

very existence - why should upmarket retailers, for example, invest in

their stores if the same product is being sold down the road in the

supermarket?



But Tesco's world non-food sourcing director Christine Cross responds

that Tesco has also made an investment in its own brand and stores.



"Our customers know that when they buy a product from us, they are

getting a certain level of quality and customer service they won't get

elsewhere.



"Brand equity lies in the product, not the price or retail

environment.



We've been putting the Levi's red tab on the backsides of hundreds of

consumers so we have actually raised its brand awareness."



However, the brand owners maintain that there is still an issue of

quality control. Noble says that even more worrying than the Levi's

court case is the ongoing Davidoff saga, which hinges on whether removal

of batch codes on products amounts to them being 'damaged'. If it

doesn't, parallel importers can go ahead and sell them.



Noble says that this has many implications. In the event of a health

scare, for example, manufacturers might have to withdraw products

globally as they would not be able to trace the faulty batch. It also

means customer guarantees on quality and safety, which are arguably part

of the brand promise, effectively disappear.



So what can brands do to protect themselves? By fighting public battles,

they do their reputation no favours. Levi's Christie admits that Tesco

has scored a PR coup by positioning itself as the consumer champion in

the court battle, but adds that Levi's had no choice but to try to

control its brands' distribution.



Protection programmes



One way of protecting a reputation is to invest in brand security

technology.



Companies such as DeLaRue offer solutions that allow brand owners,

retailers and even consumers to track and trace products, so that the

origin can always be guaranteed.



Chris Clark, business development director of DeLaRue, says: "At the

moment there is too much fire-fighting going on, such as raids of

warehouses when a problem occurs. It's all very well investing in

above-the-line advertising, but brand owners also need to ensure their

product is going where it should be."



Another solution is for companies to tighten up on their brands'

distribution.



It might see a short-term sales fall, but the strategy provides

long-term benefits.



In June, Gucci announced a rescue plan for its struggling Yves Saint

Laurent brand, which involves cutting licensed manufacturers from nearly

200 to just 12.



Yves Saint Laurent had expanded so widely in the 80s that it now appears

on a range of products from socks and baseball caps to plastic shoes -

arguably losing its exclusivity in the process.



Burberry has carried out a similar exercise and has successfully

repositioned itself as an exclusive, must-have label.



This strategy doesn't only apply to luxury goods. Gillette has announced

a new plan to control its supply chain more strictly and match

production to consumption in an effort to protect its brand. And

Christie says Levi's is taking a hard look at its distribution.



Tesco's Cross says that if brands can't, or won't, control their

distribution properly, they can't really complain if they lose

control.



"There are times of the year when you can source grey goods very easily

- such as when the brands need to boost their sales figures - and times

when you can't.



"Brands have a bit of a love-hate relationship with distributors. They

move goods around the world too, so it's not in their interest to put a

label on goods saying they are not for sale outside the EU."



With the growth of e-shopping and a consequent rise in price

transparency, consumers are going to become more demanding and retailers

more powerful.



If the next EU ruling does indeed refer back to the national courts,

brand owners are going to have to pray they - and the government - take

a more sympathetic view.



THE CONSUMER VOICE



Philip Evans, principal policy adviser, Consumers' Association



Philip Evans believes consumers are much more cynical about prices than

they used to be, and brand owners are out of touch with the way shoppers

and retail are changing.



"It's what is known as the 'Florida and Calais' effect. People used to

go on holiday to Spain and Greece and they would understand that prices

were cheaper because the standard of living seemed lower than ours.



"But now they go to Florida and Calais and they can't believe that it's

so much cheaper - people coming back from holiday abroad are much more

questioning.



"Brand owners think they control their brands' image, but it's simply

not true, particularly when you can buy stuff they've over-ordered or

last year's goods - with their blessing - in designer outlets or

discount stores such as Matalan or TK Maxx.



Do they think people don't go to these places? The average punter

doesn't know or care that it's last year's stock, unless they are a real

brand obsessive.



"Brands are really misleading consumers and their own arguments just

don't hold water. They have simply got to take a long look at their

markets.



"Some firms are wising up to it more than others - but there are

national markets and regions that are real fiefdoms, just pricing goods

at whatever level they think they can get away with."



THE BRAND VOICE



John Noble, director, British Brands Group



John Noble believes consumers' interests are not served by allowing grey

market imports. They would lose out in the long-run, he says, because of

a lack of quality control and the fact that brands' very existence would

be threatened.



"Stephen Byers has been championing the 'consumer cause', but in fact,

he was deregulating the whole of industry and not doing consumers any

favours. Guaranteeing the origin of a product must be of paramount

importance - you need to know it hasn't sat in a warehouse for 12

months.



"Brands innovate and others follow. If you undermine brands and say that

investment is not important, the whole structure falls apart.



"Brands may have exacerbated the problem by selling last year's stock to

designer outlets, but this is often driven by the bottom line.



And allowing parallel imports would also deter companies from launching

into other countries at a lower price, restricting British business from

expanding.



"Selective distribution is when retailers and manufacturers work

together to invest in brand experience. EU guidelines say this is a good

thing, because it increases competition. Putting specialist retailers

out of business means less choice for consumers, not more."



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